Economic growth: How it works; how it fails; why wealth disparity occurs

Economists have put together models of how an economy works, but these models were developed years ago, when the world economy was far from limits. These models may have been reasonably adequate when they were developed, but there is increasing evidence that they don’t work in an economy that is reaching limits. For example, my most recent post, “Why ‘supply and demand’ doesn’t work for oil,” showed that when the world is facing the rising cost of oil extraction, “supply and demand” doesn’t work in the expected way.

In order to figure out what really does happen, we need to consider findings from a variety of different fields, including biology, physics, systems analysis, finance, and the study of past economic collapses. Since I started studying the situation in 2005, I have had the privilege of meeting many people who work in areas related to this problem.

My own background is in mathematics and actuarial science. Actuarial projections, such as those that underlie pensions and long term care policies, are one place where historical assumptions are not likely to be accurate, if an economy is reaching limits. Because of this connection to actuarial work, I have a particular interest in the problem.

How Other Species Grow 

We know that other species don’t amass wealth in the way humans do. However, the number of plants or animals of a given type can grow, at least within a range. Techniques that seem to be helpful for increasing the number of a given species include:

  • Natural selection. With natural selection, all species have more offspring than needed to reproduce the parent. A species is able to continuously adapt to the changing environment because the best-adapted offspring tend to live.
  • Cooperation. Individual cells within an organism cooperate in terms of the functions they perform. Cooperation also occurs among members of the same species, and among different species (symbiosis, parasites, hosts). In some cases, division of labor may occur (for example, bees, other social insects).
  • Use of tools. Animals frequently use tools. Sometimes items such as rocks or logs are used directly. At other times, animals craft tools with their forepaws or beaks.

All species have specific needs of various kinds, including energy needs, water needs, mineral needs, and lack of pollution. They are in constant competition with both other members of the same species and with members of other species to meet these needs. It is individuals who can out-compete others in the resource battle that survive. In some cases, animals find hierarchical behavior helpful in the competition for resources.

There are various feedbacks that regulate the growth of a biological system. For example, a person or animal eats, and later becomes hungry. Likewise, an animal drinks, and later becomes thirsty. Over the longer term, animals have a reserve of fat for times when food is scarce, and a small reserve of water. If they are not able to eat and drink within the required timeframe, they will die. Another feedback within the system regulates overuse of resources: if any kind of animal eats all of a type of plant or animal that it requires for food, it will not have food in the future.

Energy needs are one of the limiting factors, both for individual biological members of an ecosystem, and for the overall ecosystem. Energy systems need greater power (energy use per period of time) to out-compete one another. The Maximum Power Principle by Howard Odum says that biological systems will organize to increase power whenever system constraints allow.

Another way of viewing energy needs comes from the work of Ilya Prigogine, who studied how ordered structures, such as biological systems, can develop from disorder in a thermodynamically open system. Prigogine has called these ordered structures dissipative systems. These systems can temporarily exist as long as the system is held far from equilibrium by a continual flow of energy through the system. If the flow energy disappears, the biological system will die.

Using either Odum’s or Prigogine’s view, energy of the right type is essential for the growth of an overall ecosystem as well as for the continued health of its individual members.

How Humans Separated Themselves from Other Animals

Animals generally get energy from food. It stands to reason that if an animal has a unique way of obtaining additional energy to supplement the energy it gets from food, it will have an advantage over other animals. In fact, this approach seems to have been the secret to the growth of human populations.

Human population, plus the domesticated plants and animals of humans, now dominate the globe. Humans’ path toward population growth seems to have started when early members of the species learned how to burn biomass in a controlled way. The burning of biomass had many benefits, including being able to keep warm, cook food and ward off predators. Cooking food was especially beneficial, because it allowed humans to use a wider range of foodstuffs. It also allowed bodies of humans to more easily get nutrition from food that was eaten. As a result, stomachs, jaws, and teeth could become smaller, and brains could become bigger, enabling more intelligence. The use of cooked food began long enough ago that our bodies are now adapted to the use of some cooked food.

With the use of fire to burn biomass, humans could better “win” in the competition against other species, allowing the number of humans to increase. In this way, humans could, to some extent, circumvent natural selection. From the point of the individual who could live longer, or whose children could live to maturity, this was a benefit. Unfortunately, it had at least two drawbacks:

  1. While animal populations tended to become increasingly adapted to a changing environment through natural selection, humans tend not to become better adapted, because of the high survival rate that results from more adequate food supplies and better healthcare. Humans might eventually find themselves becoming less well adapted: more overweight, or having more physical disabilities, or having more of a tendency toward diabetes.
  2. Without a natural limit to population, the quantity of resources per person tends to decline over time. For example, such a tendency tends to lead to less farmland per person. This would be a problem if techniques remained the same. Thus, rising population tends to lead to constant pressure to raise output (more food per arable acre or technological advancements that allow the economy to “do more with less”).

