Abstract
We are entering a new era in which biophysical limits related to natural resource extraction rates and the biosphere's waste assimilation capacity are becoming binding constraints on mature economies. Unfortunately, the data needed for policy-makers to understand and manage economic growth in the new era are not universally available. In this chapter, we discuss the problems that arise from relying solely on the Solow growth model to describe an economy that is, in reality, deeply interconnected with the biosphere. We point out that mainstream economists forecast low growth rates for mature economies for the foreseeable future, because traditional drivers of economic growth (growth rates of capital and labor productivity) have plateaued. Unfortunately, mainstream policy recommendations to reinvigorate growth, based on the Solow growth model, ignore three critical realities: the economy is tightly coupled to the biosphere, there exist real and binding physical and technological limits to the rate at which materials and energy can be extracted from the biosphere, and today’s emplacement of manufactured capital locks in tomorrow’s material and energy demands from the biosphere. As such, mainstream policy recommendations are likely to fail in the long run: today’s expansion of the stock of capital in the economy in the hopes of enhancing consumption can contribute to the slowdown of economic growth by bringing us ever-closer to biophysical limits. The chapter ends by noting that we need a new way to understand our economy, and we suggest that detailed information about materials, energy, embodied energy, and energy intensity be routinely gathered and analyzed and disseminated from a centralized location to provide markets and policymakers with more-complete knowledge of the biophysical economy.
However, a firm theoretical underpinning is needed before proceeding along this new path, and the remainder of this book provides a rigorous theoretical framework for a better system of national accounts, one that goes beyond GDP and one that is relevant to the age of resource depletion.
Where there is no reliable accounting and therefore no competent knowledge of the economic and ecological effects of our lives, we cannot live lives that are economically and ecologically responsible. It is futile to plead and protest and lobby in favor of public ecological responsibility while, in virtually every act of our private lives, we endorse and support an economic system that is by intention, and perhaps by necessity, ecologically irresponsible. [1, p. 26]
—Wendell Berry
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Notes
- 1.
The mainstream model for economic growth is encapsulated in the Cobb–Douglas production function, which takes the mathematical form
$$ y = A k^{\alpha} l^{1-\alpha},$$where y is the economic output, A is the technological progress, k is the capital stock, l is the labor, α is the factor share of capital, and \(1-\alpha\) is the factor share for labor.
- 2.
Natural areas provide ecosystem services such as water purification, carbon sequestration, and erosion control.
- 3.
In this context, we are using the term “biophysical factors” to indicate any factor related to the extraction, transport, processing, manipulation, and disposal of the physical (as opposed to financial) manifestation of any material or energy resource in the economy.
- 4.
Of course, mainstream economics discusses prices of raw materials, goods, and services. And, to the extent that biophysical factors affect prices, it could be said that mainstream economic discussions involve biophysical factors. However, biophysical factors are rarely acknowledged as causal for establishing the prices of goods and services and the raw materials of which they are comprised.
- 5.
The mathematical definition of elasticity of supply (E s ) is
$$ E_s \equiv \frac{\frac{1}{Q}\frac{\partial Q}{\partial t}} {\frac{1}{P}\frac{\partial P}{\partial t}},$$where Q is quantity of production, P is price, and t is time.
- 6.
That is, a 1 % change in the oil price will generate only a 0.04 % increase in oil supply. A price elasticity of 0.04 is extremely low (inelastic). For comparison, agricultural output is also considered fairly price inelastic in the short-run, but Pandey, et al. estimate the short-run (2-year) price elasticity of supply of Australian agricultural output to be around 0.30 [23, p. 215].
- 7.
Mathematically, energy cost share (f E ) is defined as
$$ f_E \equiv \frac{1}{GDP} \displaystyle\sum_i P_i Q_i,$$where the subscript i indicates types of energy (electricity, gasoline, natural gas, etc.), P indicates the price of energy, Q indicates the quantity of energy purchased within the economy, and GDP is gross domestic product.
- 8.
Note that “destruction of energy demand” is accomplished through recession in the short run.
- 9.
Like increasing oil production, increasing energy efficiency also has physical and technological limits. Improving energy efficiency is a medium- to long-term process.
- 10.
Embarking on an economic growth path appears to reduce the energy cost share in an economy from very high values (indicating that nearly all economic activity is focused on procuring energy) to small values that remain within a stable range. For example, Sweden’s energy cost share has stabilized at 12 % since 1970, although it was nearly 100 % in 1800 [26].
- 11.
Energy return on investment (EROI soc ) at the societal level is defined as
$$ EROI_{soc} \equiv \frac{\dot{E}_a}{\dot{E}_c},$$where \(\dot{E}_a\) is the rate of energy made available to society in MJ/year and \(\dot{E}_c\) is the rate of energy consumed in the energy production process in MJ/year. Note that this definition of EROI soc is flow based. Other definitions of EROI are accounted over the full lifetime of a project, e.g., comparing the lifetime electricity generation of a wind turbine to the energy required in its manufacture (including extraction of raw materials), installation, operation, and decommission.
- 12.
Of course, in any deck of cards there are two Red Queens. In Sect. 8.2.2, we discuss the need to increasingly divert production to maintain levels of capital stock.
- 13.
Nuclear, conventional hydroelectric power, wood and waste biomass, geothermal, solar/photovoltaic, and wind.
- 14.
Coal, petroleum, natural gas, and other gasses.
- 15.
Free cash flow is defined as the cash produced by a firm’s operations less the cost of expanding its asset base. Free cash flow is different from profit, and is thought to be a more-reliable indicator of the ability of a firm to produce profit.
- 16.
See Chap. 5 for more details on embodied energy.
- 17.
See Chap. 7 for more details on energy intensity.
- 18.
More on the problematic nature of this oversight can be found in Chap. 2.
- 19.
Manufactured capital presupposes the existence of sufficient levels of human and social capital.
- 20.
Energy consumption rates are routinely published by the US Energy Information Agency (EIA) and the International Energy Agency (IEA).
- 21.
See Sect. 8.2 for our suggested remedy.
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Heun, M., Carbajales-Dale, M., Haney, B. (2015). Introduction: The End of an Era. In: Beyond GDP. Lecture Notes in Energy, vol 26. Springer, Cham. https://doi.org/10.1007/978-3-319-12820-7_1
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