Accounting for the Wealth of Nations

Abstract

Mainstream economic models, which typically exclude physical transactions between the economy and the biosphere, are incomplete: wastes, pollution, natural resource extraction, and use of ecosystem services are not included. When economic policy is informed by these incomplete models, unexpected negative outcomes can arise. In this chapter, we suggest that the reason for the incompleteness of mainstream economic models is that we incorrectly understand the economy through the outdated metaphor of the economy as a machine. We describe three eras of thinking about the economy, its relationship to the biosphere, and the metaphors that emerged during each era. We argue that as the world enters the age of resource depletion, it is time for a new metaphor: the economy is society’s \emph{metabolism}. We describe the metabolic processes of anabolism, catabolism, and autophagy and draw analogies to key economic processes: capital formation, energy production, and recycling. Based on the machine metaphor, today’s economic policies are unable to address important issues such as appropriate levels and types of capital formation, efficient energy production, wise use of recycling, and the appropriate scale of the economy relative to the biosphere. The problem is compounded by today’s national accounting, which fails to count many beneficial activities in GDP, simply because because GDP measures only what is produced. Thus, wise and beneficial long-term decisions that would that preserve or enhance natural capital (such as refraining from clearcutting forests) might, ultimately, reduce GDP. We conclude that navigating through the age of resource depletion will require expanded national accounting that captures robust, annual data on the entire portfolio of a nation’s wealth (manufactured and natural capital) in addition to data on national income (GDP). The chapter ends with a description of the structure of the rest of the book.

Essentially, all models are wrong, but some are useful. [ 1, p. 424]

—George E. P. Box

These keywords were added by machine and not by the authors. This process is experimental and the keywords may be updated as the learning algorithm improves.

The Introduction (Chap. 1) opened with (a) the observation that economic growth has slowed in mature economies of the world and (b) the forecast that growth will remain slow for the foreseeable future. This is seen as a problem because robust economic growth is thought to be a necessary condition for maintaining growth in living standards. The observation and forecast are widely shared among mainstream economic analysts who blame stagnation in the conventional factors of production (manufactured capital, labor, and technology—all endogenous to the economy) for the bleak situation. Proposed solutions to this economic problem include investment in manufactured capital and technology (supply-side policies) or boosting consumption (demand-side policies).

We also presented evidence for an additional, biophysical reason for the slowdown: the economy is tightly coupled to the biosphere, and we are depleting stocks of natural capital, particularly stores of energy. As these natural resources are depleted, they become more expensive to produce, and economic growth suffers. We suggested the startling notion that because standard economic theory does not perceive the slowdown in biophysical terms, the mainstream prescription of investment in manufactured capital could fail as it locks in future demand for natural resources that become ever more expensive to extract. Thus, policy prescriptions based on the conventional wisdom can, unwittingly, exacerbate economic slowdown in the long-term.

How could it be that mainstream, growth-targeted economic policies actually contribute to slowdown? Could it be that the mainstream model is incomplete or ill-suited for the age of resource depletion?

Before exploring these questions, we note that models (economic and otherwise) are informed by metaphors; simplified ways of explaining and framing the world in which we live. Looking back, we note that the Introduction (Chap. 1) contained much metaphorical language.¹ We spoke of “driving” economic growth and of “fueling” the “economic engine.” And, we said that the economy has “stalled.” Society’s manner of speaking about the economy reveals that the dominant mainstream economic metaphor is mechanical. In this chapter, we explore how a machine metaphor for the economy came to be and suggest that a new metaphor can inform development of national accounting that is appropriate for the age of resource depletion.

2.1 Three Eras

There have been three eras of the relationship between the biosphere and the economy in recent human experience. We will call them the era of abundance, the era of energy constraints, and the age of resource depletion. The era of abundance began with the dawn of the industrial revolution and continued to the oil embargoes of the 1970s;² the era of energy constraints covers the time between the oil embargoes and the run-up to the Great Recession;³ and, today, we are entering the age of resource depletion.⁴ Each era is associated with a metaphor that explains the economy, an economic model that guides national accounting, and a macroeconomic production function that describes output (usually measured by GDP). From one era to the next, there is revision and refinement of the human understanding of the relationship between the biopshere and the economy. Each revision of understanding is informed by a change in the dominant metaphor that explains the economy. Each transition brings changes in national accounting⁵ and modifications to the production function.