How Humans Have Been Able to Meet the Challenge of Rising Population Relative to Resources

Humans were able to meet the challenge of rising population by taking the techniques many animals use, as described above, and raising them to new levels. The fact that humans figured out how to burn biomass, and later would learn to harness other kinds of energy, gave humans many capabilities that other animals did not have.

  • Co-operation with other humans became possible, through a variety of mechanisms (learning of language with our bigger brains, development of financial systems to facilitate trade). Even as hunter-gatherers, researchers have found that economies of scale (enabled by co-operation) allowed greater food gathering per hectare. Division of labor allowed some specialization, even in very early days (gathering, fishing, hunting).
  • Humans have been able to domesticate many kinds of plants and animals.  Generally, the relationship with other species is a symbiotic relationship–the animals gain the benefit of a steady food supply and protection from predators, so their population can increase. Chosen plants have little competition from “weeds,” thanks to the protection humans provide. As a result, they can flourish whether or not they would be competitive with other plants and predators in the wild.
  • Humans have been able to take the idea of making and using tools to an extreme level. Humans first started by using fire to sharpen rocks. With the sharpened rocks, they could make new devices such as boats, and they could make spears to help kill animals for food. Tools could be used for planting the seeds they wanted to grow, so they did not have to live with the mixture of plants nature provided. We don’t think of roads, pipelines, and lines for transmitting electricity as tools, but as a practical matter, they also provide functions similar to those of tools. The many chemicals humans use, such as herbicides, insecticides, and antibiotics, also act in way similar to tools. The many objects that humans create to make life “better” (houses, cars, dishwashers, prepared foods, cosmetics) might in some very broad sense be considered tools as well. Some tools might be considered “capital,” when used to create additional goods and services.
  • Humans created businesses and governments to enable better organization, including division of labor and hierarchical behavior. A single person can create a simple tool, just as an animal can. But there are economies of scale, such as when many devices of a particular kind can be made, or when some individuals learn specialized skills that enable them to perform particular tasks better. As mentioned previously, even in the days of hunter-gatherers, there were economies of scale, if a larger group of workers could be organized so that specialization could take place.
  • Financial systems and changing systems of laws and regulations provide additional structure to the system, telling businesses and customers how much of a given product is required at a given time, and at what prices. In animals, appetite and thirst determine how important obtaining food and water are at a given point in time. Financial systems provide a somewhat similar role for an economy, but the financial system doesn’t operate within as constrained a system as hunger and thirst. As a result, the financial system can give strange signals, including prices that at times fall below the cost of extraction.
  • Humans have tended to put resources of many kinds (arable land, land for homes and businesses, fresh water, mineral resources) under the control of governments. Governments then authorize particular individuals and business to use this land, under various arrangements (“ownership,” leases, or authorized temporary usage). Governments often collect taxes for use of the resources. The practice is in some ways similar to the use of territoriality by animals, but it can have the opposite result. With animals, territoriality is used to prevent crowding, and can act to prevent overuse of shared resources. With human economies, ownership or temporary use permits can lead to a government sanctioned way of depleting resources, and thus, over time, can lead to a higher cost of resource extraction.

Physicist François Roddier has described individual human economies as another type of dissipative structure, not too different from biological systems, such as plants, animals, and ecosystems. If this is true, an adequate supply of energy is absolutely essential for the growth of the world economy.

We know that there is a very close tie between energy use and the growth of the world economy. Energy consumption has recently been dropping (Figure 1), suggesting that the world is heading into recession again. The Wall Street Journal indicates that a junk bond selloff also points in the direction of a likely recession in the not-too-distant future.

Figure 1. Three year average growth rate in world energy consumption and in GDP. World energy consumption based on BP Review of World Energy, 2015 data; real GDP from USDA in 2010$.

Figure 1. Three year average growth rate in world energy consumption and in GDP. World energy consumption based on BP Review of World Energy, 2015 data; real GDP from USDA in 2010$.

What Goes Wrong as Economic Growth Approaches Limits?

We know that in the past, many economies have collapsed. In fact, if Roddier is correct about economies being dissipative structures, then we know that economies cannot be expected to last forever. Economies will tend to run into energy limits, and these energy limits will ultimately bring them down.

The symptoms that occur when economies run into energy limits are not intuitively obvious. The following are some of the things that generally go wrong:

Item 1. A slowdown in economic growth.

Research by Turchin and Nefedov regarding historical collapses shows that growth tended to start in an economy when a group of people discovered a new energy-related resource. For example, a piece of land might be cleared to allow more arable land, or existing arable land might be irrigated. At first, these new resources allowed economies to grow rapidly for many years. Once the population grew to match the new carrying capacity of the land, economies tended to hit a period of “stagflation” for another period, say 50 or 60 years. Eventually “collapse” occurred, typically over a period of 20 or more years.

Today’s world economy seems to be following a similar pattern. The world started using coal in quantity in the early 1800s. This helped ramp up economic growth above a baseline of less than 1% per year. A second larger ramp up in economic growth occurred about the time of World War II, as oil began to be put to greater use (Figure 2).

