The End of Growth – Richard Heinberg

” The central assertion of this book is both simple and startling: Economic growth as we have known it is over and done with.      … we are seeing a perfect storm of converging crises that together represent a watershed moment in the history of our species. We are witnesses to, and participants in, the transition from decades of economic growth to decades of economic contraction.”

Post Carbon Senior Fellow Richard Heinberg is currently putting the finishing touches to his new book The End of Growth, which is set for publication by New Society Publishers in July 2011. Given the urgency and fragility of the global economic crisis, [the Post Carbon Institute] are serializing the draft content as Richard writes it.

Additionally, Richard will be offering ‘live peeks’ at the events and information that inform his writing process through Facebook and Twitter accounts created expressly for this publication.

The article was originally published as the MuseLetter #222

Here are some extracts:

Introduction: The New Normal

The central assertion of this book is both simple and startling: Economic growth as we have known it is over and done with.

The “growth” we are talking about consists of the expansion of the overall size of the economy (with more people being served and more money changing hands) and of the quantities of energy and material goods flowing through it.

The economic crisis that began in 2007-2008 was both foreseeable and inevitable, and it marks a permanent, fundamental break from past decades—a period during which most economists adopted the unrealistic view that perpetual economic growth is necessary and also possible to achieve. There are now fundamental barriers to ongoing economic expansion, and the world is colliding with those barriers.

This is not to say the U.S. or the world as a whole will never see another quarter or year of growth relative to the previous quarter or year. However, when the bumps are averaged out, the general trend-line of the economy (measured in terms of production and consumption of real goods) will be level or downward rather than upward from now on.

Nor will it be impossible for any region, nation, or business to continue growing for a while. Some will. In the final analysis, however, this growth will have been achieved at the expense of other regions, nations, or businesses. From now on, only relative growth is possible: the global economy is playing a zero-sum game, with an ever-shrinking pot to be divided among the winners. 

Why Is Growth Ending?

Many financial pundits point to profound problems internal to the economy—including overwhelming, un-repayable levels of public and private debt, and the bursting of the real estate bubble—as immediate threats to the resumption of economic growth. The assumption generally is that eventually, once these problems are dealt with, growth can and will pick up again. But the pundits generally miss factors external to the financial economy that make a resumption of conventional economic growth a near-impossibility. This is not a temporary condition; it is essentially permanent.

Altogether, as we will see in the following chapters, there are three primary factors that stand firmly in the way of further economic growth:

  • The depletion of important resources including fossil fuels and minerals;
  • The proliferation of environmental impacts arising from both the extraction and use of resources (including the burning of fossil fuels)—leading to snowballing costs from both these impacts themselves and from efforts to avert them and clean them up; and
  • Financial disruptions due to the inability of our existing monetary, banking, and investment systems to adjust to both resource scarcity and soaring environmental costs—and their inability (in the context of a shrinking economy) to service the enormous piles of government and private debt that have been generated over the past couple of decades.

Despite the tendency of financial commentators to focus only on the last of these factors, it is possible to point to literally thousands of events in recent years that illustrate how all three are interacting, and are hitting home with ever more force.

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But we are, and will be, seeing a cavalcade of environmental and economic disasters, not obviously related to one another, that will stymie economic growth in more and more ways. These will include but are not limited to:

  • Climate change leading to regional droughts, floods, and even famines;
  • Shortages of water and energy; and
  • Waves of bank failures, company bankruptcies, and house foreclosures.

Each will be typically treated as a special case, a problem to be solved so that we can get “back to normal.” But in the final analysis, they are all related, in that they are consequences of growing human population striving for higher per-capita consumption of limited resources (including non-renewable, climate-altering fossil fuels), all on a finite and fragile planet.

Meanwhile, the unwinding of decades of buildup in debt has created the conditions for a once-in-a-century financial crash—which is unfolding around us, and which on its own has the potential to generate substantial political unrest and human misery.

The result: we are seeing a perfect storm of converging crises that together represent a watershed moment in the history of our species. We are witnesses to, and participants in, the transition from decades of economic growth to decades of economic contraction.

 

But Isn’t Growth Normal?

Economies are systems, and as such they (to a certain extent at least) follow rules analogous to those that govern biological systems. Plants and animals tend to grow quickly when they are young, but then they reach a more or less stable mature size. In organisms, growth rates are largely controlled by genes, but also by availability of food.

In economies, growth seems tied to economic planning, and also to the availability of resources—chiefly energy resources (“food” for the industrial system), as well as credit (“oxygen” for the economy).

During the 19th and 20th centuries, expanding access to cheap and abundant fossil fuels enabled rapid economic expansion; economic planners began to take this situation for granted. Financial systems internalized the expectation of growth as a promise of returns on investments.

