This section contains excerpts from the book Relocalization in Rural British Columbia: A Guide for Communities Before the Energy Descent, currently in writing.

Economics: the dismal science

Economics is the most uncontested science on earth. Fewer people question our world as presented by orthodox economics than question the world presented by biology, palaeontology, medical science and even physics. We don’t question the laws of economics, as far as we can discern them. We understand that free enterprise is somehow grounded in certain laws and the proof of the theory is that capitalism beats the hell out of socialism and communism.

Economics is one of the “soft” sciences, along side psychology, archaeology and political science. These are so-called soft sciences, because their measurables are a whole lot more fuzzy than empirical sciences that measure the number of bacteria in a Petri dish or the changes in light from a distant star. Economists will argue that economics is a “hard” science because it uses empirical data. However, one of the reason economics is “the dismal science” is that empirical data aren’t very useful for predictions. Economics is soft because it needs people to act according to theory.

And yet, in the court of public servitude, economics is the hardest of sciences. No matter what the ups and downs of the economy – and there have been some do-zzz during the fossil fuel age – few question that economics is a natural science. Our economic anthem is founded on proven economic theory. Almost as tacit as the air we breathe is a presumed economics orthodoxy. The Divinity of this orthodoxy was dubbed “the invisible hand” by the patriarch of modern economic theory, Adam Smith. An eerie term, spectral - difficult to argue against. Leave it alone and the rational forces of private interest will reach a balance where the optimal economic good is achieved for all.

Classical and neo-classical economists made some big mistakes. One of the biggest was to treat people and the organizations they form as always-rational decision makers. Another mistake was to consider the environment as an economic input, rather than economics operating within the limits of the environment.

Modern economic theory also failed to understand the role of energy in economic sustainability.

Economic Growth in the 20th Century

Neoclassical economic theory once explained economic growth as a function of increases in labour and capital. The more labour employed, the more capital invested, the more an economy grew.

In the 1950s, Nobel Prize winning economist Robert Solow found only 20% of economic growth in the United States since 1900 could be explained by increases in labour and capital. He explained the remainder of growth – 80% - as a function of technological improvement in the use of capital and labour. The portion of growth not attributable to inputs of labour and capital is called the “Solow residual.”

Solow’s model of economic growth continues to be assumed today. Growth comes primarily from improvements in productivity. Productivity is a measure of the efficiency of three inputs – labour, capital and technology. Technological improvements account for 80% of the increase in productivity = economic growth.

Following the 1973 Yom Kippur oil crises and the recession it caused, three German researchers asked if perhaps energy supply had a role in economic growth. In order to find out, they introduced inputs of energy into the analysis of U.S. economic growth since 1900. They found that for every 1% increase in energy use, there was a 0.54% increase in economic output. In other words, increases in energy use was responsible for 54% of economic growth in the United States.

More recently, Robert Underwood Ayers asked if economic growth could be explained by improvements in energy efficiency. Instead of using total energy consumed as an input, he used the amount of energy that actually did useful work, productive energy . Using an analytical method similar to the German researchers, he determined that increases in energy productivity were responsible for 70% of U.S. economic growth. His model generated a prediction of U.S. economic growth during the 20th century that almost exactly matched actual growth.

So, it is not technological advance in general that explains the “residual” 80% of economic growth. Increases in the consumption of energy account for 54%. Refining the analysis, improvements in energy productivity (a technology) explain 70%, almost all of Solow’s residual. Seventy percent of economic growth comes from increases in the productive energy we use.

There is good news and bad news in this explanation of economic growth. The good news is that increased efficiency in energy use pays big economic dividends. Using energy more efficiently will offset reductions in the amount of available energy. A kilojoule saved is a kilojoule earned.

The bad news is that we have a measure of the extent to which economies are dependent on energy. One can say that energy is the fundamental currency of an economy. Every 1% decrease in productive energy will, in Western economies, cause a roughly 0.7% decrease in the size of the economy.

Oil, which supplies about 40% of our energy, is expected to decline by 3-7% after the oil peak. Let’s use 5%. So, using a crude math, without substitutes, our economy would shrink by 2% annually. Every year until we find a solution.

EROI and EROEI

Energy return on investment (EROI) refers to the amount of energy produced per input of labour and capital. It is a measure of the efficiency, measured in cost, of producing energy. EROI is what decides if an energy source is currently economically viable. The best EROI is always sought. Increases in EROI should stimulate economic growth. Decline in EROI should cause economic decline.

A related measure with slightly different significance is energy return on energy invested (EROEI). Just as it sounds, this is the measure of how much energy must be consumed to produce a unit of energy. As EROEI increases, it takes more energy to produce energy. In early days of oil production, the equivalent energy of one barrel of oil produced thirty or more barrels of oil. Alberta oil sands have an EROEI between four and six.

