Consciousness of Sheep
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There is an old joke about economics that goes like this:
- Q: What is another word for “economist?”
- A: Wrong!
Given the current performance of the armies of economists in the UK Treasury and the Bank of England, it’s not so funny now that every forecast and policy announcement has a shelf life of just a few days… the word “unexpected” turning up in just about every economic news headline these days.
Not, of course, that UK economists are unusual, or, indeed, that economists haven’t been getting it wrong for as long as economics has been a thing. EU economists got it woefully wrong when they promised that disconnecting from cheap Russian gas would have no effect on the European economy. UK and US economists were dangerously wrong when they told governments that currency creation would obviate any potential harms from locking down economies and disrupting supply chains. And the failure to spot the banking and finance collapse of 2008 was something of a high point for economic incompetency (although in relative terms, it was very similar to the failure in 1929… and for much the same reason). As another joke has it, economists, it seems, exist mainly to make astrologers look good.
But humour aside, this ought to raise a very tricky question. Because nobody is betting a nation’s future on the horoscopes published in the back of tabloid newspapers, despite their being at least no less accurate than the forecasts made by economists. The question is, why do we continue to trust economists given the economic mess they have helped to create?
I would argue that the reason we still trust them is that the economics of every era is a plausible myth… A fairy tale wrapped around a central truth which is persuasive, common sensical, and wrong. And it all begins with the quest to understand where profit – that is, value – comes from. I would also argue that the reason every school of economics has got it wrong is because the true source of value is invisible.
The earliest proto-economists, physiocrats like François Quesnay and Victor de Riqueti, developed their ideas in early-eighteenth century France, when the great landed estates of the pre-industrial age formed the backbone of the economy. Understanding that, then, just as today, towns and cities could only survive by importing food from the lands beyond, the physiocrats reasoned that it must be the land which is the source of all value. Given the periodic local famines of the period, this seemed entirely plausible. After all, whatever economic activity might have been happening in a city came to an abrupt end if the harvest failed.
Later in the century, as the first phase of the British industrial revolution gathered pace, a new group of classical liberal economists observed the way in which the new, water-powered manufactories had sucked labour away from agriculture in favour of industries like cotton weaving. It seemed obvious enough to economists like Adam Smith and David Ricardo, that it was human labour rather than inert land which was the source of value. After all, untended land is unproductive while the tended industrial machinery of the period generated value at a previously unimagined scale.
In the nineteenth century, Karl Marx built on the labour theory of value developed by the classical liberals, to explain the unequal distribution of the profits generated from the value produced by labour. In short, Marx – correctly – reasoned that there had to be some input to the process of industrial production which was bought for less than it was worth. This, he argued – almost entirely erroneously – was labour… and specifically wage labour.
The trick, Marx explained, was that the workers were paid for their time, not their work. And the capitalists who bought (i.e., paid wages for) their time accumulated the unpaid work (surplus value) that they delivered, realising it as profits when the goods were sold. In this respect, the mainstream economics of the period was less about accurately explaining the workings of the economy than covering up the means by which capitalists exploited the workforce: “the common sense in every age being the sense of the ruling class,” as Marx put it.
But while this version of the labour theory of value seemed to work in the early stages of the industrial revolution, in the later stages of industrialisation, as competitor nations like Germany and the USA overtook Britain, even Marx began to concede that the massive, steam-powered machines of the age might be generating value separate from workers who had been reduced to mere machine-minders. Although, since this conflicted with Marx’s political theories, he failed to develop the idea of machine-based value (although it remains a subtext within economics to this day, with “technology” unthinkingly proffered as the solution to declining productivity).
In the late-nineteenth and early twentieth centuries, a neoclassical economics emerged, based less on sweeping theories about the source of value, and more about how individuals – consumers, workers, managers, investors, etc. – make decisions on the basis of marginal utility (i.e., how they benefit) in a market economy. In this way, value – in the way earlier economic thought meant – was lost, replaced instead by mere market outcomes. There is no source of value, it is merely an outcome of the operation of the free market. Such, along with the creation of “Homo Economicus,” explains why economists of the period failed to predict the 1929 Crash and the ensuing Great Depression, why they arrived at plausible but wrong explanations in the aftermath, and why their failure continues to this day.