But just as organisms cease growing, economies must do so too. Even if planners (society’s equivalent of regulatory DNA) dictate more growth, at some point increasing amounts of “food” and “oxygen” may cease to be available. It is also possible for industrial wastes to accumulate to the point that the biological systems that underpin economic activity (such as forests, crops, and human bodies) are smothered and poisoned.

But many economists don’t see things this way. That’s probably because current economic theories were formulated during the anomalous historical period of sustained growth that is now ending. Economists are merely generalizing from their experience: they can point to decades of steady growth in the recent past, and they simply project that experience into the future. Moreover, they have ways to explain why modern market economies are immune to the kinds of limits that constrain natural systems: the two main ones have to do with substitution and efficiency.

If a useful resource becomes scarce, its price will rise, and this creates an incentive for users of the resource to find a substitute. For example, if oil gets expensive enough, energy companies might start making liquid fuels from coal. Or they might develop other energy sources undreamed of today. Many economists theorize that this process of substitution can go on forever. It’s part of the magic of the free market.

Increasing efficiency means doing more with less. In the U.S., the number of inflation-adjusted dollars generated in the economy for every unit of energy consumed has increased steadily over recent decades (the amount of energy, in British Thermal Units, required to produce a dollar of GDP dropped from close to 20,000 BTU per dollar in 1949 to 8,500 BTU in 2008). Part of this increasing efficiency has come about as a result of the outsourcing of manufacturing to other nations—which burn the coal, oil, or natural gas to make our goods (if we were making our own running shoes and LCD TVs, we’d be burning that energy domestically). Economists also point to another, related form of efficiency that has less to do with energy (in a direct way, at least): the process of identifying the cheapest sources of materials, and the places where workers will be most productive and work for the lowest wages. As we increase efficiency, we use less—of energy, resources, labor, or money—to do more. That enables more growth.

Finding substitutes for depleting resources and upping efficiency are undeniably effective adaptive strategies of market economies. Nevertheless, the question remains as to how long these strategies can continue to work in the real world—which is governed less by economic theories than by the laws of physics. In the real world, some things don’t have substitutes, or the substitutes are too expensive, or don’t work as well, or can’t be produced fast enough. And efficiency follows a law of diminishing returns: the first gains in efficiency are usually cheap, but every further incremental gain tends to cost more, until further gains become prohibitively expensive.

In the end, we can’t outsource more than 100 percent of manufacturing, we can’t transport goods with zero energy, and we can’t enlist the efforts of workers and count on their buying our products while paying them nothing.

Unlike most economists, most physical scientists recognize that growth within any functioning, bounded system has to stop sometime.

The Simple Math of Compounded Growth

In principle, the argument for an eventual end to growth is a slam-dunk. If any quantity grows steadily by a certain fixed percentage per year, this implies that it will double in size every so-many years; the higher the percentage growth rate, the quicker the doubling. A rough method of figuring doubling times is known as the rule of 70: dividing the percentage growth rate into 70 gives the approximate time required for the initial quantity to double. If a quantity is growing at 1 percent per year, it will double in 70 years; at 2 percent per year growth, it will double in 35 years; at 5 percent growth, it will double in only 14 years, and so on. If you want to be more precise, you can use the Y^x button on a scientific calculator, but the rule of 70 works fine for most purposes.

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In nature, growth always slams up against non-negotiable constraints sooner or later. If a species finds that its food source has expanded, its numbers will increase to take advantage of those surplus calories—but then its food source will become depleted as more mouths consume it, and its predators will likewise become more numerous (more tasty meals for them!). Population “blooms” (or periods of rapid growth) are always followed by crashes and die-offs. Always.

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The Peak Oil Scenario

As mentioned, this book will argue that growth is over because of a convergence of three factors—resource depletion, environmental impacts, and systemic financial and monetary failures. However, a single factor may be playing a key role in bringing the age of expansion to a close. That factor is oil.

Petroleum has a pivotal place in the modern world—in transportation, agriculture, and the chemicals and materials industries. The Industrial Revolution was really the Fossil Fuel Revolution, and the entire phenomenon of continuous economic growth—including the development of the financial institutions that facilitate growth, such as fractional reserve banking—is ultimately based on ever-increasing supplies of cheap energy. Growth requires more manufacturing, more trade, and more transport, and those all in turn require more energy. This means that if energy supplies can’t expand and energy therefore becomes significantly more expensive, economic growth will falter and financial systems built on expectations of perpetual growth will fail.