Figure 2. World GDP growth compared to world energy consumption growth for selected time periods since 1820. World real GDP trends for 1975 to present are based on USDA real GDP data in 2010$ for 1975 and subsequent. (Estimated by author for 2015.) GDP estimates for prior to 1975 are based on Maddison project updates as of 2013. Growth in the use of energy products is based on a combination of data from Appendix A data from Vaclav Smil's Energy Transitions: History, Requirements and Prospects together with BP Statistical Review of World Energy 2015 for 1965 and subsequent.

Figure 2. World GDP growth compared to world energy consumption growth for selected time periods since 1820. World real GDP trends for 1975 to present are based on USDA real GDP data in 2010$ for 1975 and subsequent. (Estimated by author for 2015.) GDP estimates for prior to 1975 are based on Maddison project updates as of 2013. Growth in the use of energy products is based on a combination of data from Appendix A data from Vaclav Smil’s Energy Transitions: History, Requirements and Prospects together with BP Statistical Review of World Energy 2015 for 1965 and subsequent.

Worldwide, the economic growth rate hit a high point in the 1950 to 1965 period, and since then has trended downward. Figure 2 indicates that in all periods analyzed, the increase in energy consumption accounts for the majority of economic growth.

Since 2001, when China joined the World Trade Organization, world economic growth has been supported by economic growth in China. This growth was made possible by China’s rapid growth in coal consumption (Figure 3).

Figure 3. China's energy consumption by fuel, based on data of BP Statistical Review of World Energy 2015.

Figure 3. China’s energy consumption by fuel, based on data of BP Statistical Review of World Energy 2015.

China’s growth in energy consumption, particularly coal consumption, is now slowing. Its economy is slowing at the same time, so its leadership in world economic growth is now being lost. There is no new major source of cheap energy coming online. This is a major reason why world economic growth is slowing.

Item 2. Increased use of debt, with less and less productivity of that debt in terms of increased goods and services produced.  

Another finding of Turchin and Nefedov is that the use of debt tended to increase in the stagflation period. Since growth was lower in this period, it is clear that the use of debt was becoming less productive.

If we look at the world situation today, we find a similar situation. More and more debt is being used, but that debt is becoming less productive in terms of the amount of GDP being provided. In fact, this pattern of falling productivity of debt seems to have been taking place since the early 1970s, when the price of oil rose above $20 per barrel (in 2014$). It is doubtful that that economic growth can occur if the price of oil is above $20 per barrel, without debt spiraling ever upward as a percentage of GDP. It is supplemental energy that allows the economy to function. If the price of energy is too high, it becomes unaffordable, and economic growth slows.

Figure 4. Worldwide average inflation-adjusted annual growth rates in debt and GDP, for selected time periods. See post on debt for explanation of methodology.

Figure 4. Worldwide average inflation-adjusted annual growth rates in debt and GDP, for selected time periods. See author’s post on debt for explanation of methodology.

China has been using debt to fund its recent expansion. There is evidence that it, too, is encountering falling productivity of additional debt.

We mentioned that appetite controls how much an animal eats. Debt helps control demand for energy products, and in fact, for products of all kinds in the economy. Appetite is different from debt as a regulator of demand. For one thing, debt can be used for an almost unlimited number of purposes, whether or not these purposes have any real possibility of adding GDP to the economy. (This is especially true if interest rates are close to 0%, or even negative.) There are few controls on debt. Governments have discovered that in some instances, debt stimulates an economy. Because of this, governments have tended to be very liberal in encouraging growth in debt. Often, when a debtor is near default, this problem is hidden by extending the term of the loan and pretending that no problem exists.

With respect to biological organisms, energy is often stored up as fat and used later when there is a shortfall of energy. This is the opposite of the way financing for human “tools” generally works. Here financing is often obtained when a tool is put into operation, with the hope that the new tool will pay back its worth, plus interest, over the life of the tool. Much debt doesn’t even have such a purpose; sometimes it is used simply to make an expensive object easier to purchase, or to give a young person (perhaps with poor grades) an opportunity to attend college. When debt has such poor regulation, we cannot expect it to work as reliably as biological mechanisms in feeding back information regarding true “demand” through the price system.

Item 3. Increased disparity of wages; non-elite workers earning less.

Item 3 is another problem that Turchin and Nefedov encountered in reviewing economies that collapsed. One of the reasons for the increased disparity of wages is the increased need for hierarchical relationships if an economy wants to work around a shortfall in goods and services by adding new “tools”. Businesses and governments need to grow larger if they are to accommodate these more complex processes. In such a case, the natural tendency is for these organizations to become more hierarchical in nature. Also, if there is growth, followed by a temporary need to shrink back, the cutbacks are likely to come disproportionately from the lower ranks of workers, reinforcing the hierarchical structure.

Figure 5. Chart by Pavlina Tscherneva, in Reorienting Fiscal Policy, as reprinted by the Washington Post.

