Our complex economic, technical, political and social systems, eroded by energy-related and other biophysical constraints, are showings early signs of failure

Thought provoking.

Slow economic growth is not just an after-effect of the Great Recession but part of a deeper malaise that predates, and indeed may have helped cause, the financial crisis. A number of narratives have emerged in recent years to try to explain this global dearth of growth, such as the ‘debt overhang’ narrative, which states that growth is primarily hampered by an excessive indebtedness of economic agents, or various versions of the ‘secular stagnation’ narrative, which sees the cause of slow growth in a chronic shortfall of demand resulting from population ageing and the rise of income and wealth inequality, and/or in the diminishing returns of technological innovation. These various narratives probably all have some degree of validity. However, they tend to focus on developments that, even if they act as mutually reinforcing drags on growth, are in fact symptoms of the world’s economic predicament rather its deeper root causes.

Even more than from what most economists usually look at, i.e. constraints on capital and labour and on the productivity of their use, the slowdown of global economic growth since before the financial crisis might be resulting from factors that they typically ignore, i.e. constraints on the supply of energy and other biophysical resources that feed into the economic process and impact its functioning. In fact, the world’s capacity to create additional wealth is getting increasingly eroded by biophysical boundaries that over time tend to raise the acquisition costs, constrain the quantity and degrade the quality of the flows of energy and natural resources that can be delivered to the economic process, as well as by the constantly increasing costs of some of the economic process’ side effects (i.e. ‘negative externalities’ including environmental degradation and climate change), and the growing need to ‘internalise’ them into the price system. These biophysical constraints, as they increase, tend to weigh more and more on the economy’s productive capacity, thus eroding the potential for productivity and output growth.

The root causes of the long-term erosion of the world economy’s growth potential, therefore, may be related to biophysical constraints rather than to factors affecting just capital and labour inputs. As a consequence, policies aimed at boosting or reviving economic growth by targeting solely capital and labour inputs and the productivity of their use are highly unlikely – and, as a matter of fact, have failed in recent years – to deliver their intended results. Pursuing such policies would typically mostly lead to putting ever-growing pressure on those factors of production – and most particularly on the traditionally weaker factor of production, i.e. labour – to try to obtain productivity improvements and output growth that would consistently fail to materialise. In fact, continuous dual pressure on labour – upward on productivity, downward on compensation – has already been at play for several years, and this dual pressure is a major contributor to the populist backlash now underway in many countries. …

Over the last decades, the industrialised world has found a workaround to biophysical constraints by expanding the reach of global capitalism but also and maybe more fundamentally by substituting debt accumulation to genuine wealth creation. This debt-fuelled growth, which has been instrumental in enabling the transition of Western countries to a service-based economy, imploded in 2008-2009 and has since then only been maintained on life support by the massive liquidity injections made by the world’s major central banks, as well as by the massive and compounding asset bubbles that have been blown as a result in developed as well as emerging economies. These injections and bubbles have so far prevented a brutal deflation of the financial assets that underpin the entire global financial and economic system, but the ability of central bankers to contain this deflationary spiral is dwindling as time passes and as genuine growth continues to be lacking. …

A key determinant of a society’s capacity to develop greater organisational and technical complexity, according to Joseph Tainter, is its capacity to harness ever-growing supplies of energy. The availability of abundant, inexpensive, high quality energy has indeed been historically instrumental in the development of industrial societies’ capacity to build increasing complexity into their economic, technical, political and social systems. As biophysical constraints on the quantity and quality of energy and other resources rise, this ‘energy-complexity spiral’ may transition from being an upward spiral to being a downward one. Technical innovation that increases productivity may slow down this evolution, but research shows that innovation in industrialised countries tends to become more expensive and less productive over time, meaning that societies need to continuously step up their investments in innovation to continue solving problems through building up increasing complexity.

At some point, however, investment in socio-political complexity typically reaches a point of diminishing returns, meaning that the marginal beneficial returns (i.e. problems solved) of additional complexity begin to decline, leading to a lowered capacity to solve the new problems that arise and to deal with their consequences. These returns may even turn negative, at which point societies are not anymore capable of upholding the level of complexity they have reached. Typically, they then tend to break down to a lower complexity level. …

The political crisis that is now engulfing Western countries, and more particularly Europe, suggests that we may be reaching or even have reached the point identified by Joseph Tainter where our standard way of solving the problems we face – i.e. investing in organisational and technical complexity – is yielding diminishing returns. If this is the case, we should not be surprised that more and more of our complex economic, technical, political and social systems are showings signs of stress, or even early signs of failure. As our capacity to invest in further complexity continues to get eroded by energy-related and other biophysical constraints, we should expect more stress to develop across the board, potentially leading to some sort of systemic breakdown and forced simplification. The growing popular revolts against globalisation, the EU, or multiculturalism are signs that our societies are already struggling to uphold their level of complexity and are subject to strong forces that are pulling towards a break down to a lower complexity level (i.e. localised economies, national governance, homogeneous societies, etc.).

These trends are largely obscured, however, by our habit of thinking about the problems we face in purely political terms, i.e. in terms of governance, leadership and policy choices, regardless of the historical circumstances in which they are made. If something doesn’t turn out the way we expect, we tend to blame policy-makers and the decisions they have taken or failed to take, or in some cases voters and the choices they have made. More rarely, we question the adequacy of our public institutions. Faced with the protracted crisis of the EU, we blame the current generation of European ‘leaders’ for their mediocrity and inability to rise up to the standards of their predecessors – even if those predecessors are precisely those who are responsible for building the EU’s dysfunctional edifice in the first place. We try to imagine solutions that would allegedly solve the EU’s problems, but we conveniently choose to ignore that the conditions and requirements for their adoption and successful enactment can probably not be fulfilled. By pursuing in this direction, we will most likely end up making policy or institutional choices that will fail to reach their intended objectives, and that will bring about new problems we will be unable to solve or even comprehend, and unintended consequences we will be unable to control.

#Brexit, the populist surge and the crisis of complexity