Both measures are indicators of diminishing returns. Peak oil is the tipping point at which investments of capital and energy yield diminishing returns. Oil production will cease when either measure is so low that capital or energy flows to higher returns.

Long before oil runs out, diminishing returns on investments will mean that oil energy increases in expense. As time goes by, it will take more and more resources to produce a unit of oil energy. That is to say, our production of energy will become less efficient. Economic growth has been 70% fuelled by increased energy efficiency (net productive energy over units of energy, labour and capital used). As returns diminish, so will the economy.

Most economists don’t understand the role of energy in economies or the consequences of diminishing EROI and EROEI. It is little wonder that the public has incorrect perceptions. Much of the popular hope for the post-oil glut age is that other forms of energy will provide alternatives. There are two major problems with this hope. Firstly, most alternatives have lower EROI and EROEI than oil production. Reductions in EROI and EROEI translate into decreased useable energy and wealth. Secondly, all alternatives depend in some way on energy from oil for their manufacture and maintenance. Combine these two factors and you have high EROI and EROEI oil being used to produce lower EROI and EROEI substitutes.

Economics of energy and the energy descent

Energy is the most fundamental resource. No, you will say. Surely food and water are more fundamental. Food is an energy resource. We will grant you that water is just as fundamental. Some economists argue there is a direct relationship between a society’s ability to harness and distribute energy and its economic, social and military strength. Simple evidence for that can be seen at stages of human development. Once food could be grown, there was an energy dividend that allowed non-food producing occupations and eventually the formation of more complex polities. As ability to control the source of energy (food) was extended and production was increased by irrigation, ever more complex social organizations developed.

The concept of energy return on energy invested is critical for understanding energy economics (and why oil is so special and difficult to replace). Hunters and gatherers got just about the same energy yield from their efforts as they put into the tasks. Farmers could produce more energy than they needed and the surplus was used by non-farmers. That surplus EROEI is wealth.

Exploitation of fossil fuels kicked off the industrial revolution. Nations with access to energy sources and the technology to use them led the development race and became wealthy fastest. Coal was replaced at the beginning of the 20th century by more efficient and versatile oil. Since then, human population, agricultural output, economic growth and social complexity have increased at rates never seen in human history.

Cheap, abundant, transportable, versatile black goo has supported exponential growth and planetary exploitation over the past century. Oil is an amazingly intense source of energy. A litre of gasoline contains the equivalent of three days (30 hours) of human physical labour. High EROI and EROEI have added fantastic growth in world wealth, albeit that wealth is unevenly distributed.

Oil is used for 95% of transportation fuels and transportation uses consume 60% of what is produced. Another 30% is used to power farm, logging, mining and construction equipment, to fuel irrigation pumps, make lubricants and provide energy to heat and for manufacturing. Only 10% of oil is used to make things, which gives some perspective on how much 10% is. It takes pages to list the things that are made from oil. Here are a few: plastic bags (100 billion annually in the U.S.), nylon clothing, CDs and DVDs, all plastics and synthetic rubber, packaging, pesticides and fertilizers, dyes, inks and paints, pharmaceuticals, detergents, carpets, insulation, cosmetics, adhesives, asphalt, acrylic resins.

We are as dependent on oil as ancient agricultural societies were on what they could grow. Agricultural societies got there most important and versatile energy from crops for human consumption and to fuel there transportation and work instruments, namely oxen, horses, dogs and the like. They grew crops to make many of the most important things: clothing, sails, rope, dyes, resins, containers, tools, medicines and etcetera. When there was famine people and work tools starved; transport, work and manufacturing declined. An oil famine will have the same effect because we virtually eat oil, it fuels our transport and work and we make the most important things from it.

Our reliance on oil for these sources of power and manufactured goods is fairly well known. It is less well understood that only something else that is both an energy source, chemical source and material source can replace oil with all of its versatility. One cannot make things out of wind or nuclear power, nor are they efficient sources of transportation power, at least not now.

But our dependence of oil (and gas) does not stop on things that transport us or things we make out of it. Our institutions depend on fossil fuels. Connectivity and complexity are fuelled by oil.

As technologies have advanced and material wealth grown, the world has become increasing inter-connected and inter-dependent. We have instantaneous world-wide communications. An event in any part of the world can be known globally in minutes. Globalization is another name for connectivity. A car assembled in Oshawa can have design, insurance, and parts from scores of countries. Our financial institutions are globally one and even small failures in one part of the world can reverberate around the globe, as the 1998 Asian flu economic crisis and the more recent sub-prime mortgage collapse in the United States illustrate. Cheap energy has enabled connectivity.