Today, we stand at the dawn of the age of resource depletion, and it is an important time to review past eras and anticipate changes ahead. By doing so, we can anticipate some important questions: What new economic metaphors and models are appropriate for the age of resource depletion? How should we now measure and model economic growth? And, what changes should occur in national accounting?

2.1.1 Era of Abundance

The defining characteristic of the era of abundance was plentiful natural resources relative to economic demand.⁶ Society had not moved too far along the path foretold by the best-first principle (Sect. 1.3.2), and materials and energy were easy to obtain from the biosphere. On the global scale, ecosystem services, particularly waste assimilation, were sufficient for the scale of the economy.⁷ In this era, the abundance of natural resources made industrialization possible in many economies. The binding economic constraint was the availability of manufactured capital and/or labor. Expanding the stock of capital or the pool of labor generated, to a greater or lesser extent, economic growth.

In the era of abundance, the dominant metaphor for the economy was the “clockwork” mechanism from classical physics. By associating complex phenomena with something simpler and well-understood, all metaphors help us make sense of the world around us, and the clockwork metaphor signaled that the economy was as predictable and regular as time itself.

The traditional model of the economy (Fig. 2.1) was unashamedly mechanistic and was based on classical physics’ models of mechanical equilibrium which arose from the “clockwork universe” [5–7]. In the traditional model, goods and services flow from the production sector to the household sector (consumption) in exchange for payments (spending). Factors of production are sold by the household sector to the production sector in exchange for wages and rents (income). Attention is primarily focused on the circular, clock-like flow of money (dashed line).

Fig. 2.1

In the traditional economic model, the economy is represented as a circular flow of goods and services between two sectors. Producers manufacture goods and services by taking in labor and capital. Consumers exchange labor for wages which are used to purchase the goods and services of the producers. There are no connections between the economy and the biosphere. We use energy circuit diagrams to represent the flow of materials, energy, and information [8]

The traditional model is reflected in the economic production functions that arose in the era of abundance. Economic output (y) was deemed to be a function of the factors of production (manufactured capital, k, and labor, l) and augmenting technology (A) in the Cobb–Douglas equation [9]:

$$y = A k^{\alpha} l \, ^\beta,$$

(2.1)

where α is the output elasticity of capital, β is the output elasticity of labor, and $\alpha + \beta = 1$ if constant returns to scale are assumed.⁸

In the era of abundance, the clockwork metaphor, the traditional model, and the Cobb–Douglas production function were all, in some sense, appropriate: capital and labor were the key drivers of economic performance. And, national accounting reflected the binding constraints of the time. Economist Simon Kuznets led the development of the first official national accounting tables in response to the extreme unemployment of the Depression. The first US national accounts (published in 1947) were focused primarily on financial quantifications of flows of capital and labor among sectors of the economy.⁹ And, they still are.

Today, with the benefit of hindsight, we note that the clockwork metaphor, the traditional model of the economy, and the first US national accounts precluded any sort of connection between the economy and the biosphere.¹⁰ Thus, only the internal dynamics of the economy were important.¹¹ By implication, the clockwork metaphor and traditional model signaled that natural resources were unimportant, effectively assuming that the biosphere would always provide. If a particular natural resource became scarce, substitution to a different, more-readily-available resource would be made. Wastes were quantitatively unimportant, effectively assuming that the biosphere had infinite assimilative capacity. Economic forces, through prices and market mechanisms, were thought to effectively guide any necessary transition within the economy. With the clockwork metaphor, physical constraints imposed by the biosphere on allocation of resources, distribution of outputs, and scale of the economy were outside the scope of economic discussion [11].

In short, the clockwork metaphor and the traditional model of the economy told us that the clockwork-economy could and would carry on.

But, what happens when availability of manufactured capital and labor are no longer the binding constraints on an economy? The answer arrived with the era of energy constraints.

2.1.2 Era of Energy Constraints

It came as a severe shock to the economic establishment that energy constraints brought about by the oil embargos of the early 1970s wrought such economic havoc [12, p. 3]. The global economy “stalled” due to scarcity of a single, highly-constrained resource relative to demand: fuel. How could it be that economists were taken by surprise?

