On the Thermodynamic Origins of Economic Wealth
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Tim Garrett:
"On the thermodynamic origins of economic wealth
What are the origins of wealth?
Economics textbooks describe wealth as an accumulation of all financially valuable resources. It is our collective beliefs that give this accumulated stock value. Human labor uses this stock to produce more stuff through the GDP thereby enabling overall wealth to grow with time.
At least on the face of it, this view of the economy makes a lot of sense. Economists have mathematical equations that express these ideas providing quantitative descriptions for how and why the economy grows.
Yet something still seems unsatisfyingly magical. Why should we believe in the concept of economic value in the first place?. The existence of a financial system is hardly obvious. It hasn’t always existed through history, even during periods where people produced and consumed. And most of what we do in our lives (fortunately) doesn’t involve any exchange of currency at all. We are able to enjoy a good moment of each other’s company without having to pay a single cent.
The economy and the second law
Sure, financial wealth is a human quantity, but we are still part of the physical universe. No matter how rich we may be, we are all equal subjects of its rules.
Chief among these rules is the Second Law of Thermodynamics. The Second Law has been expressed in many ways that are either wrong, strangely mystical, or maddeningly vague. It doesn’t have to be this way. The most straightforward is to view the direction of time as a flow of matter that redistributes energy to ever lower potentials. Drop something it falls. It was up, now it’s down; air flows from high to low gravitational potential or pressure to make the winds. Easy.
Take the waterwheel in a mill. A mill consumes high gravitational potential energy from a flowing stream. The flow drives the wheel circulations and finishes its journey in the stream below where the potential energy is becomes unusable. The total capacity of the mill to dissipate potential energy, its size or “stock”, is something we can estimate by looking at the size of the mill and noting how fast it circulates.
Or how about a hurricane? The pressure difference between the eye of the hurricane and its surroundings provides the potential energy with which to drive the winds while the hurricane constantly loses energy by radiating to space. Again the hurricane has a size or “stock” that defines its power.
What does this have to do with the economy? Well, everything. Our perceptions are based on neuronal activity in the form of cyclical transfers of charge from high to low potential in our brains. The cycles are sustained by by high potential calories in food that we dissipate as waste heat from our bodies. Our food is produced with high potential fossil fuels that we burn to till the land, produce fertilizer and transport from farm to market. We get to and from market using gasoline that is dissipated in our cars. The money we use to buy food comes from the fruits of our labors staring at computers that that themselves dissipate energy as they make computations with a certain cycle frequency and transfer data to and from other computers along communication networks, all of which turns high potential energy to low potential waste heat.
But can we really reduce all this to something as simple as a waterwheel or hurricane? There’s 7+ billion of us, our brains are so complicated, and the economy is so big.
All the circulations in civilization are ultimately derived from the consumption and dissipation of high energy density “primary energy resources”. As a global organism, our civilization collectively feeds on the energy in coal, oil, natural gas, uranium, hydroelectric power and renewables. Civilization continually consumes these resources to accomplish two things: the first is to propel all civilization’s internal back-and-forth “economic” circulations along its accumulated networks; the second is to incorporate raw materials into our structure in order to grow and maintain our current size against the ever present forces of dissipation and decay.
Energy, from whatever source, powers our machines, our telecommunications, modern agriculture, and the supply of the meals that give us the energy to sustain our thoughts, attention, and perceptions. Without energy, civilization would no longer be measurable. Everything would grind to a halt. Nothing would work. Lacking food, we would be dead and our attention span with it. The gradient that meaningfully distinguishes civilization from its environment would disappear. Value would vanish.
Wealth is power
Stepping back to see the world economy as a simple physical object, one where people are only part of a larger whole, would be a stretch for a traditional economist hung up on the idea that wealth must be restricted to physical capital rather than people. But, crucially, unlike traditional models, it is an idea that can be rigorously tested and potentially disproved. It is a hypothesis that is falsifiable.
I have shown in peer-reviewed studies published in Climatic Change, Earth System Dynamics, and Earth’s Future that the observed relationship between the current rate of energy consumption or power of civilization, and its total economic wealth (not the GDP), is a fixed constant of 7.1 ± 0.1 milliwatts per inflation-adjusted 2005 dollar.
Equivalently, every 2005 dollar requires 324 kiloJoules be consumed over a year to sustain its value. In 2010, the global energy consumption rate of about 17 TW sustained about 2352 trillion 2005 dollars of global wealth. In 1970, both numbers were about half this. Both quantities have increased slowly by about 1.4% per year to 2.2% per year averaging a growth rate of 1.90% /year. The ratio of the two quantities has stayed nearly constant over a time period when both wealth and energy consumption have more than doubled and the rates of growth have increased by about 50%. Currency is the psychological manifestation of a capacity to dissipate energy.