As the global economy became far more complex in the aftermath of World War Two, economics ran into two big show-stoppers. First, came a problem identified by sociologist Immanuel Wallerstein: that the economy is global, but we rely on national statistics to try to understand it. Imagine, for example, trying to explain how the food gets to your local supermarket without being able to reference anything that occurs outside of your country, and you begin to glimpse the problem. You can only talk about – probably the minority – foods whose entire supply chain is within your country… and that might not be so easy to determine if various imported additives and preservatives have to be taken into account. You might be able to talk about the trucks that bring food from the ports to the distribution centres and from there to the individual supermarkets. But even then, the trucks themselves may have been imported. So too, the diesel fuel that powers them. As we have all discovered since the politicians imposed two years of lockdowns, unless you understand how the entire supply chain across the economy works (and it updates in real time, so you can’t) then you will end up being blind-sided.
The “solution” was not the kind of supercomputing that now makes weather forecasting far more reliable than any forecast produced by an economist, but rather a wholesale abstraction which turned economics into a study of transactions rather than a science of the real economy.
This was the social science version of the drunk looking for his keys beneath the lamppost. Since it is impossible to model the economy, lets settle for exquisite but wrong econometric models based on the flows of currency within individual nations… not even taking account of how systems of international exchange work in the real world. And once we had simplified our understanding to this extent, economic debate is reduced to ultimately futile arguments between “Keynesians,” who are accused of issuing too much currency and causing inflation, and “Austrians,” who are accused of stifling growth by refusing to issue enough currency to provide for investment (the political equivalent of this is seen in the opposite – social democrat versus libertarian – wings of the western uniparties).
Writing in the aftermath of the 1929 Crash, Frederick Soddy was scathing about the way this abstraction made a mockery of economics:
“Economists usually deny the existence of absolute wealth. MacLeod, merely more outspoken than the rest, says: ‘There is no such thing as Absolute Wealth, nothing which in its own nature and in all circumstances and in all places and in all times is Wealth. It is necessary that someone not its owner should desire and demand it and be willing to give something for it.’ He thus entirely ignores the primary object of owning and acquiring wealth, namely consumption or use…
“Bluntly, the position they take up is that there can be no food without hunger, no drink without thirst. Such purely subjective considerations are, of course, at the root of commerce, whether between individuals or nations, but they are utterly at variance with national economics as concerned with the more material side of human happiness. They are merely a vicious survival of pre-scientific philosophy, which denied the existence, apart from perception, even of the physical world…
“But the idea of wealth, apart from a revenue, has almost lapsed even in individual economics. The immense accumulations of commodities implied by the existence of £M7,000 of legal claims to wealth as War Loan we saw destroyed as fast as they were produced. But, by the inexorable laws of thermodynamics, if not of economics, the immense accumulations of the nineteenth century in railways, canals, factories and slum cities, even if they did not get out of date, are all on the same broad highway to destruction. But debts neither get out of date nor wear out; they grow.”
