We cannot continue to grow our economy forever. A physics professor at the University of California has used the laws of physics to write two blogs that explain why.
Permabusiness takes this information and looks at what would come next — both for the financial system and the wider economy.
Unexpectedly, we find stories in the news that indicate this is already happening.
Tom Murphy, professor of physics at the University of California (San Diego), has written two detailed blogs on the scientific reasons why energy use and economic activity cannot grow forever.
When we use energy, for example, we heat up the surface of the earth. Each of us only heats the earth a tiny bit, and normally that just radiates away into space. But Tom shows that if we continue to grow our energy usage at the rates we have been doing, then the laws of physics mean that within a few hundred years the earth will become hotter than boiling water.
This means that the economy can only continue to grow if more and more of it is taken up with activities that use very little energy: financial services, buying and selling houses, haircuts, psychotherapy. In order for the economy to continue to grow, these activities would need to become such a large proportion of the economy that activities like manufacturing, transportation, energy generation and growing food were negligible by comparison.
But we have a word for what happens when the prices of items not connected to the real world grow much larger than the prices of physical items — we call it a ‘bubble’.
As Tom Murphy says, “Adam Smith imagined a 200-year phase of economic growth followed by a steady state. But our mentality is currently centered on growth. Our economic systems rely on growth for investment, loans, and interest to make any sense. If we don’t deliberately put ourselves onto a steady state trajectory, we risk a complete and unchoreographed collapse of our economic institutions.”
So that means our financial system has to change. A financial system based around compound interest works fine when the world economy is growing. But when we finally reach ‘globalisation’ the rate of growth has to slow. And when global manufacturing capacity exceeds demand (as it currently does) then we have ‘recession’. We have reached a limit. Compound interest can no longer be paid.
At that point a borrower or class of borrowers somewhere in the system will default on the compound-interest payment schedule they had agreed previously. Their default will then ripple through the financial system, as we have seen.
The solution is to create a new shared-consensus, a shared realisation and agreement, that compound interest can no longer be paid. This will not happen overnight. But until it does the system as a whole cannot shift to a flat-interest, or even a zero-interest or negative-interest lending system.
This may sound completely unrealistic, but it has actually happened this week. On Monday, for the first time, Germany issued debt with a negative yield. Investors agreed to pay the German government for the privilege of lending it money (see also this analysis) in return for increased confidence that they will get back a larger proportion of their money. For them the mix of risk/reward from buying German bonds with negative yield is better than the return they think they can get from investing in currencies, commodities, or the shares of corporations.
Once the view of a large part of the total financial system has shifted to this new consensus, then the real economy of businesses can begin to make plans on this new basis and can also shift to a new mode.
What would businesses operating in a non-growth economy look like? How could we optimise economic activity in a post-growth economy?
At a detailed level, this is what the whole permabusiness project is about. At a high level we can say that the Ecotron experiments give a glimpse of what it is likely to look for the whole economy.
The Ecotron experiment created a series of closed ecosystems (in a laboratory) that each contained different numbers of species of plants and animals. Each ecosystem is like a model of an economy.
What the experiment found was that:
- Plant productivity was highest in more complex ecosystems — this range of species allows the total ecosystem to make use of the greatest proportion of the available sunlight
- These ecosystems were also more resilient to stress situations like drought — ecosystems with a smaller number of species would collapse more easily
(You can read more detail here.)
This seems to imply that we expect a future ‘steady state’ economy would be largest, and most resilient, when there is a large variety of different businesses operating within it. An economy with a smaller number of dominant businesses would have a lower total GDP, and would be more vulnerable to recession or resource shocks etc.
Perhaps the recent focus on medium-sized businesses as a key source of growth has something to do with this.
I love reading astrophysicists’ analysis of Environmental issues. I was just reading Hubert Reeves ‘L’espace prend la forme de mon regard’ over xmas – astrophysicist + philosopher. Good stuff.