Can wealth continue to grow?
What this means is that we must continue to grow our capacity to consume primary energy reserves just to grow our wealth. We should never conclude that growth can’t continue over coming decades, as some claim in perennial doomsday predictions. It’s just that there is nothing stronger than inertia to guarantee that it will. The water wheel in the picture above can rot or the river can dry. Hurricane low pressures can dissolve. For us, continued consumption growth may quite plausibly become too difficult due to depletion of energy and mineral reserves or accelerating environmental disasters such as climate change. If this happens, all our efforts to produce growth can be expected to be more than offset by decay.
At some point, all systems experience decay and collapse. We’ve seen the waxing and waning of civilizations throughout history. Historical studies suggest that any long-term decline in a society’s capacity to consume forebodes hyper-inflation, war, and population decline. The question for us should not be whether collapse will happen, but when, and whether it will be slow or sudden."
Discussion
Economic growth: the engine of collapse Nephologue
Tim Garrett, December 18, 2019 :
Economists and environmental scientists are trying to help us develop strategies to forestall our worst visions of the future, so we can simultaneously maintain a healthy environment and a robust growing economy that meets development goals. The hope is that, with astute academic guidance and sufficiently powerful doses of political will, we can navigate our way safely through the Anthropocene.
But there are physical limits to what is possible. The human world is as much part of the natural universe as anything else. If we readily accept that the complex motions of the earth’s climate march to physical laws, it’s hard to see how society should somehow divorced from the rest of the universe and be an exception.
To be sure, many of us see treating people as physical systems seems a bit abhorrent, somehow an abnegation of the essence of what it means to be human. Bach surely is proof that we are not mere automatons! We’re different. And if we truly want to triumph against profound societal challenges, then surely we can.
But – sigh – even music appears to obey simple mathematical laws seen throughout nature. Perhaps if we really want to address our 21st century existential crises we should start trying to think more broadly about what it means to be human.
To get a sense of any physical limits, it helps to look at how physical systems function. A useful concept here is a thermodynamic “heat engine” where available energy powers cyclical motions thereby enabling “work’’ to be done to move something else while giving off waste heat. This process is as familiar as burning gasoline in a car to power its pistons and propel it forward.
What is less recognized is how this basic idea from physics can be extended to living systems. Organisms take high potential chemical energy (food and oxygen) and release it in an unavailable chemical state (mostly heat radiation, water and carbon dioxide). The interesting part is where organisms employ a selfish self-propagating twist. Unlike a car, if conditions are right, living things can use the energy and matter in food to grow, allowing themselves the opportunity to consume more energy in the future.
So, for example, people use the energy in fats, proteins, and carbohydrates, along with the matter in oxygen, water, vitamins and minerals, to sustain their daily motions and metabolic processes. Whenever we manage to consume more than our daily metabolic needs, we get bigger, and usually our appetite grows too to meet our newly larger metabolic demands.
Groups of organisms take this self-reinforcing cycle to the next level. A lioness expends energy to hunt gazelles so that she can feed herself and her pride. With enough extra food, her fertility allows her to reproduce and support cubs, so increasing the predatory population.
The global economy is just a natural extension, what has been termed by some as a “superorganism”. Collectively, we bootstrap ourselves to greater things by extracting energy and material resources from our environment in order to sustain interactions among the accumulated fruits of our prior labours. Growth happens only when there is a remainder of raw resources available to make more people and new stuff.
Suppose for a moment that we were offered the opportunity to look down at our growing civilization from afar. We might see, for example, the back-and-forth of people and their vehicles as they move over the land, sea, and air. Looking even closer, we could measure the activities of human brains and notice that, as part of a larger whole, these brains use some combination of past experiences and new information to make estimates of economic and societal market value, acquired through Google searches, social gatherings, travel, and trade.
All these activities that form our judgments require a continual consumption of food and fuel. So we might even go a step further to hypothesize that there is some connection between total market value and energy. Indeed, quantitative analysis reveals that in any given year, the historical accumulation of past global economic production has had a fixed ratio to the current rate of global energy consumption, give or take a couple of percent. In each year between 1970 and 2016, each additional one thousand U.S. dollars of net worth that we collectively added to civilization through the global inflation-adjusted GDP has required an additional 5.6 Watts of continuous power production capacity.