Soddy’s Wealth and Debt: the solution of the economic paradox ought to have been the first text book on every economics course reading list, and ought to have become at least as famous as Keynes’ General Theory of Employment, Interest and Money, Or Marx’s Das Capital, Since Soddy’s book sets out an energy-based economic theory which does not conflict with the Second law of thermodynamics, whereas the neoclassical economics of the period was no more than a trick to create the illusion of a monetary perpetual motion machine which had to fail on contact with reality:
“Although, to everyone except an engineer or a physicist, energy seems to be quite a minor item in the production of wealth, if we concern ourselves with what is used up in the process of creating wealth, it is the largest and most important item. Thus, in the cost of upkeep of a car the petrol is a minor item. Till lately the tyres cost more. Yet, if we pursue the tyres to their origin, we shall find how much of their cost is due to expenditure of energy. They call for a flow of the solar energy of a particular climate, physical labour in rubber plantations, coal for the railways and ships that transport the raw materials from the tropics, as well as for the factories where it is made into tyres. These railways and ships, again, and all the buildings and equipment necessary for their manufacture, no less than the materials they use—the iron and metals and the coal which have to be mined—are the results of the expenditure of physical energy. The armies of people these industries maintain have to be supplied with food, clothes and houses, and energy under intelligent human direction is the first requisite for the supply of all such things…
“Thus, when we deal with the real factors that underlie the production of wealth—unclouded by questions of property-law, the individual rights of ownership, and the complications introduced by monetary systems—we can sum them up as Discovery, Natural Energy and Human Diligence. The first enters in the form of sudden and more or less spasmodic contributions which, once made, permanently alter the whole future course of history. But the two last must be continuously and unremittingly provided as long as time shall last…”
The ongoing drain of entropy causes a civilisation to have to supply energy and human attention in perpetuity simply to maintain the real wealth that already exists. More so, to cause the pool of real wealth to grow. Nevertheless, writing at a time when the switch from coal to oil was progressing in the USA, Soddy foresaw the boom which would eventually result simply from the higher energy content of oil, once coupled to new technologies. And, despite writing more than a decade prior to the world’s first self-sustaining, controlled nuclear chain reaction, he understood the enormous potential in breaking the neutron bonds of an atom.
Nevertheless, Soddy echoed Marx in pointing out that economics had become an elaborate justification of the claims upon wealth exercised by the ruling elites rather than a serious attempt to understand and explain how the real economy works… And since Soddy was a chemist (in fact, a Nobel Prize-winning one) not an economics insider, he was easily dismissed. Instead, it was a Keynesian money-based economics which temporarily won out because it appeared to work.
Whether it was Hitler’s rearmament, FDR’s New Deal, or the post-war Marshall plan, the creation and distribution of new currency by a metastasising state seemed to be the key to ending unemployment and ushering in a new age of prosperity. And yet, once again proving that economic history is the only vaguely realistic discipline within economics, Keynes and his followers had little understanding of what the sudden influx of gold and silver from the Americas had done to the Hapsburg Empire or what the debasement of the denarius had done to Rome… in both cases, just as in the 1970s, the expansion of the money supply without the surplus energy and resources to absorb it merely devalued the currency itself… that is, inflation.
It wasn’t the monetary alchemy overseen by an econometric clerissy on behalf of the banking elites that engineered the massive post-war boom between 1953 and 1973 (the further away from which we get, the more fleeting it appears) but the energy potential of oil, the development of a new suite of oil-age technologies, and the post-war switch from coal to oil as the primary energy source for both the USA’s allies and the defeated nations of Japan and West Germany. Crucially, at that point, almost all of the world’s resources were still in the ground, and the mass of demobilising troops provided the ‘human diligence’ to exploit them.
But, once again, the mythical economics of the period appeared plausible. And so, ignorant of the real world, economists and governments attempted to steer economies via currency creation… a process which worked until it didn’t. After which, the ideas of the corporate-funded Mont Pelerin Society were used to justify the wholesale rape and pillage of the public wealth by the elites in the name of crushing the price increases caused by the supply shocks resulting from the end of cheap oil.
The use of the remaining, more expensive conventional oil between 1985 and 2005, provided a degree of stability which, once again, allowed the mythical economics of the day to appear plausible. Offshoring the manufacturing base of the western economies helped drive down prices, while the explosion of debt provided the illusion of a permanent western consumer base. Until, that is, global oil production peaked in 2005, causing price spikes throughout the global supply chains. And just as the Keynesian’s currency creation myth failed them in the 1970s, so the neoliberal’s interest rate hikes failed after 2005, causing the massive 2008 crash rather than depressing prices.
A key driver of the current insanity which is manifesting in the political arena is the absence of a new economic myth. Since 2008, the economies of the western states have forgotten how to grow, while even the manufacturing states in Asia have undergone dramatic slowdowns. Neither interest rate manipulation nor state currency creation has been able to change much other than in the very short-term. And governments are floundering as, reverse-Midas style, everything they touch is turning to shit.