Looking back, we realize that all metaphors inform our thinking about the real world, but, consequently, they also constrain our ability to frame reality. Erroneously, we can mistake the model-metaphor for reality, and we interact with reality in the same manner as we interact with the abstract objects of our models.¹² Classical physics told us the universe was like clockwork, so we began to interact with the universe as if it really were clockwork. During the era of abundance, economists, guided by the clockwork metaphor and traditional model, were focused on manufactured capital and labor only; they ignored the physical role that energy plays in the economy.

The defining characteristic of the era of energy constraints was the scarcity, relative to demand, of fossil fuel energy resources, particularly oil (see Sect. 1.3.1.). These energy constraints on western economies were caused not by the depletion of oil reserves but by withholding oil supply for political objectives¹³ or other geopolitical events.¹⁴

Fig. 2.2

The machine model of the economy includes flows of energy into the economy from the biosphere. This may be considered a perpetual motion machine of the second kind

If they did not already know it, many economists and scientists came to realize that energy was required for successful operation of the economic “engine.” Some saw that ignoring energy during the era of abundance had been a mistake! The desire to include energy resources in the economic picture spurred the efforts of early (net) energy analysts [14, 15]. Indeed, Fig. 1.2 can be seen as an early attempt to understand the role that energy plays in the economy. In the process, a machine metaphor and accompanying engine model for the economy rose to prominence.

The engine model (Fig. 2.2) accounts for energy flows from the biosphere to the economy. With the new metaphor, the economy changed from being an isolated system (Fig. 2.1) to being a closed system (Fig. 2.2).¹⁵ The importance of input energy was acknowledged, but wastes were still missing. And, the biosphere was positioned as the provider of energy resources, the larder and gas station of the economy [16].

In addition to reevaluating the economic metaphor, some researchers reconsidered the production function.¹⁶ Energy augmentation of the Cobb-Douglas production function took several forms [17, Eq. 1], one of which [18, Eq. 3.10] is

$$y = A k^{\alpha} l \, ^\beta e^{\gamma},$$

(2.2)

where e is energy input to the economy,¹⁷ γ is the output elasticity of energy, and $\alpha + \beta + \gamma = 1$ if constant returns to scale are assumed.¹⁸In addition, a new production function, the LINear EXponential (LINEX) function, appeared [23, 26, 27].

$$\begin{aligned}y & = Ae\end{aligned}$$

(2.3)

$$\begin{aligned} A & \equiv \mathrm{e}^{a_0\left[2 \left(1 - \frac{1}{\rho_k} \right)\;+\;c_t \left(\vphantom{\frac{1}{\rho_k}}\rho_l - 1 \right)\right]}\end{aligned}$$

(2.4)

In the LINEX function (Eq. 2.3), energy (e) is the only factor of production. $\rho_k \equiv \frac{k}{\tfrac{1}{2} \, (l+e)}$ is a measure of capital deepening, and $\rho_l \equiv \frac{l}{e}$ describes the increase of labor (l) relative to energy (e). When either ρ _k or ρ _l increases, the only factor of production (energy, e) is augmented (A). a ₀ and c _t are fitting parameters, and e in Eq. 2.4 is the exponential function.

In the era of energy constraints, the machine metaphor, the engine model, and energy-augmented production functions were, arguably, apt for their time: energy was the binding constraint on the economy. The appearance of energy in the engine model and energy-augmented production functions (Eqs. 2.2 and 2.3) was mirrored by international efforts to include energy in national accounting.¹⁹ The International Energy Agency (IEA) “was founded in response to the 1973/4 oil crisis in order to help countries co-ordinate a collective response to major disruptions in oil supply” [28]. One of the primary objectives of the IEA was “to operate a permanent information system on the international oil market” [28]. Today, that “permanent information system” [29] remains one of the most important sources of economy-level energy production and consumption statistics in physical units.²⁰ And, the IEA’s annual World Energy Outlook series [30] is one of the premier sources of forward-looking analysis on the relationship between energy and the economy. Although physical energy statistics and indicators were not inserted into SNA, the dawn of the era of energy constraints provided the impetus for gathering and disseminating the world’s energy data.