Figure 5. Chart by Pavlina Tscherneva, in Reorienting Fiscal Policy, as reprinted by the Washington Post.

Funding arrangements for the new “tools” to work around shortages add to the hierarchical behavior. Typically, businesses must expand to fund the development of the new tools. This expansion may be funded by debt, or by stock programs. Regardless of which approach is used for funding, the programs tend to funnel an increasing share of the wealth of the economy to the wealthier members of the economy. This happens because interest payments and dividend payments both go disproportionately to benefit those who are already high up on the wealth hierarchy.

Furthermore, the inherent problem of fewer resources per person is not really solved, so an increasingly large share of jobs become “service” jobs, using only a small quantity of energy products, but also providing little true benefit to the economy. The wages for these jobs are thus low. The addition of these low-paid jobs to the economy further reinforces the hierarchical nature of the system.

In a sense, what is happening is that the economy as a whole is growing very little in output of goods and services. An ever-larger share of the output is going to the wealthier members of the economy, because of increased hierarchical behavior and because of growth in debt and dividend payments. Non-elite members of the economy find their wages falling in inflation adjusted terms, because, in a sense, the productivity of their labor as leveraged by a falling amount of energy resources is gradually contracting, rather than increasing. It becomes increasingly difficult for the low-paid members of the economy to “pay the wages” of the high-paid members of the economy, so overall demand for goods and services tends to contract. As a result, the increasingly hierarchical behavior of the economy pushes the economy even more toward contraction.

Item 4. Increased difficulty in obtaining adequate funding for government programs.

Governments operate on the surpluses of an economy. As an economy finds itself in a squeeze (job loss, more workers with lower wages, fewer goods and services being produced), governments find themselves increasingly called upon to deal with these problems. Governments may need larger armies to try to obtain resources elsewhere, or they may be needed to build a public works project (like a dam, to get more water and hydroelectric power), or they may need to make transfer payments to displaced workers. Here again, Turchin and Nefedov found governmental funding to be one of the problems of economies reaching limits.

Energy products are unique in that their value to society can be quite different from their cost of extraction. A third value, which may be different from either of the first two values, is the selling price of the energy product. When the cost of producing energy products is low, the wide difference between the value to society and the cost of extraction can be used to fund government programs and to raise the wages of workers. In fact, this difference seems to be a primary reason why economic growth occurs. (This difference is not recognized by most economists.)

As the cost of extraction of energy products rises, the difference between the value to society and the cost of extraction falls, because the value to society is pretty close to fixed (except for changes taking place because of energy efficiency changes), based on how far a barrel of oil can move a truck or how many British thermal units of energy it can provide. As the cost of energy extraction rises, it becomes increasingly difficult to obtain enough tax revenue, either from taxing energy products directly, or from taxing wages. Wages tend to reflect the energy consumption required to support each job because supplemental energy acts to leverage the abilities of workers, and thus improves their productivity.

Energy selling prices may behave in a strange manner, as an economy increasingly reaches limits. Falling prices redistribute what gain is available, so that energy importers get more, while energy exporters get less. Of course, the problem we are now seeing is that oil exporting countries are having difficulty obtaining sufficient revenue for their programs.

Debt is different this time

This time truly is different. We should have learned from past experience that debt tends not to be very permanent; it often defaults. We should therefore expect huge periods of debt defaults, and we should expect to need frequent debt jubilees. Economist Michael Hudson reports that the structure of debt was very different in the past (Killing the Host or excerpt). In early times, he found that by far the major creditors were the temples and palaces of Bronze Age Mesopotamia, not private individuals acting on their own. Because of the top-down nature of the debt, it was easy for the temples and palaces to forgive debt and restore balance to the social structure.

Now, especially since World War II, there is a new belief in the permanency of debt, and about its suitability for funding insurance companies, banks, and pension plans. The rise in economic growth after World War II was important in this new belief in permanency, because without economic growth, it is extremely difficult to pay back debt with interest, unless debt is used for a truly productive purpose. (See also Figures 2 and 4, above)

FIgure 6. Ngram showing frequency of words over a period of years, by Google searches in books.

Figure 6. Ngram showing frequency of words over a period of years, by Google searches of a large number of books. Words searched from top to bottom are “economic growth, IRA, financial services, MBA, and pension plans.”

The Ngram chart above, showing the frequency of word searches for “economic growth, IRA (Individual Retirement Accounts), financial services, MBA (Master of Business Administration), and pension plans” indicates that economic growth was essentially a new concept after World War II. Once it became clear that the economy could grow, financial services began to grow, as did the training of MBAs. Pension plans grew at first, but once companies with pension programs found that it was difficult to keep them adequately funded, there was a shift to IRAs. With IRAs, employees are expected to fund their own retirements, generally using a combination of stock and debt purchases.

Now that debt is “reused” and integrated into the economy, it becomes much more difficult to forgive. We have a situation where insurance companies, banks, and pension plans are all tied together. They all depend on the current economic growth paradigm, including use of debt with interest, continued dividend plans, and rising stock market prices. We have a major problem if widespread debt defaults start.