As early as 1998, petroleum geologists Colin Campbell and Jean Laherrère were discussing a Peak Oil impact scenario that went like this. Sometime around the year 2010, they theorized, stagnant or falling oil supplies would lead to soaring and more volatile petroleum prices, which would precipitate a global economic crash. This rapid economic contraction would in turn lead to sharply curtailed energy demand, so oil prices would then fall; but as soon as the economy regained strength, demand for oil would recover, prices would again soar, and as a result of that the economy would relapse. This cycle would continue, with each recovery phase being shorter and weaker, and each crash deeper and harder, until the economy was in ruins. Financial systems based on the assumption of continued growth would implode, causing more social havoc than the oil price spikes would themselves generate.

Meanwhile, volatile oil prices would frustrate investments in energy alternatives: one year, oil would be so expensive that almost any other energy source would look cheap by comparison; the next year, the price of oil would have fallen far enough that energy users would be flocking back to it, with investments in other energy sources looking foolish. But low oil prices would discourage exploration for more petroleum, leading to even worse fuel shortages later on. Investment capital would be in short supply in any case because the banks would be insolvent due to the crash, and governments would be broke due to declining tax revenues. Meanwhile, international competition for dwindling oil supplies might lead to wars between petroleum importing nations, between importers and exporters, and between rival factions within exporting nations.

In the years following Campbell and Laherrère’s initial publication, many pundits claimed that new technologies for crude oil extraction would increase the amount of oil that can be obtained from each well drilled, and that enormous reserves of alternative hydrocarbon resources (principally tar sands and oil shale) would be developed to seamlessly replace conventional oil, thus delaying the inevitable peak for decades. There were also those who said that Peak Oil wouldn’t be much of a problem even if it happened soon, because the market would find other energy sources or transport options as quickly as needed—whether electric cars, hydrogen, or liquid fuel made from coal.

In succeeding years, events appeared to be supporting the Peak Oil thesis and undercutting the views of the oil optimists. Oil prices trended steeply upward—and for entirely foreseeable reasons: discoveries of new oilfields were continuing to dwindle, with most new fields being much more difficult and expensive to develop than ones found in previous years. More oil-producing countries were seeing their extraction rates peaking and beginning to decline despite efforts to maintain production growth using high-tech, expensive secondary and tertiary extraction methods like the injection of water, nitrogen, or CO2 to force more oil out of the ground. Production decline rates in the world’s old, super-giant oilfields, which are responsible for the lion’s share of the global petroleum supply, were accelerating. Production of liquid fuels from tar sands was expanding only slowly, while the development of oil shale remained a hollow promise for the distant future.

From Scary Theory to Scarier Reality

Then in 2008, the Peak Oil scenario became all too real. Global oil production had been stagnant since 2005 and petroleum prices had been soaring upward. In July 2008, the per-barrel price shot up nearly to $150—half again higher (in inflation-adjusted terms) than the price spikes of the 1970s that had triggered the worst recession since World War II. By summer 2008, the auto industry, the trucking industry, international shipping, agriculture, and the airlines were all reeling.

But what happened next riveted the world’s attention to such a degree that the oil price spike was all but forgotten: in September 2008, the global financial system nearly collapsed. The reasons for this sudden, gripping crisis apparently had to do with housing bubbles, lack of proper regulation of the banking industry, and the over-use of bizarre financial products that almost nobody understood. However, the oil price spike had played a critical (if largely overlooked) role in initiating the economic meltdown (see Temporary Recession or the End of Growth?).

In the immediate aftermath of that global financial near-death experience, both the Peak Oil impact scenario proposed a decade earlier and the Limits to Growth standard-run scenario of 1972 seemed to be confirmed with uncanny and frightening accuracy. Global trade was falling. The world’s largest auto companies were on life support. The U.S. airline industry had shrunk by almost a quarter. Food riots were erupting in poor nations around the world. Lingering wars in Iraq (the nation with the world’s second-largest crude oil reserves) and Afghanistan (the site of disputed oil and gas pipeline projects) continued to bleed the coffers of the world’s foremost oil-importing nation.

Meanwhile, the debate about what to do to rein in global climate change exemplified the political inertia that had kept the world on track for calamity since the early ’70s. It had by now become obvious to nearly every person of modest education and intellect that the world has two urgent, incontrovertible reasons to rapidly end its reliance on fossil fuels: the twin threats of climate catastrophe and impending constraints to fuel supplies. Yet at the Copenhagen climate conference in December, 2009, the priorities of the most fuel-dependent nations were clear: carbon emissions should be cut, and fossil fuel dependency reduced, but only if doing so does not threaten economic growth.

 

Read this chapter in full and other released chapters at

http://www.postcarbon.org/article/178709-the-end-of-growth