Today, with the benefit of hindsight, we note that the machine metaphor and the engine model of the economy continued to ignore the flow of wastes from the economy to the biosphere; the engine model still assumed that the biosphere had infinite assimilative capacity. But, according to the second law of thermodynamics, all real-world processes involve the generation of entropy manifest as the degradation of material and, especially, energy resources.²¹ High quality (low entropy) material and energy come in; low quality (high entropy) material and energy go out. Wastes exist! Because the generation of high entropy (low quality) output is a necessary feature of all processes (including economic processes), the generation of wastes is a normal feature of the economy, not an anomaly. The engine model had it wrong.

Furthermore, we see that the machine metaphor and the engine model of the economy were adopted in an era where scarcity of oil supply relative to demand was caused not by the issues associated with the best-first principle (Sect. 1.3.2), but rather by politically-motivated withholding of supply or other geopolitical events. The forward-looking projections from the IEA (and other organizations) continued to assume that there were effectively no physical limitations to increasing the rate of fossil fuel extraction from the biosphere. The presence of natural capital (e.g., oil) was acknowledged, but the quantity of natural capital (e.g., oil remaining underground) was not thought to constrain the extraction rate. In that era, neither the machine metaphor nor engine model deemed that the effects of the best-first principle were a factor in economic performance.

In short, the machine metaphor and the engine model of the economy told us that the engine-economy could and would carry on, so long as it was supplied with energy.

But, what happens when the availability of natural resources, especially energy, is no longer merely a political matter? What happens when stocks of natural resources especially energy, are depleted to such an extent that it becomes too expensive for the economy to obtain them?

The answer arrived with the age of resource depletion.

2.1.3 Age of Resource Depletion

Much of Chap. 1 was spent describing the age of resource depletion, whose defining characteristic is that stocks of natural capital constrain economic growth. The effects of the best-first principle (exemplified by decreasing EROI _soc for oil) and the limited waste-assimilation capacity of the biosphere relative to the disposal rate of materials are now affecting the economy in ways they never did before. Richard England puts it this way:

[T]here must arrive a moment in the world’s history when natural capital is no longer relatively abundant and human-made [manufactured] capital is no longer relatively scarce. At that moment, aggregate output is no longer constrained by the populations of humans [labor] and their artifacts [manufactured capital] and by the productivity of human effort [A in Equations 2.1 and 2.2]. Rather, the scale of economic activity is constrained by the remaining stock of natural capital and by its productivity. \dots When this moment arrives, a new era of history has begun. [31, p. 430]

Prior to the age of resource depletion, mainstream economists assumed that the ability to increase the rates of extraction of natural capital was not a factor in economic growth. They assumed that the biosphere had infinite assimilative capacity for the physical waste of an economy. But, things have changed. As Richard England said (and we echoed at the end of Sect. 1.4), “a new era of history has begun.”

When society transitioned from the era of abundance to the era of energy constraints, three important events occurred. (1) The dominant economic metaphor was reevaluated, and the clockwork metaphor and traditional model (Fig. 2.1) were replaced by the machine metaphor and the engine model (Fig. 2.2). (2) The production function was modified to include energy as a factor of production. And, (3) national accounting changed: energy indicators and statistics in physical units were collected and disseminated for all countries.

All of which raises the question, how should the transition from the era of energy constraints to the age of resource depletion affect (1) society’s dominant metaphors for and models of the economy, (2) the production function, and (3) national accounting? In the next section (2.2), we present a new metaphor, and the heart of this book (Chaps. 3–7) provides theoretical grounding for national accounting in the age of resource depletion. The way forward on production functions is beyond the scope of this text.²²

2.2 The Economy is Society’s Metabolism

In our opinion (and that of several others²³) an apt metaphor for the economy in the age of resource depletion should provide for robust interaction and suggest tight coupling between the biosphere and the economy. Specifically, it should account for the following facts about real economies. Economies:

• 1. intake material and energy from the biosphere;

• 2. exchange materials, energy, and information internally;

• 3. discharge material and energy wastes to the biosphere;

• 4. are affected by energetic costs;

• 5. are affected nonlinearly by scarcity in the face of low substitutability;

• 6. can change nonlinearly or in discrete steps with the potential for structural transformation;