Demographic Bubble

The other problem we are up against, making government funding even more difficult than it would otherwise be, is the retirement of the baby boomers, born soon after World War II. This by itself would be a problem for maintaining adequate government funding. When it is added to multiple other problems, including bailing out banks, insurance companies, and pension plans if there are debt defaults, the demographic bubble leaves us in much worse shape than economies that reached limits in the past.

Note that High Energy Prices Are Not on the List of Expected Problems

The idea that as we approach limits, we should expect ever-higher energy prices, is simply not true. It should be viewed as a superstition, or as an erroneous understanding of our current situation, based on a poor model of energy supply and demand. Turchin and Nefedov found evidence of spiking food prices, perhaps similar to the spiking we saw in energy prices as we approached the peak in prices in 2008. But with wages of non-elite workers falling too low, especially on an after-tax basis, it was hard for prices to continue to spike.

The idea that collapse can come from low prices, rather than high, is something that is not obvious, unless a person thinks through the situation carefully. Prices seem to be primarily influenced by two factors:

(1) Wages of non-elite workers. These wages are important because there is such a large number of them. If their wages are high enough, they buy homes, cars, and other products that are big users of commodities, both when they are made, and as they are operated.

(2) Increases or decreases in the amount of debt outstanding. If debt defaults start to rise, it is very easy for growth in the quantity of debt outstanding to slow, or even to fall. In such a case, low commodity prices, rather than high, become a problem. As economic growth slows, we should expect more debt defaults, not fewer. There is also a limit to how high Debt/GDP ratios can rise before many suspect that the world economy functions much like a Ponzi Scheme.

Mark Twain wrote, “It ain’t what you know that gets you in trouble. It’s what you know for sure, that just ain’t so.” This is especially a problem for academic researchers who depend on the precedents of past academic papers. A researcher may have come to a conclusion years ago, based on a narrow set of research that didn’t cover today’s conditions. The belief can get carried forward endlessly, even though it isn’t really true in today’s situation.

If we are going to figure out the real answer to how the economy operates, we need to look closely at indications from many areas of research. Such an approach can allow us to see the situation in a broader context and thus “weed out” firmly held beliefs that aren’t really true.

1,034 thoughts on “Economic growth: How it works; how it fails; why wealth disparity occurs


    We often have inflation vs. deflation discussions here, so I thought the above article would be of interest. It’s called the New Yorker inflation watch. Below is the price rise for publications from 2012-2015.

    2012 $5.99
    2013 6.99
    2014 7.99
    2015 8.99

    Also, when my wife was at the store this evening 2 heads of organic broccoli was priced at $9 bucks! Last time she was in it was 6. Even though she’s an organic only eater usually she got the non-organic for 4 bucks.

    Evidently much of the commodity deflation is not translating to consumer goods.

    • “Evidently much of the commodity deflation is not translating to consumer goods.”

      If you need it- its high.
      If you want but dont need it- its low.

      The higher the price of the necessities goes the wider the definition of whats discretionary and abandonment of those purchases. Do you really need to heat the whole house in the winter?
      People cut and cut and will continue to cut. Deflationary death spiral. The worry robs all the pleasure from non essential purchases. Do I really need a phone? Do I really need internet?
      Mortgage, rice, a bit of energy, and taxes. Thats it.

      And why is food so high? . The 47 million households receiving food stamps of course. Take that away and it would be a fire sale, just like everything else.

      • I hadn’t thought about food stamps driving up the price of food. That is an interesting idea – take away all that subsidized govt. bought food and it would be a fire sale – lol! Broccoli, asparagus, get your vegetables real cheap here! I suppose that will be even more the case when twice as many are on food stamps as we work our way down the diminishing returns ladder.

        • 3 meals from anarchy…. take away the food stamps and I suspect the crime would explode….

          • I live in a rural southern farming area with 25% minority population. I remember the time before food stamps and welfare. No one went hungry and crime was low. There were plenty of jobs in small industries, forestry, and agriculture. People had gardens and did other odd jobs during the off season. Many went North during the summer to work seasonal harvest jobs, returning home when the New York potato crop was in and orange picking began.

            With increased mechanization less tractor drivers and chain saw operators were needed. With welfare and subsidized housing there was no need to follow the harvest. What labor that was needed was done by Mexican migrants. With free trade manufacturing moved to China.

            When I was a child 50% of the population was involved in agriculture and almost every product sold was made in America. If we want full employment those days will have to return. I was disappointed when I was 9. My dad promised me the year before I would get to work in the field picking up potatoes for five cents a basket. Instead he got a one row harvester that funneled the potatoes into sacks that a worker sat back on the ground to be picked up and stacked on a ten wheel truck. The next year he got a two row harvester with a boom to pour the potatoes into a truck mounted bulk body. Thirty pickers and stackers were out of a job. This was on a hundred acre farm. Multiply that by the twenty thousand acres in my area. Bring those days back, plenty of work for everyone. I still have my wire basket, I’m ready, even if my back isn’t.

