Cartoon by Gus Leoniski [1]
Kerryn Higgs is a longtime Webdiary columnist [2]. This is the last in a series of three articles (see Is the economy part of the planet – or the planet part of the economy? [2] , and A Brief History of Economic Growth [2]) that Kerryn has written for Webdiary.
Trained in mathematical statistics before he studied economics under eminent US economist Joseph Schumpeter, Nicholas Georgescu-Røegen [3] worked in his native Roumania until 1948, when he fled the Communist regime, stowed away with his wife in a couple of barrels. Though he started out in the neoclassical orthodoxy, Georgescu-Røegen is celebrated for his application of the second law of thermodynamics to the economic process. The second law is the so-called entropy law, developed by German physicist Rudolph Clausius from Carnot’s original observations of engines. In 1850, Clausius formulated the principle that heat always moves in one direction only, from the hotter to the colder body, and will not flow the other way without the application of more energy. Based on this elementary fact, the entropy law holds that, in closed systems, all energy dissipates, becoming useless for further work in the process.
Thermodynamics describes one-way processes of qualitative change, which are subject to the ‘arrow of time’, and Georgescu-Røegen argues that economic activity is just such a process [4], even if economists have not noticed: Irreversible physical transformations are implicit in production; material resources and available energy are consumed and waste left behind. Any economy will require a source of materials and a sink where the waste can be dumped, and an economy which produces large quantities of material artefacts will require large sources and large sinks. Standard economic formulae include no variables to represent resources or wastes and are thus incapable of reflecting the thermodynamic implications of an expanding economic process.
Georgescu-Røegen saw all natural resources as subject to entropic exhaustion, and human economic production as inevitably hastening that dissipation. Mineral ores, for example, are most useful and most accessible for human use in concentrated form. The world’s most concentrated ores have already been heavily depleted, while more dilute sources are only rendered accessible by the application of new technologies and more and more energy—but, other than solar, energy resources are also subject to depletion. Gold mining in the twenty-first century illustrates the trend. Much of the gold that remains untapped consists of microscopic particles [5] so that, in most mines today, something like 30 tons of rock has to be removed, pulverised and sprayed for years with cyanide drizzle to recover an ounce of gold. Such an undertaking can only be profitable on a huge scale; it requires a lot of energy and leaves literally mountains of waste.
Georgescu-Røegen uses soil degradation as another illustration of the slow march of entropic exhaustion: “Thousands of years of sheep grazing elapsed before the exhaustion of the soil in the steppes of Eurasia led to the Great Migration”1 (The Entropy Law and the Economic Process [6], p. 19). By contrast, indicative of the scale, pace and intensity of recent economic history, two decades of intensive cashmere goat grazing in northern China has already compromised the fertility of the Alashan Plateau of Inner Mongolia. China’s rapidly expanded herds of cashmere-producing goats [7] might have slashed the price of sweaters, but they have also grazed these Chinese grasslands down to a moonscape, unleashing some of the worst dust storms on record.
In the case of oil, too—the energy on which the past century of explosive growth has been based—depletion has not taken thousands of years, another sign of the exceptional pace of twentieth century change. Even if oil supply continues to meet demand for several more decades, as optimists argue, there is little doubt that depletion will occur fairly soon in any long-run view of the human prospect. In July 2007, the International Energy Agency warned of looming shortfalls in the supply of both oil and natural gas [8]. What also seems imminent in the year 2007 is the limited capacity of the planet to act as a satisfactory sink to absorb the waste which will be released by burning the rest of the fossil fuels.
While coal is widely expected to be available for a few hundred years, oil appears likely to become the first crucial industrial scarcity, the first resource of which cheap and accessible supplies have approached exhaustion. Apart from the low-cost oil fields remaining, primarily in the Middle East, oil recovery is now carried on in ever less hospitable contexts—deep seas, Arctic climates and low-content oil sands and shales. The proportion of energy yield expended in extraction is on the increase.
For Georgescu-Røegen, this energy ‘budget’ is just as relevant as the economic one—a ton of oil from shale is not worth extracting if it takes equivalent energy from gas to do it [9]: whatever the dollar value, it makes little sense to extract energy once it costs more energy than it yields. This is, after all, one of the most severe qualifications on the virtues of corn-based ethanol. Even the most optimistic estimates suggest [10] that, in the US, it takes 7 or 8 litres of petroleum to produce 10 litres of ethanol, while Cornell’s David Pimentel has estimated a significant net energy deficit [11].