The existence of a mathematical “constant” tying society to physics offers a critical piece of the human puzzle: economic wealth is inseparable from energy consumption; any diminished capacity to recover the energy necessary to maintain the steady hive of civilization must lead to economic collapse. If for whatever reason we fail to adequately fuel ourselves, we can expect the cyclic motions of our machines and ourselves to slowly grind to a halt. Our interest in crypto-currency or the auction price of a self-destructing Banksy will be replaced by more primal values like having a can-owner for opening a can of Spam. In the logical extreme, with an absence of food, we will wither and die, with all our perceptions of economic worth buried along with us.
Of course, macro-economists would call linking wealth to energy through a constant absurd, even those that acknowledge the key role of energy in economic production. They would likely point out that the global GDP has been rising faster than energy consumption, and offer the utopian dream of “decoupling” the economy from its basic environmental needs. Dream on. How much is your home worth in an uninhabitable city where there the fuel supply and electrical power are shut off for the foreseeable future? GDP represents the accumulated production of worth over an arbitrary period of just one year; meanwhile, energy is required to sustain the activities of a healthy civilization that has been steadfastly built up over all of history. Current energy consumption is far more tied to maintaining the fruits of centuries of collective effort than to the national vagaries of a single prior year. We cannot erase the past; it is always with us, and it must be fed.
So growth, if we want it over and above repairing everything we have previously built, requires us to extract and transform wood, copper, iron, and crops fast enough to overcome decay. Rust never sleeps. Only when energy is sufficiently plentiful that the material balance between extraction and decay can be tipped in our favour is it possible for civilization to gain weight.
Admittedly, we’re pretty good at this! Recently, total net worth and energy consumption, the size of civilization, has been expanding by up to 2.3% each year and the GDP slightly faster. Ever since the end of the last ice age with the innovation of agriculture, we have collectively grown by leaps and bounds, from global populations of millions to billions, and from comparative poverty to extraordinary total wealth. It took 10,000 years to learn how to achieve 200 Quadrillion Btu’s of annual energy consumption in 1970s; we doubled that rate just 30 years later.
Feats of innovation have enabled us to accomplish not just exponential growth – e.g. growth at a fixed rate of 1% per year — but the incredible mathematical feat of super-exponential growth: a growth rate that has increased with time. Humanity has been uncovering and exploiting ever newer and richer fuel resources – from wood, to coal, to oil – and ever more exotic raw materials – from wood, to copper, to niobium – and each has done its part to amplify the pace of expansion into the terrestrial buffet.
Unfortunately, we have become so consumptive that our future success is competing with the ongoing resource demands of a growing unchangeable past. The larger we get, the more energy and raw materials we require simply to sustain ourselves, forcing us to deplete the finite resource larder faster than ever before.
In the two decades following World War II, a remarkable period of rapid gas and oil discovery created an epoch of super-exponential growth. More recently, new extraction technologies and discoveries of fossil fuel reserves have only barely kept up with previously created demand. GDP growth is stagnating and individuals, professions, and nations are increasingly competing for their share.
Inevitably, there will come a point where collectively we can no longer access sufficient resources to sustain the current period of expansion. The question is not whether civilization is ultimately in trouble, but instead whether we will gradually subside or crash like a wave on the beach.
The negative impacts of past growth are already clear with accelerating climate change and environmental degradation. They will become particularly pronounced when resource depletion makes it challenging to self-repair, as flooded cities and drought-stricken farmland is abandoned. In biological and physical systems, when growth stagnates, fragility sets in. Following even small crises, recovery times slow, and there arrives a tendency for larger-scale collapse.
Of course, predicting the future is hard. But there are always going to be basic physical limits on what can and cannot happen. We can say with confidence that if civilization maintains current rates of economic growth over the next 30 years, within just one generation it will need to double its current rate of energy consumption, extracting as much total energy from the environment as it has since the beginnings of the industrial revolution.
Can we really do this? Perhaps. Maybe we will continue to find the energy and raw materials on our finite planet to accomplish this extraordinary feat, but with the trade-off that sustaining “economic health” now means more potentially catastrophic consequences of global climate change later. Absent an extraordinarily rapid metabolic shift away from carbon based fuels, persistence of growth implies that we will face a likely 4 °C to 9 °C temperature rise within the lifetimes of those born today.
To all but Nobel Prize winning climate economists, such warming seems impossible to survive. Smaller civilizations have been through collapse before so looking to history may provide lessons for what actions are required to avoid the worst of what is to come."
Tim Garrett on Exponential Growth
Tim Garrett:
"Exponential growth is curious, particularly in the economics literature where it is often presented as a God-given truth without questioning where it actually comes from. In fact, whether we look at boats, fish, or kids, or anything else, exponential growth is subject to fundamental thermodynamic constraints. The rate of exponential growth constantly changes over time as a function of past growth and current conditions, and that rate can evolve from being positive (growth) to negative (decay).