            • Daddio7

              Yes, that chimes with what I’ve read about pre-industrial agriculture in Britain, even up to 1945: following the harvests, filling in with lots of small and useful jobs, everything more or less alright just as long as you had your health and avoided the slippery slope of taking to drink, the easiest way to lose modest earnings.

              The Scots walked down to England to work, and walked back up again to save their money, even after the railways came. During the Depression which led to untended land everywhere, they came down and settled in this part of England, the only ones who would do the work and attracted by extremely low rents. Have to admire people like that.

            • Thanks daddio7; its all so simple really. Maybe dark ages are fantastic places to live. We all yearn for the glory that was Rome.

            • The potatoes were still being distributed by fossil fuel energy.. You lament the combustion motor driven equipment but in reality it is the only thing that made what you describe work. Fossil fuel is the only reason the wages had purchasing power. There is no return to easy to extract energy and there is no substitute.

            • I forget people reading what I write can not see my thought process. With limited mechanization there is still enough jobs for those who need one. We now have almost total mechanization and people with limited skills and intelligence have little chance of employment. Our tax and health-care system punishes employers who hire too many full time low wage workers. Jobs that require basic skill and intelligence are off shored instead.

              In a free market capitalist environment a few companies can make a lot of profit. Governments have to tax much of it away to help support a large unemployed population. It is a very fine balancing act. Reverting back to limited use of fossil fuels and increased human labor could help the county survive cutting back on oil usage but as some have said no one in government is intelligent enough to make it work.

          • “Reverting back to limited use of fossil fuels and increased human labor could help the county survive cutting back on oil usage but as some have said no one in government is intelligent enough to make it work.”

            Small, self governing hubs too. Centralization costs too much, I think. Still, some kind of central source of high-enough energy that can make the local low-energy work. There needs to be a sub-civilization just keeping nuclear plants under wraps. They get nearly all the fossil fuel energy.

            And, yes, it requires the level of rational thinking that is now absent. It also requires the kind of public “conditioning” that now only favors obedience, passivity and consumerism. It works for the capitalist purveyors now, but it will kill them too, along with everybody else.

      • If you don’t want your wife to divorce you, yes, you do have to heat the whole house in winter!

        • True enough, but then you also have to agree on how much the windows are open so there can be some fresh air. I open an inch, she closes. I just put on a jacket down to 58F but my wife’s hands get cold so like you say, better run the heater or agree to a divorce. I swear though, being in northern CA, not Canada, if it were just me I’d only turn it on for about 15 minutes in the morning to replace damp air. I prefer fresh air to warm.

          • I would say that the brain is quite a big eater of energy. The presence of warm climate is an important factor for intelectual work. That is why Greece and other warmer parts of the world were the cradles of the civilizations. The use of fossil fuels allowed us to do intellectual work also in the coldest parts of the world where no wood is available.

            When there is not enough warmth in the room for the given person, the brain lacks the energy for intellectual work. The thin persons need more heat than fatter persons that can burn the stored fat.

            • I remember reading the German prisoner survivors of battle of Stalingrad were the smaller guys or lightweights. They did not require as many calories for survival. Also, I visited Salem, Massachusetts and the colonial days the people were very tiny. Japan also had diminutive population because of the poor diet. After the end of BAU, we humans will revert back to that statue. Just think of all the savings!

  2. Dollar-Debt Blows up in Mexico, Pushes Biggest Construction Firm (ICA) toward Abyss
    by Don Quijones • December 19, 2015
    The Oil Connection
    Pemex’s shrinking fortunes have meant that the government has had to raise taxes as well as drastically cut back on large-scale infrastructure projects, cutting off vital cash flow to companies like ICA. The biggest blow came in September this year when the new governor of the state of Nuevo Leon, Jaime Rodriguez, decided to cancel a controversial project to build an aqueduct in Monterrey worth close to $1 billion.
    Even for many of the infrastructure jobs ICA has already finished, payment is not forthcoming, the company complains. Meanwhile, many of ICA’s providers have launched lawsuits over its and the government’s failure to pay them. Each time a company goes under, a vital link in the business food chain is severed.

    As its cash flow has slowed to a trickle, ICA’s dollar-denominated debt has continued to grow, largely on the back of a weakening peso. In the crucial weeks ahead the fate of the company will depend on its ability to keep the few operations it has up and running as well as find common ground with its creditors on ways to restructure its debt.”

  3. Dear Finite Worlders
    A few posts ago I said that finance through the mechanisms of ZIRP, futures markets, and contango were enabling the shale industry to keep drilling for and producing oil. Later, it occurred to me that another elephant in the room is taxes. IF oil companies had to pay for the numerous wars which have been fought and continue to be fought over oil, then the oil financials would look very much different.