• 7. accumulate embodied energy in material stocks; and

• 8. maintain organizational structure despite changes in their environment.²⁴

Metabolisms²⁵ exhibit the characteristics in the list above. Metabolisms and the organisms they support are intimately connected with the biosphere: they withdraw materials and energy from the biosphere (1), transfer materials and energy internally via metabolic processes (2), and discharge wastes back to the biosphere (3); in fact, their very survival depends on these processes. Extending Figs. 2.1 and 2.2 to include the facts in items (1)–(3), we obtain Fig. 2.3. Metabolisms are affected by energetic costs (4): an organism that acquires less energy than it expends is doomed. Withholding life-sustaining resources brings drastic, nonlinear consequences for any metabolism (5). Metabolisms enable nonlinear, structural transformations in their host organisms (e.g., metamorphosis, puberty, and evolution) (6). And, energy absorbed by a metabolism is considered to be “embodied” in the cells of the organism (7). Metabolisms exist in a state of dynamic stability (8), adjusting and readjusting to maintain their internal conditions despite changes in the environment; for a metabolism, equilibrium means death! The economy is society’s metabolism.

Fig. 2.3

The metabolism model provides a comprehensive view of the economy, fully consistent with the laws of thermodynamics, including degraded resources (waste) expelled to the environment as a necessary consequence of economic activity

Although we are not the first to suggest the metabolism metaphor for the economy, we believe that the metabolism metaphor is underutilized on both practical and theoretical levels. On the practical level, the metabolism metaphor is underutilized because SNAs, to date, are built upon the clockwork metaphor and traditional model for the economy (Sect. 2.1.2). This book attempts to correct that oversight by using the metabolism metaphor to develop a rigorous theoretical framework for comprehensive national accounting (see Chaps. 3–7). On a theoretical level, the metabolism metaphor is underutilized, because, many researchers (with the exception of the authors listed in Footnote 23) use the metabolism metaphor merely as framing device for analyses of raw material flows into the economy for the purpose of understanding stocks of raw materials in the biosphere.²⁶ Some who employ the metabolism metaphor tend to focus little attention on capital stock within the economy itself. In effect, this is the same oversight as national accounting: under-appreciation of the important role of capital in determining material and energy demand for its emplacement, use, maintenance, and replacement.

It becomes a vicious cycle. By not accounting for capital stock on a physical basis in national accounting, society is unable to appreciate the important physical role that capital stock plays in the economy (Sect. 1.3.3). Because society under-appreciates the physical role of capital stock in the economy, there is little urgency to begin accounting for manufactured capital on a physical (rather than financial) basis.

We think that a deeper understanding of the metabolism metaphor can serve to both highlight the important physical roles of both resource extraction and manufactured capital stock and provide the basis for a rigorous theoretical framework for comprehensive national accounting. In the following sections, we deepen the metabolism metaphor by considering anabolism (capital formation), catabolism (energy production), autophagy (recycling), and issues of scale.²⁷ Thereafter, we summarize the benefits of the metabolism metaphor for national accounting.

2.2.1 Anabolism (Capital Formation)

Metabolic processes are classified as anabolic and catabolic (Sect. 2.2.2). Anabolic processes build up materials within the body (bones, muscles, and other tissues). For example, anabolic steroids are hormones that stimulate the human body’s natural muscle and bone growth processes. Anabolic processes are fueled by the breakdown of adenosine triphosphate (ATP), the cellular energy source. Raw materials for anabolic processes are provided by food, which ultimately comes from the biosphere.

The economic analog to biological anabolism is capital formation, net addition to the stock of capital (infrastructure, more generally) within a period of time. Traditionally, capital formation is measured in currency units. Thus, capital formation is the financial evidence of the emplacement of manufactured infrastructure. Whereas biological anabolism is fueled by ATP, capital formation is fueled by the energy sector of the economy. The raw material for capital formation comes to the economy from the biosphere.

We discuss extraction and use of materials in Chap. 3 and the importance of capital stock throughout the book.

2.2.2 Catabolism (Energy Production)

Catabolic processes break down and destroy material stocks within an organism through an oxidation process. At the cellular level, catabolic oxidation releases chemical free energy, some of which synthesizes adenosine triphosphate (ATP), thereby providing fuel to cells. The remainder of the released energy is manifest as waste heat. One of the waste products of cellular catabolism is CO₂. Catabolic processes are part of a chain of material and energy transformations wherein stored chemical energy is converted to useful energy with waste heat and CO₂ as byproducts.