There’s a couple of important themes:
System growth
This is the most basic ingredient of exponential growth. As a system grows, it grows into the resources that enabled its growth in the first place, increasing its interface with its supply. A larger interface permits higher flow rates of the resources thereby allowing the system to grow faster. A bigger fleet catches more fish. As long as fish are profitable, this leads to a bigger fleet yet.
Diminishing returns
Even if a system grows into new resources, growth rates have a natural tendency to slow with time. The reason is that systems compete with their growing selves for available resources so that growth of the interface succumbs to diminishing returns. The more Enoch’s fleet grows, the more his own boats compete with with the rest of the fleet for the remaining fish that are there; the bigger the fleet, the more competition. The consequence is that the interface of boats with fish does not grow as fast as the fleet itself so consumption stabilizes.
Discovery
As former U.S. Secretary of Defense Donald Rumsfeld famously put it, there are the “unknown, unknowns… There are things we do not know we don’t know.”. A system grows exponentially by growing its interface with known resources. Normally, diminishing returns takes over, but by way of this growth, there can also be discovery of previously unknown resources. Early Portuguese fisherman could not easily have anticipated the extraordinary riches of cod to be found in the New World that would propel fish catches skyward.
Depletion
Resources can be depleted if they are not replenished as fast as the ever increasing rate of consumption. In turn, growth of the interface between the system and its supply grows more slowly than it would otherwise. Enoch catches fish to grow his fleet. But New England fish stocks decline – there are limits to growth.
Decay
Poor Enoch will eventually grow old and his boats and nets constantly need repair. What can’t be fixed also slows growth. Exponential growth is still possible if decay is slow enough. But an unpredicted hurricane could wipe out Enoch’s entire fleet of boats beyond his knowledge or control, in which case gradual decay can easily tip towards collapse.
Putting it together
Putting all these things together we end up with a mathematical curve for growth known as the logistic function characterized by increasing rates of explosive growth followed by decreasing rates of exponential growth. Growth then stagnates and tips into either slow or rapid decline.
An example of the timeline is shown above, illustrated for the special case where resources are in fixed supply and simply drained like a battery. Resources are consumed by the system; the system thrives on resources but is always consumed by decay. While growth is initially exponential, diminishing returns takes over. Then, during a period of overshoot, the system keeps growing for a time, even as resources and consumption decline, but eventually decay takes over and tips the system into decay and collapse. Critically, there is no equilibrium of steady-state to be had, not at any point.
But, the situation is rarely as simple as a depleted battery. This is because resources can be discovered. The figure above shows how this works. All the same phenomena are present as in the drained battery scenario except just as the system enters overshoot and plateaus, a new resource is discovered, and the system enters a second period of exponential growth. Eventually decay still takes over, but it does not forbid the system from potentially entering some new phase of growth in the future, perhaps repeating the original cycle.
It’s easy to see some of these dynamics at play in our civilization. At least in the U.S., energy has consumption has seen multiple waves of exponential growth, diminishing returns, competition and discovery. Since the mid-1700s, we have progressed from biomass, to coal, to petroleum, each discovery rescuing the U.S. so that it can continue expansion outward of its interface with primary energy supplies. Currently, natural gas and renewables appear to be entering a new exponential growth phase, with coal sliding into decline.
Similar things can be seen in world population growth going back even further in time: always successive pulses of exponential growth, followed by stagnation, then discovery, and renewed expansion. We are now growing faster than ever.
So what does this mean for us and our future? The thermodynamics and mathematics of how a system grows can be described and predicted provided we know the size of resources and the magnitude of decay. The problem is that we don’t because there are always the “unknown unknowns”. That said, we can say with some confidence that there are two main forces that will shape this century, resource depletion and environmental decline: it seems like one of the two will get us.
So far resource discovery has more than adequately kept civilization afloat. But this cannot continue forever. When will it stop? This depends on this balance between discovery and decay. Discovery of new energy resources seems to be fairly unpredictable. Still, we’ve been remarkably good at it considering doomsday forecasts of Peak Oil have been overcome by the introduction of shale oil, natural gas, and renewables. Nonetheless, we currently double our energy demands every 30 years or so. Can new discoveries keep pace? If they can, won’t that lead to environmental disaster as atmospheric CO2 concentrations climb past 1000 ppm and we lay waste to the forests, oceans, and ground?
Unlike diamonds, exponential growth cannot be forever. It just can’t. Eventually, something has to give."
More information
- The Power Theory of Value: energy consumption and economic wealth are tied by a constant