Excerpts from "Energy, Growth, and Sustainability: Five Propositions" by Steve Sorrel
by Gail Tverberg
Steve Sorrel, Senior Fellow, Sussex Energy Group, University of Sussex in the UK has recently published a 25 page paper called Energy, Growth and Sustainability which can be downloaded at this link. This post provides some excerpts from the paper, which summarize its findings. Readers are encouraged to read the entire paper.
According to the introduction to the paper:
This paper questions the conventional wisdom underlying climate policy and argues that some long-standing and fundamental questions regarding energy, growth, and sustainability need to be reopened. It does so by advancing the following propositions:
1. The rebound effects from energy efficiency improvements are significant and limit the potential for decoupling energy consumption from economic growth.
2. The contribution of energy to productivity improvements and economic growth has been greatly underestimated.
3. The pursuit of improved efficiency needs to be complemented by an ethic of ‘sufficiency’.
4. Sustainability is incompatible with continued economic growth in rich countries.
5. A zero-growth economy is incompatible with a debt-based monetary system.
These propositions run counter to conventional wisdom and highlight either blind spots or taboo subjects that deserve closer scrutiny. While accepting one proposition reinforces the case for accepting the next, the former is neither necessary nor sufficient for the latter.
[...]
Proposition #5:
A zero-growth economy is incompatible with a debt-based monetary system
[i]An excerpt:
A purely private enterprise system can only function if companies can obtain sufficient profits which in turn requires that the selling price of goods exceeds the costs of production. This means that the selling price must exceed the spending power that has been ‘cast into circulation’ by the production process. Hence, to ensure sufficient ‘aggregate demand’ to clear the market, additional spending power is required from some other source. In a purely private enterprise system, this normally derives from investment in new productive capacity which will increase the amount or quality of goods supplied, but only after some interval. Investment therefore serves the dual role of increasing productive capacity and creating additional demand to clear the market of whatever has already been produced (Hixson, 1991). Importantly, the investment cannot be financed from savings since the resulting increase in aggregate demand would be offset by a corresponding decrease in consumption spending.
Aggregate demand is commonly expressed as the product of the amount of money in circulation and the speed with which that money circulates through the economy. Hence increases in aggregate demand require increases in the money supply or the speed of circulation or both. Increases in the money supply, in turn, lead to increases in aggregate output, the average price of goods and services or both.
The key issue is how the increase in the money supply is brought about. Governments could (and should) create the new money interest-free and spend it in to circulation in much the same way as coins and notes are created. But instead, the bulk of the money supply is created by commercial banks who print credit entries into the bank accounts of their customers in the form of interest-bearing loans. This system of ‘fractional reserve banking’ has its origins in the essentially fraudulent practices of the early goldsmiths who made ‘loans’ of a far greater quantity of gold that they actually held in their vaults. This gave them substantial profits and allowed them to increase their claims on wealth (in the form of collateral), but also served the essential function of increasing purchasing power in a growing economy. This practice gradually evolved into modern banking, with central banks imposing minimum reserve requirements and acting as a lender-of-last-resort.
A crucial consequence of this system is that most of the money in circulation only exists because either businesses or individuals have gone into debt and are paying interest on their loans. While individual loans may be repaid, the debt in aggregate can never be repaid because this would remove virtually all the money from circulation. The health of the economy is therefore entirely dependent upon the continued willingness of businesses and consumers to take out loans for either investment or consumption. Any reduction in borrowing therefore threatens to tip economies into recession.
Individual loans need to be repaid with interest, but the money required to pay this interest was not created with the original loan. While banks will recycle a large part of the interest payments in the form of wages, dividends, and investments, a portion will be retained as bank capital to underpin further loans (Binswanger, 2009). Hence, the only way that individual borrowers can pay the interest on their loans, without at the same time reducing the money supply, is if they, or other borrowers, borrow at least as much as is being removed (Douthwaite, 2000). As a result, the amount of money in circulation needs to rise each year which means that the value of goods and services bought and sold must also rise, either through inflation or higher consumption (Douthwaite, 2000). In other words, both debt and GDP must grow - with the former growing faster than the latter.
Slow or negative growth will leave firms with lower profits and unused capacity, discouraging them from investing. Less investment will means fewer loans being taken out and thus less money entering into circulation to replace that being removed through interest payments. And less money in circulation will mean that there is less available for consumers to spend, which will exacerbate the economic slowdown and cause more bankruptcies and unemployment. By such processes, the monetary system creates a structural requirement for continued growth and increased consumption.
Summary
This paper has advanced five linked and controversial propositions regarding energy consumption, economic growth and sustainability. These run counter to conventional wisdom and highlight either blind spots or taboo subjects within orthodox theory. Each raises numerous theoretical and empirical questions that deserve both detailed and critical investigation. This will take time, but that commodity is becoming increasingly scarce.
A sustainable economy needs to have much higher levels of energy and resource efficiency than exist today and policies to encourage this have a crucial role to play. But for the reasons outlined above, this is unlikely to be sufficient to meet growing environmental constraints. Instead of encouraging further growth and greater consumption, the benefits of improved efficiency need to be increasingly channelled into low carbon energy supply and improved quality of life. Quite how this can be achieved remains far from clear since a credible ‘ecological macroeconomics’ has yet to be developed. Most importantly, a crucial element of that macroeconomics - namely monetary reform - remains almost entirely overlooked. It is hoped that this paper will at least stimulate some thinking in that direction.
http://www.energybulletin.net/node/52507