The analogy between catabolic processes and energy transformation processes within the economy is striking. Power plants (fired by coal, oil, natural gas, or refined liquid fuels) in either the energy sector or the final consumption sector break down fossil fuels in an oxidation process (combustion) to produce useful energy (typically, electricity or mechanical drive [23]), thereby providing energy to sectors of the economy. Both waste heat and CO₂ are byproducts of combustion, and O₂ is consumed in the process. Energy production in the economy is a chain of material and energy transformations wherein machines and engines convert stored chemical energy to useful energy with waste heat and CO₂ as byproducts.

We focus on energy flows among sectors of the economy in Chap. 4.

2.2.3 Autophagy (Recycling)

One catabolic pathway, autophagy, involves the breakdown of damaged, unneeded, or dysfunctional cellular components (proteins and cell organelles) for the purpose of re-use within the organism. Autophagy can be an adaptive response to low calorie intake, promoting cell survival.

Again, the analogy between cellular metabolism and the economy is striking. Whereas cellular autophagy repurposes proteins and cell organelles for reuse by an organism, recycling repurposes degraded yet economically-valuable materials for reuse by the economy. Furthermore, recycling can also be an adaptive response to reduced material and energy inputs. One famous example can be found on the streets of Cuba. In the face of economic sanctions, government restrictions on vehicle purchases, and high import tariffs, automobile imports by Cuba are very low. As a result, Cuba hyper-recycles autos that were imported prior to sanctions and manufactures replacement parts locally. The average lifespan of automobiles has been extended such that an estimated 60,000, pre-1960 cars [41] (so-called “yank tanks”) are in service on the island.²⁸ (see Fig. 2.4.)

Fig. 2.4

Vintage autos (“yank tanks”) in Cuba. ©2011 Larry Cowles, http://lcowlesphotography.wordpress.com. Used by permission

Its not difficult to imagine that dynamics similar to Cuba’s will emerge if the inflow rate of any important natural but recyclable resource is reduced to a trickle by the effects of depletion.²⁹

Regardless of the origin of material constraints, the effect on the economy will be the same: reuse, recycling, and, where possible, substitution to other resources will become increasingly imperative.

We focus on recycling in Sect. 8.4.

2.2.4 Issues of Scale

The metabolism metaphor brings to light issues of scale (size) for economies and societies. First, scale is directly related to material flow rates. Larger organisms consume food at higher rates than smaller organisms, in part to obtain essential nutrients to replenish cellular structures. Similarly, economies with higher levels of emplaced capital require larger material flow rates to provide raw materials to machines and food to people. (see Sect. 1.3.3 for more on this topic.)

In Fig. 2.5, we see Max Kleiber’s empirically-determined relationship between metabolic rate (heat production, in kcal/day) and animal mass (in kg) plotted on a log-log scale for a variety of animals, from mice to whales. Dashed lines represent theoretical scaling by either mass (weight) or surface area. The best fit to the data (thick line) passes between the weight and surface area lines.

Kleiber’s law, which states this relationship mathematically, is defined as

$$\dot{Q} = q_{0} {m^{3/4}}$$

(2.5)

where $\dot{Q}$ is metabolic rate (heat production), m is the mass of the animal, and q ₀ is a mass-independent normalization constant. From Eq. 2.5, we see that doubling the mass increases the metabolic rate by $2^{3/4} = 1.68$ times. To compensate for higher rates of heat loss due to high surface area-to-volume ratio, small animals have higher metabolic rates and larger food requirements per unit mass.³⁰

Fig. 2.5

Kleiber’s law for metabolic rates (heat production) of different-sized animals [43, p. 530]. Larger animals, as determined by mass, have a higher metabolic rate, but the relationship between mass and metabolic rate is not linear

If the economy is society’s metabolism and the scale of an organism corresponds to the inventory of capital stock in an economy, the metabolism metaphor suggests that larger economies will require a higher rate of energy supply. In fact, we know this to be true. Built-out, industrialized economies with higher levels of emplaced capital (those with more roads, cars, and buildings) tend to consume energy at a higher rate compared to developing economies.