At this point, they would do well to acknowledge one of the handful of things that Marx got right, and that Soddy saw as central to how the economy really works. As I explained in both The Energy Theory of Value and Why Don’t Lions Eat Mice?, the process of wealth creation and value is simple but obfuscated by the various economic mythologies down the ages. Wealth creation is simply the application of energy (or, more strictly exergy) by human actors to transform the natural world. Imagine, for example, beginning with some timber, a saw, a hammer and some nails, a human actor might apply his mind to planning a table, and his muscle power (energy) to actually build it. This, of course, is much easier to visualize than wealth creation in a complex industrial civilisation. But the basic proposition is correct. And here we must apply one of those things which Marx got right about value. In a pre-industrial economy, our table would have been built for use (although probably without iron nails) and, so long as the timber is good and the construction competent, it might serve our family for decades. But in a capitalist economy, a table is constructed for its exchange value. Of course, it must still be useful. But the purpose behind its construction has shifted to being primarily about selling tables at a profit. Profit, that is, being the realisation of value after its exchange.
It is at this point though, that Marx got things so woefully mistaken that his followers have wrought death and destruction across the planet ever since. Because, while he correctly saw that to enjoy the fruits of exchange value, some input to the production process must be being purchased for less than it is worth, he claimed that that input was human labour. Profit, he argued, was the unpaid labour of the working class… and humanity has been locked in one or other version of the class war ever since.
As with all economic myths, there was a grain of truth in Marx’s theory. Insofar as the productive process required a degree of human diligence, then that could certainly be exploited by paying workers for their time rather than the value they helped to create. And insofar as, in the early phases of industrialisation, workers provided muscle-power (energy) then labour power could be a source of value. But by the end of Marx’s life (1883) he had already wrestled with the idea that the widespread use of steam-driven machinery was generating far more value than could be created by labour alone. Indeed, he was to rail against the process whereby craftsmen had been reduced to mere machine-minders.
But that’s the point. In an economy running solely upon renewable energy, human and animal labour appears to be enormous. But in an economy powered by fossil fuels, it is rendered so puny as to be almost irrelevant. And it is this observation which allows us to correct Marx.
There was something in the production process which was bought for far less than the wealth it generated in return. But it wasn’t labour, it was fuel (energy). A ton of coal provides the equivalent of a year’s work by a heavy horse or five-and-a-half year’s work by a human labourer. And yet, in the 1830s a Welsh miner 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.
Therein is the true source of value. The millions of years of solar energy locked up in coal was providing massively more value than it cost to extract. And in the oil age, the rate of exploitation grew even further. 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 $80 or so that a barrel currently trades at… which is precisely why oil-powered industrial capitalism has generated such huge profits for the owning classes while simultaneously – at least until recently – raising the living standards of people in the developed and developing states.
Here, we can set Marx aside and return to Soddy’s proposition that the wealth created in this way is not permanent. It requires ongoing energy and resource inputs together with human oversight to maintain it. And even then, the best we can achieve is to halt its decay. A new car or a new house doesn’t stay new for long. Parts break, and regular servicing becomes an inevitable downside to ownership. But such problems are trivial in relation to the critical infrastructure that makes industrial civilisation possible. In the western economies, much of that infrastructure was built in the 1960s and 1970s and is now decaying rapidly… with concrete structures presenting a particular problem because even terminal decay may not be visible from the outside.
However, so long as we have enough energy and resources, we can rebuild and replace. But therein is another crisis that today’s economists and politicians remain blissfully unaware of. Because to access energy and resources, we have to set aside some energy for their production. But because humanity exploits the cheapest (i.e., easiest to access) resources first, sometime around the turn of the century, we reached a point where the surplus energy left over for the wider economy was no longer sufficient both to maintain the wealth we had already created and to continue to grow the economy.
Economists and politicians have referred to this growing stagnation as a “productivity puzzle.” But if they had begun their education with Soddy, they would understand that there is no puzzle at all. Because, while we use “technologies” (in the broadest sense of the term) to optimise the work we derive from energy, the process of technological improvement follows an “S” curve. When a new energy source is first exploited, most of the energy is lost as waste heat. However, a series of cheap and easy technological improvements allow far more of the energy to be converted into work. But as we get closer to the thermodynamic limit, the technological improvements become ever more difficult and expensive. And eventually, any further improvement resides only inside people’s heads or in AI-generated posts on social media… no longer possible in the material world.