    From an energy perspective, governments can tax their citizens in order to fight wars. If oil is no longer a source of energy, then the citizens will have to pay the taxes based on what they can glean from coal and natural gas…and gardening IF they can make gardening pay an energetic return. (There is little evidence that biofuels or nuclear can generate much in the way of energetic returns.)

    Do a little arithmetic and you will quickly figure out that the situation is dire. One of the thermodynamic modelers thinks that the models may help by persuading governments that wars over oil are no longer worth fighting.

    My own take on that belief is skepticism. The benefits of oil (in the form of energy slaves) are so apparent, and society has so totally ignored the cost (in energy slaves) that we have real trouble visualizing the notion that the energy slave equation is now yielding negative results.

    Don Stewart

      • Costs more in finance and/or energy to feed the slaves than the return obtained. EROI turning negative. EVERYTHING has a basis in EROI. Intellectually beat around it all you want but at the end of the day, the cause of failure, collapse and death has one basic cause.

      • Ed
        Let’s make a couple of assumptions. First, let’s assume that Gail is correct that ‘we need 20 dollar oil’ to sustain a healthy economy. But, for the sake of simplicity, let’s round that up to 30 dollars, which is not far off the current price. Now lets assume that the price of oil which is necessary to sustain a healthy oil production system is 90 dollars. (‘Healthy’ could be disputed for a long time…just assume that it’s true for the sake of discussion.)

        Then the average new barrel we produce is a loser to the tune of 60 dollars. We are assuming that the dollars are a true reflection of a ‘claim on oil’.

        So a barrel of oil might give us a thousand energy slaves, but it cost 3000 energy slaves to produce and use it. The result is a negative 2000 energy slaves. (‘Using it’ means things like internal combustion engines used in transportation., as well as the transportation infrastructure and the social system which sustains them.)

        The mechanism can be obscured, as I have written, by financial maneuvers and taxes and unfunded liabilities and the like. It takes some sort of scholarly model to estimate how far underwater we are.

        Don Stewart
        PS You could also state the ‘healthy oil production system’ differently, such as ‘a healthy energy system for transportation’, which would allow for things like electrification powered by renewables.

  4. Dear Finite Worlders
    One more thought following up on the energy slave benefits and the energy slave costs. You probably remember Al Bartlett’s talk on exponential growth, and how humans just don’t get it. I think we can apply a similar law to situations where the benefits are obvious, but the costs are obscure.

    Climate change is a current example. The benefits of driving to work so that one can earn a salary with which one can buy food and pay the rent are obvious. The costs have to be calculated based on scientific studies which are complex. The natural human response is likely to favor immediate benefit over possible future costs.

    I was reading in The Hidden Half of Nature this morning about Pasteur and Koch and their squabbling as, separately but together, they developed the germ theory of disease. The germ theory bore immediate fruit, and most families today have a member who has survived because of the discoveries that were sparked by the germ theory. But some scientists understood almost immediately that there were downsides to the widespread and profligate use of antibacterial chemicals. Now we are beginning to experience the costs of blindly using antibacterial compounds anytime we wanted to use them. For example, 90 percent of antibacterial compounds are used to make confined animals gain weight more rapidly. The use of antibacterials in animals is a primary contributor to our problems with resistance. And the use of antibacterials is implicated in the destruction of the gut microbiome, which is implicated in the explosion of chronic diseases.

    Similarly, the authors of Hidden Half recount a visit to a home show in Seattle, where they were courted by the Scotts company to begin a regular course of inorganic fertilizers, pesticides, and fungicides in their garden. Instead, the couple chose the slower course of building up organic matter. In that case, wisdom prevailed over immediate gratification.

    Consider the ‘going to war over oil’ decision. Oil appears to give an immediate payoff in terms of energy slaves. The notion that the energy slaves which must be expended in order to utilize the energy slaves in a barrel of oil has to be based on complex scientific studies, and are not immediately apparent.

    My proposed addition to Bartlett is:
    Humans will almost always pick the obvious payoff over the speculative, or hard to understand, cost.

    Going back to my example of the chickadees. Everything is going well in the winter. Our solitary chickadee is happily eating seeds in a meadow. Then spring arrives and the sap begins to rise and the chickadee experiences an overwhelming hormonal urge to find a member of the opposite sex and mate. The pair then are overcome by overwhelming hormonal pressures to feed those hungry little mouths with caterpillars. Chickadees only weigh three ounces, so their brain has to be tiny. Does it ever occur to their tiny brains that maybe just staying in the seed patch might have been the better choice? I doubt it. Chickadees do what their hormones tell them to do. Humans have large brains, which permit them to override their hormones in certain circumstances, and to generally create situations where they are boxed in and can’t get out. Perhaps a mistake by Evolution?