2.2.5 Benefits of the Metabolism Metaphor

The metabolism metaphor is compelling, because it helps us to see more clearly and understand more deeply how the real, biophysical economy operates. But does the metabolism metaphor lead us to a better understanding of the coupling between the biosphere and the economy and provide guidance for more-comprehensive national accounting? We think so.

In terms of a better understanding of the economy, the metabolism metaphor teaches us that the economy is a biophysical entity that requires both materials and energy for survival. We learn that economic activity is natural. It can be likened to breathing (respiration): O₂ is consumed as CO₂ is produced. It can be likened to digestion: raw materials and chemical potential energy are ingested, the body grows, and energy is provided for everyday activities. Just as food from the biosphere provides materials and energy for anabolic and catabolic processes in an organism, materials and fuels from the biosphere provide matter and energy for capital formation and energy production in society. Without materials and energy from the biosphere, metabolisms fail and organisms die. Without materials and energy from the biosphere, the economies collapse and societies fade away. In short, the economy is coupled to the biosphere, because it is utterly and completely dependent upon it.

The metabolism metaphor teaches us that larger economies demand increasingly larger material and energy flow rates from the biosphere. We see that limits to economic growth are both possible and expected. From the metaphor we learn that economic “stall” is not pathological, but natural, especially in mature economies that have encountered some type of biophysical limit (see Sect. 1.3.2.). We might expect to encounter any number of limits: supply rates of materials from the biosphere, supply rates of energy from the biosphere, scale of the economy relative to the biosphere. In the metabolism metaphor, autophagy indicates that stocks of capital within society are reservoirs of material and (embodied) energy that can and should be broken down and reused or repurposed, rather than discarded, when out of service.

Through an understanding of the deep interconnectedness and complexity of organisms and species in the biosphere, we come to appreciate the interdependence among actors within and sectors of the economy. Furthermore, an appreciation of the complex nature of economies leads us to acknowledge the difficulty in discerning precisely which limit(s) is (are) encountered when growth stalls. In fact, there is no single explanation for the slowdown of growth in OECD economies discussed at the outset of Chap. 1. The best explanation to date involves many intertwining factors: slowing growth of energy input rate, decreasing energy return on investment in the liquid fuel sector, problems in the credit markets, and a natural tendency for growth to slow in economies just as growth slows in organisms as they approach adulthood.

In terms of national accounting, a deeper understanding of the metabolism metaphor will lead to significant changes in national accounting. It will lead us to acknowledge the important role of both flows (e.g., GDP, rates of material and energy extraction from the biosphere, rates at which money spins through the economy) and stocks (e.g., manufactured capital, monetary savings, nonrenewable energy supplies). Furthermore, appreciation of the physical basis of the real economy will lead us to account for both stocks and flows in physical units (kg and kJ) as well as financial units (currency).

Deeper understanding of the metabolism metaphor will lead systems of national accounts to become focused as much on stocks as on flows. Systems of national accounts will expand beyond financial accounting to become a compendia of both physical as well as financial assets of an economy. By counting flows and stocks in both physical and monetary units, national accounting will provide a comprehensive picture of both the health and the wealth of economies, respectively.

2.3 New National Accounting

Society needs to respond to the material and energy shortages that we now face (Chap. 1), and part of that response should involve more-comprehensive national accounting guided by a deeper understanding of the real, biophysical economy gained through the metabolism metaphor (Sect. 2.2). It is imperative that we begin now to help society deal with impending biophysical limits.

But how? What should we be counting and in what units? And, how should the data be analyzed?

As discussed in the Prologue, the UN System of Environmental-Economic Accouting (SEEA) is a conceptual framework that was developed by a wide range of experts beginning in the early 1990s. This framework has just undergone a third, comprehensive revision using a global collaborative process. The SEEA are national accounts that capture data related to “interactions between the economy and the environment, and the stocks and changes in stocks of environmental assets” [44, p. 1]. These accounts measure physical as well as financial flows, and are designed to dovetail with the SNA. As such, the UN SEEA represents the state of the art, in terms of accounting material and energy resource flows through our economies. If implemented, the SEEA allows national governments to answer questionsusing national accounts that were previously unanswerable, such as, “At what rate do we use steel?” or “How much concrete is embodied within our economy?” Indeed, analyses similar to the one presented in Fig. 1.2 (GDP vs. fuel consumption) might be undertaken for any material (e.g., iron or water) tracked by the SEEA. Governments gain a great deal of understanding about the energetic and material requirements of the country through the use of SEEA.