Again, we passed that thermodynamic limit to the technologies of the oil-age sometime around the turn of the century. And the increasing drag on the economy has thrown the gains of the early oil age into reverse. Birth rates are falling along with life expectancy. The living standards of the bottom half of the western population have been in steep decline for two decades. And even the prosperity of the previously affluent middle classes has taken an irreversible downturn since the stupidity of lockdowns and self-harming sanctions of the past five years.
Here, we might return to the final thing that Marx almost got right. Marx talked about a “crisis of overproduction,” which, in an economy based around the production of capital goods, might have looked plausible. The basic proposition was that since the workers, collectively, were paid less than the value of the goods they produced, then eventually too many goods would be left unsold because nobody could afford to pay for them.
There is a degree of truth to this, except that it revolves around the relative shares of surplus energy. The massive glut of cheap oil in the early post-war years, for example, allowed corporations to amass an undreamed-of number of claims upon wealth, while simultaneously improving the living standards of the population. Famously, by the early-1960s, a semi-skilled worker could afford to buy a house in the suburbs, raise a family, run a car, and take an annual holiday. But with the oil shocks of the 1970s and the real but unseen decline in the surplus energy available to the wider economy, the corporations and their bought-and-paid-for politician lackeys responded by paring back the living standards of the working and middle classes. Today, a semi-skilled worker on a single wage is living in a converted cupboard mendaciously described as a “room” in a shared house.
Access to credit, coupled to the alchemy of securitisation and the expansion of a shadow banking sector, maintained consumption for a few more decades. But since the turn of the century, the consumer base in the western economies has been ever less able to maintain the discretionary sectors of the economy. Not so much a crisis of overproduction, but more of under-consumption… although it will no doubt appear in the form of containers of unwanted goods piling up on Chinese quaysides soon enough.
The previous existential crisis which Soddy was wrapping his mind around in the early-1930s, was the result of the fast-declining surplus energy from coal. Indeed, if coal had been the only fossil fuel, by now we would have reverted to an economy not dissimilar to that of the Anglo-Saxons following the collapse of the Western Roman Empire. But instead of collapse, oil provided us with another half-century of explosive growth… allowing the economists and politicians to persuade the public that they were vaguely competent. In fact, they were always and only like so many surfers trying to maintain balance as they rode the waves. With sufficient surplus energy they could stay upright. But the moment surplus energy declined, they were wiped out.
Today, of course, only the mentally impaired believe that politicians and economists have the first idea of what they are doing. Everyone else correctly, if only instinctively, understands that the creatures who walk the corridors of power are completely out of their depths. This is already resulting in early forms of political extremism (although if you think Trump and Farage are bad, the day is coming soon when you will look back on them as relative moderates). At the same time, the discretionary sectors of the economy are imploding as the majority struggle to afford essentials like housing and food. The banks – although they won’t admit it – are still sat on a mountain of debt which can never be repaid. And we are now witnessing states themselves breaking apart as their ability to tax and borrow their way out of collapse is stymied by the declining prosperity of the population.
Some time ago, I suggested that an energy-based economics might develop a brown new deal to address the unfolding crises. My basic proposition was that – although we would have done better if we’d done it in the 1970s – we needed to prepare for an energy-deprived future in which the majority of us would need to work to re-localise and de-grow the economy in a managed way so as to maintain as many of the benefits of our current way of life (such as fertiliser and dental anaesthetic) as possible. At the same time, insofar as the state still has some capacity to fund research, it should draw together the best engineering and physics minds to work solely on practical and time-bound projects designed to find ways of increasing (or offsetting the decline of) the surplus energy available to us.
It won’t happen, of course, because our corporate rulers will continue to hoard claims upon wealth even as the wealth itself crumbles to dust. Economists, all the while, will continue to serve these elites by constructing ever-less plausible and ever more obviously wrong mythologies, even as our thermodynamic collapse gathers pace. We might not be able to stop it, but at least if we had learned Soddy’s energy-based economics, we would understand the disease which is killing us.
As you made it to the end…
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