Shell’s plans to extract petroleum from kerogen deposits in Colorado [12] demonstrate the curious relationship between financial profits and energy deficits and suggest that the market is not necessarily affected by considerations of the ‘energy budget’. Shell plans to freeze an underground perimeter around 15 acres and then heat the 15 acres inside it to 650 degrees Fahrenheit for up to four years, thus ‘cooking’ the kerogen into a liquid suitable for refineries currently handling light crude oil. The energy for this project will come from coal-fired electricity. With western coal priced at about US$12 per ton and oil prices already fluctuating up to US$80 a barrel (and with no royalty charge for the kerogen resource), Shell might turn a profit even if they run an energy deficit—though the corporation has not conceded such a deficit.
If there is a deficit, as both Justin Bleizeffer [13] and Colin Campbell [14] suspect, it would suggest that an energy extraction activity can be profitable in the market without yielding an energy surplus. It should be noted, in addition, that any oil that Shell produces from kerogen not only risks a net energy deficit but will yield greatly inflated CO2 emissions, due to the large amount of coal burned in the course of its extraction. The market, however, is not sensitive to such drawbacks.
As far as energy is concerned, the earth is not a closed system of course—it receives an immense amount of solar energy every day, making available a generous and indefinite supply of energy, should humans have the means to harness it. Since the solar energy flux will continue, Georgescu-Røegen regarded it as the only rational basis for long term human energy use—a source not subject to entropic exhaustion for another four or five billion years. Industrial capitalism, however, replaced solar-based energy forms such as wind, water and biomass with the energy stored in terrestrial fuels. These are finite and very much affected by the second law, which tells us that energy, once tapped for work and dissipated as heat, cannot be re-concentrated for a second use. In the words of controversial biologist Paul Ehrlich, those who are waiting for a breakthrough which would overturn the second law might as well “wait for the day when the beer refrigerates itself in hot weather and squashed cats on the freeway reassemble themselves and trot away”.
Some neoclassical economists reject the concept of a physical setting for economic processes. Carl Kaysen claimed that “resources are properly measured in economic not physical terms. New land can be created by new investment, as when arid lands are irrigated, swamps drained, forests cleared. Similarly new mineral resources can be created by investment in exploration and discovery. These processes… have been going on steadily throughout human history” (italics mine). While claims of steady growth can be supported by the evidence of the recent past, the long view of history reveals many dead ends and regressions—and rapid change, whether social or technological, was unknown in pre-capitalist societies.
Thus, though it is true that ‘new land’ has been ‘created’ throughout the history of human settlement, for example as the vast boreal forests of Europe were cleared over several millennia and those of North America were subsequently cleared over a few centuries; and whereas land is still being ‘created’ with the current clearing of the tropical forests of South America, southeast Asia and Africa—over much shorter spans—it seems apposite to ask where the next wave of new land is to be ‘created’. As Herman Daly pointed out, the surface of the earth is not expected to grow and, in the absence of such a development, one would have thought that only tectonic activities are likely to ‘create’ new land. For economists like Kaysen, this is not ‘the right way to look at it’.
A related concept in neoclassical economics is the idea of market substitution which holds that any resource will be readily replaced if it runs down. Nobel Laureate Robert Solow considered that capital investment could substitute for actual resources and even embraced the peculiar possibility that “the world can, in effect get along without natural resources… [A]t some finite cost production can be freed of dependence on exhaustible resources altogether.”
Economists like Kaysen and Solow, by downplaying the physical nature of production and the finite nature of the world, stand squarely on a growth platform which recognises no limits whatsoever. Investment is said to conjure any productive resource we may need. These are the dominant economic ideas which influence the insitutions, both national and international, of the modern world.
In the words of Kenneth Boulding’s much-quoted aphorism: Anybody who believes exponential growth can go on forever in a finite world is either a madman or an economist.
1. ‘The Great Migration’ describes the westward movement of the central Asian herders (known popularly as barbarians) into Europe, a migration sometimes argued to have contributed to the fall of the Roman Empire.
References:
Kaysen, Carl (1972), “The Computer that Printed Out W*O*L*F*”, Foreign Affairs, 50 (4), 660-668.
Solow, Robert M. (1974), “The Economics of Resources or the Resources of Economics”, American Economic Review, 64 (2), 1-14.