However, because the SEEA framework is defined at the economy-wide (E-W) scale, there are many more important questions that still cannot be answered. One such question is, “What are the material and energetic requirements to scale-up the renewable energy industry?” This is a highly important question for future sustainable development, not just for nations, but for the globe as a whole. Furthermore, the accumulation of materials and embodied energy in the manufactured capital stock of a particular economic sector is impossible to estimate with economy-wide analyses. Such an analysis would require measuring intersectoral (i.e., intra-economy) flows of materials and energy. In the age of resource depletion, we believe measuring intersectoral flows in both physical and financial units to be an essential aspect of extended national accounting.

Firm theoretical grounding is needed before we begin the process of expanding national accounts. We need a framework, a way to organize our thoughts about the notion of national accounting in the age of resource depletion. This book is an attempt to provide just that: a theoretical framework for comprehensive national accounting in the age of resource depletion that could be adopted in systems of national accounts.

The first question above (“What should we be counting and in what units?”) is the topic for the remainder of this section, and the answer provides the structure for the heart of the book. The second question above (“How should the data be analyzed?”) is the topic of Chap. 7–9.

We believe the key to understanding society’s metabolism in the age of resource depletion is to understand how materials, energy, embodied energy, and economic value each interacts with the economy. Specifically, it is important to understand how each accumulates within the economy and how each flows into, within, and out of the economy. The first three items (materials, energy, and embodied energy) are inspired directly by the metabolism metaphor. The fourth item (economic value) is necessary to understand the way that the lifeblood of economies (currency) flows through the economy. Of course, each of the items in the list interacts with the others and the biosphere dynamically. If we can begin to carefully track these items, we will be on our way toward gathering the information necessary to improve national accounting for the age of resource depletion.

National accounts that are informed by the metabolism metaphor and account for materials, energy, embodied energy, and economic value may allow consumers, producers, and policy-makers to answer critical questions that are not answerable today, such as:

• 1. how much energy was used in the manufacture and transport of two competing goods in the supermarket? (Or, equivalently, how much energy is embodied in two competing goods in the supermarket?)

• 2. what might be the optimal scale of an economy in terms of GDP and what are the impacts of an optimally-sized economy on natural capital?

• 3. how is dependence upon scarce fossil fuels embedded in the interwoven fabric of the economy?

• 4. how will economies that are dependent on coal, oil, and other forms of nonrenewable energy transition to renewable forms of energy?

• 5. how might an economy be affected as an increasing share of production is directed toward replacing degraded ecosystem services? [45, p. 221]

• 6. what are the material and energy requirements to scale-up the renewable energy industry?

Our approach to developing a rigorous theoretical foundation for comprehensive national accounting is to develop a dynamic model by applying rigorous thermodynamics to materials and energy flows into, among, and out of economic sectors, informed by the metabolism metaphor, in a manner that is corresponds with the existing (or expanded) national accounts.

2.4 Structure of the Book

The list of items to be accounted (materials, energy, embodied energy, and economic value) provides structure for our proposed framework and much of the rest of this book.

Part I addresses flows of physical matter and energy through the economy. Chap. 3 discusses material stocks and flows and accumulation. Stocks and flows of energy are covered in Chap. 4, and a rigorous, thermodynamics-based definition of and accounting for embodied energy is presented in Chap. 5.

In Part II, we turn to flow and accumulation of nonphysical entities through the economy. Flows and accumulation of economic value are discussed in Chap. 6. In Chap. 7, we combine the results from Chaps. 5 and 6 to develop an important indicator of economic activity: the energy intensity of economic production.

Part III gives context to the framework developed in Parts I and II. Chapter 8 draws out some of the implications of our proposed framework. And, we end with a summary and a list of proposed next steps in Chap. 9.

Throughout the methodological chapters (3–7), our accounting framework is developed through a series of increasingly-disaggregated models of the economy (Table 2.1) using, as much as possible, the same structure for each. Doing so provides a detailed, step-by-step explanation of our proposed accounting framework. We use the US auto industry as a running example for application and discussion.

Table 2.1 Examples used throughout this book