    Don Stewart

    • Here is something that is really easy to understand:
      When you drive 30 miles to your office, you are damaging the earth as it it were 3 million miles as the longerm CO2 forcing will be of the factor 100.000
      Easy to understand ?
      Also Bartletts videos are very easy to understand (he passed away this year)
      Ugo Bardi is tackeling the “story telling” of climate change quite often but he does not have a good idea.
      A formar poster mentioned, the limits to growth should become a religion. (this can happen, when it is too late…)
      The toughest things people do are due to religious beliefs.
      Our religion is growth and progress. If we could kill that god. I bet that for many unemployed young people that is already true but there is no really good other religion showing up 😦
      From the astrological standpoint we enter aquarius now. Aquarius can be seen as some sort of “stewardship of the earth”. If there were not so many evil stewards, this coud be a lot of joy.

    • That’s exactly what I keep banging on about
      Every species has no choice but to reproduce itself to the maximum that resources allow—and just a little beyond that.
      The point of the ‘little beyond’ is a little game of chance that nature plays, to see which is the stronger in survival terms. We must fight to survive, or die.
      Humankind is the oddity in this game of evolutionary roulette for several reasons:
      1….We are self aware
      2… We invented gods to convince ourselves that we are exempt from the laws of physics
      3…we think we are the ‘dominant’ species here.—Bacteria are about to prove us wrong

      • “3…we think we are the ‘dominant’ species here.—Bacteria are about to prove us wrong”

        Bacteria are easily defeated by copper and silver. They have found that copper door knobs destroy bacteria, and were found to have 90 to 100% fewer bacteria than stainless steel doorknobs. They were also devoid of any MRSA or other drug-resistant bacteria.

        Replace all the commonly touched surfaces in hospitals with copper or bronze, and presto. No need to use antibiotic wipes or chlorine. Replace utensils with silverware. Filter water through activated charcoal.

        • I think what he means Matt is some bacteria has evolved to be anti-biotic resistant; super bugs. It’s a big problem in hospitals and different door knobs, silverware and charcoal filtered water might help but doesn’t cover all contamination pathways.

  5. The following article from zero hedge is something everybody following peak oil should understand. And that is when the Fed supposedly stopped QE, they ACTUALLY altered the program into a revolving door. Meaning as it explains below, instead of ending QE, they actually take maturing debt/securities and regurgitate them into NEW ones. See, to really end QE they would have to retire those funds i.e. the loop was complete from origination to expiration, but they found what is referred to in the movie ‘Lawnmower Man’ as a BACKDOOR! It’s like breaking up with someone but still visiting for a friends with benefits type situation. You get all the benefits but none of the bad press baggage associated with the desperate act of QE. So it keeps revolving, but the masses think it ended. But notice the way the Fed words it: REINVESTING. Ha!

    Wait A Minute… Why Is The Fed Continuing QE?

    “Despite increasing the interest rate, pretending the situation of the American economy is much better now, the Federal Reserve said it would continue to reinvest the proceeds of the maturing agency debt and mortgage backed securities as well as the income on existing securities into new ones. This basically is a continuous ‘soft’ Quantitative Easing, something we already pointed out in a previous column, published in October 2014.”

    • Also… other countries are continuing QE big time… Japan… the EU…. that money circulates around the world… it does not just stay at home…

      US QE also circulates around the world — loads of corporations have taken on cheap USD debt — and now they are in trouble because of the dollar’s strength….

  6. “There hasn’t been any significant signs of a pick-up in demand and we haven’t seen any meaningful cuts to production,” Ric Spooner, a chief analyst at CMC Markets in Sydney, said by phone. “Nothing has really changed in the oil market over the past couple of months apart from the price.”

    Even more surprising has been the apparently negative effect on the world economy.

    If you had told us two years ago, or even one year ago, that oil would fall below $40 a barrel, most economists would have said that this would be extremely bullish for the world economy.

    As it is, each new phase of oil and commodity price weakness seems to have led to stock market losses and renewed bearishness about the world economy.

    I can smell the burning gears inside the heads of economists as they see their brilliant models go up in smoke….

    This time is different.

    • He might be correct.

      That would explain why the Men in Black (Elders…) are doing nothing to prepare for the end of BAU.

      They would know if there was anything to prepare for….

      There is no point preparing because:

      1. Spent fuel ponds will exterminate all life

      2. There will be almost no food without fossil fuels because we have ruined the soil – and what there is will be quickly consumed by 7.5 B ravenous humans.

      3. The world is past the point of no return on warming… which means extinction

      4. 1 and 2

      5. 2 and 3

      6. 1 and 3

      7. All of the above

      • 1. Probably, if you are talking about human life; but if the Elders know this, why not start decommissioning now?

        2. This will cause mass dieoff, but not extinction (you did admit ‘almost’);

        3. Ditto. The poles will warm a lot, the equator not so much. There will still be areas with suitable temperatures for humans and we are quite capable of moving and taking edible plants with us if necessary.

        • 1. You cannot decommission a spent fuel pond. The fuel must remain for years before it can be dry casked.

          2. My money is on extinction. But we split hairs — does anyone really want to be around to live in the hell-hole that the world will be? It’s not as if one could be considered a lucky one by surviving this.

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