Complexity refers to the number and specialization of institutions, regulatory bodies, technologies and procedures that accompany economic growth. All of these take energy to maintain them. Here is a constructed example. A province is opened up for homesteading in the 1850s. The government sends in a survey team to mark sections. A system of roads is built. Farming begins. A registry of land deeds is set up. A department is needed to determine and collect taxes. A system for collecting taxes is set up. Law enforcement is required sometimes to collect taxes. Both the tax collectors and law enforcers require organizations to govern them and others organizations to audit them. Later, boards are set up to regulate production quotas and to provide crop subsidies to farmers. These organizations need a watch dogs. Later, a watch dog of all watch dog organizations is created. And so on.

Every level, every new organization, even every regulation requires energy. Every time a government department is added, more office space is built: more energy to heat the work place, more telephones, computers, paper, etc. Travel is required to get to work and to get the job done.

What is important to understand from this contrived example is that no additional energy is added by these tiers of organization. The same amount of energy, in this case food energy, is produced. Early levels of organizational development – land surveys, road building – are necessary to produce the crops (energy), but most subsequent levels are not. Although developing layers may provide some social good (taxation), each successive layer uses energy. Each additional layer yields diminishing returns on improving the creation and distribution of energy. The EROI shrinks and quickly layers have negative EROI; they are parasitic on the energy base.

Tiered complexity adds less and less to productivity in the corporate world, non-profit sector, education, military, you name it. Think of all of the forms of regulation, organizations of associations, regulatory bodies, regulators of regulatory bodies in BC, where even parents of children need to take a course in food safety before they can cook hotdogs for their kids at a school outing. How much energy does Food Safe use?

Every layer requires energy. We have been able to create systems of complexity because energy has been cheap and we can afford to add non-productive layers to our social and economic organization. Complexity breeds complexity. Every new technology requires regulation, and hence monitoring . . . and monitoring of the monitoring. And frills: studying the complexity we have created.

As our problems grow – many of which are outcomes of complexity – we add more institutions, procedures and regulations in attempt to solve them. This is not an argument against institutionalism or regulations. And we do find ways to get more out or our energy sources. Yet, even increased energy efficiency goes, in part, to adding complexity.

In the decades ahead our problems are going to get even bigger. We are going to have a depression caused by lack of our most important energy resource. We will fight a depression with less energy. Governments helped ease the Great Depression with massive expenditures of energy on building infrastructures. Governments will not be able to that in a depression caused by energy shortages. And, we will need to tackle the effects of global warming and a shrinking energy economy on a global scale. The problem is we will have less energy to use. That means that we will have to shed complexity, while solving global problems.

On the home front, during the energy descent our national, provincial and local institutions will have to down-size with the declining economy. We will simplify. The effects can be described as reductions in layers and scale. We will first shed the layers with the lowest returns on energy invested. Reductions in scale will follow layer divestment, but some of the localization of politics and economy will occur because they address new realities.

It is possible that a transition from complexity to simplicity will have as great an impact on the quality and order of the energy descent as will reductions in wealth. Our social fabric is adjusted to our level of complexity and connectivity. Simplification will be, fundamentally, a shift in our political economies (plural is intentional). Our governments need to work out relationships that are suited to an energy-poor depression.

We will need to shift from a top-heavy national/provincial governance to regional governance. Currently, our laws prohibit almost all of the autonomies that the energy descent economy will require. For example: local food consumption – the chicken that does not travel 1000 km round trip from farm to abattoir to table – is prohibited by a multitude of farm boards and regulations. Here is an example of a recipe for conflict during the energy descent. A provincial government (for as long as it is capable) legislates that food be shipped to the city. Rural communities are managing food production for local needs.

Many of the decisions made far away will be made locally. The current form of rural government in BC is legislated by provincial government in two principle Acts: The Local Government Act and The Community Charter. Legislation and funding mechanisms make rural communities and hinterlands dependent on the provincial government. It is not a bad relationship now. It is unlikely that we will see an enlightened devolution of power from province to self-proclaimed regions. If things get really serious, devolution will happen per force.

An orderly change from globalization and national scales to regionalism and localization is probably the biggest challenge we will face during the energy descent. There is no model to guide us. The historical record is empty when it comes to navigating through deep decline or collapse, unless we believe the Biblical story of Egypt saving the plenty of seven years for seven years of famine.

Everyone will suffer. Assets will become worthless. Things will not be available. We can’t dodge the impacts of declining wealth and declining complexity. Our success at getting through the energy descent in something like an orderly fashion will depend on a reorganization of society, politics and economics. Fortunately, changing the way civilization operates is something we can control. There is nothing inevitable when it comes to social change. The required changes will be fundamental and will effect every aspect of life and governance. It is best not to wait for the inevitable decline to make changes in structures over which we have some control.

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