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What Would it Take to Get to a Steady State Economy?

Humans live in equilibrium with other species in a finite world. In such a world, there is never really a Steady State. Instead, there is a constant ebb and flow.  One species may be dominant in an area for a while, and then another. If populations are closely matched in “ability,” then the ups and downs aren’t too severe. If a predator depends on a particular type of prey for its dinner, it can’t eat all of the prey, or it will go hungry.

When the populations of various species are graphed, they rise and fall.  We usually think of a close match, such as depicted in this graph:

volterra-lotka

Figure 2. Volterra_Lotka equations used to illustrate situation where population of predators and prey do not vary over too wide a range. Source: Wikipedia.

In fact, the variability of the many species over time tends to be greater than this, as illustrated by the following model that started with 80 baboons and 40 cheetahs:

Figure 3. Lotka-Volterra equations used to illustrate situation that begins with 80 baboons and 40 cheetahs. Source: Wikipedia

Figure 3. Lotka-Volterra equations used to illustrate situation that begins with 80 baboons and 40 cheetahs. Source: Wikipedia

If species evolve together, a natural balance tends to remain in place. If a species suddenly finds a new, better source of nourishment (really, energy supplies, since food supplies energy), its population may increase greatly. For example, yeast may metabolize the sugar in grape juice, converting it to alcohol. The yeast population temporarily rises and then declines, as the food source disappears and alcohol pollution poisons the yeast. Or bacteria may multiply inside the human body, if they find the right nutrients and the body’s systems for fighting them off are not sufficiently activated.

An example is sometimes given of reindeer introduced to St. Matthews Island near Alaska, where there was considerable lichen on the rock. The reindeer ate the lichen at a speed faster than the lichen could reproduce. Soon the lichen was gone, and the reindeer population crashed.

Figure 4. Assumed population of St. Matthew Reindeer herd, with actual counts given. Based on research of  David R. Klein.

Figure 4. Assumed population of St. Matthew Reindeer herd, with actual counts given. Based on research of David R. Klein of University of Alaska.

The reindeer example is similar to a very severe predator-prey curve. The reindeer ate a renewable resource faster than it could reproduce. There were a few other food sources a reindeer could eat, so a few reindeer remained, but there was a very sharp drop in the number of reindeer.

The population of humans has ramped up greatly in recent times:

Figure 5. World population based on data from

Figure 5. World population based on data from “Atlas of World History,” McEvedy and Jones, Penguin Reference Books, 1978 and Wikipedia-World Population.

The most recent growth coincides with the addition of fossil fuels to the energy supplies used by humans, starting about 1800. If we look back, we see though that human population has been ramping up for a very long period. Humans discovered how to control fire over 1,000,000 years ago. Since 75,000 BCE, there has been fairly consistent population growth, if we look at the data on a log/log graph.

Figure 6. Log/log graph of human population growth, with energy sources giving rise to this growth.

Figure 6. Log/log graph of human population growth, with energy sources giving rise to this growth.

The initial growth of human population occurred with the discovery of how to burn biomass, and how to use it for such purposes as cooking, keeping warm, honing stone tools to a sharper edge, and scaring predator animals away. All of these uses allowed ancestors of modern man to spread over a wider area of the globe, while at the same time wiping out many species of animals, as humans spread to new areas. Biologist and paleontologist Niles Eldridge says that Phase One of the Sixth Mass Extinction began when the first modern humans began to disperse to different parts of the world about 100,000 years ago. Phase Two began about 10,000 years ago when humans turned to agriculture. Even at these early stages, energy use by humans allowed human population to grow at the expense of the population of predator species.

There was a lull in human world population growth between 1 CE and 800 CE (Figure 6). In this period, there were many local collapses, so growth in one area tended to offset collapse in another area. When these collapses happened, they generally looked financial in nature, according to the research of Peter Turchin and Surgey Nefedov in Secular Cycles. Populations had found a new resource that allowed them to have more food supply–say cleared land of trees or learned to do irrigation. But over time, population grew, and caught up with available resources. At the same time, the resources started degrading. The soil started eroding, or became less fertile, and or salt built up from irrigation. Wages of the common worker dropped, and it was hard to get adequate nourishment. Epidemics became common. The general shape of these collapses was approximately as follows:

Figure 7. Shape of typical Secular Cycle, based on work of Peter Turkin and Sergey Nefedov.

Figure 7. Shape of typical Secular Cycle, based on work of Peter Turkin and Sergey Nefedov.

So even in the Year 1 CE to Year 800 CE period, there was not a Steady State. Instead, there was a combination of overshoot an collapse type waves of the types seen with other species in different parts of the globe, which together averaged out to relatively flat world population growth.

Angus Maddison analyzed GDP growth in the 1 CE to 1000CE period. He concluded that the per capita GDP was was slightly lower at the end of the period (453) than at the beginning of the period (476). He doesn’t give amounts at the Year 800. But assuming that the change was fairly representative, the period 1CE to 800CE or 1 CE to 1000CE was close to a Steady State economy (with lots of collapses), considering the lack of both population growth and GDP growth per capita.

In more recent times, humans were able to add more energy sources (including peat moss, windmills, and water mills). The also developed better ocean-going ships that allowed them to make colonies, and spread agriculture further, and demand that these colonies extract resources to support the home country. Also, with a more globalized world, agriculture could be improved by allowing a wider choice of domesticated plants and animals, by introducing species from other parts of the world.

Since 1800, the growth in fossil fuels has helped ramp up both population and standards of living.

Figure 7. Per capita world energy consumption, calculated by dividing world energy consumption (based on Vaclav Smil estimates from Energy Transitions: History, Requirements and Prospects together with BP Statistical Data for 1965 and subsequent) by population estimates, based on Angus Maddison data.

Figure 8. Per capita world energy consumption, calculated by dividing world energy consumption (based on Vaclav Smil estimates from Energy Transitions: History, Requirements and Prospects together with BP Statistical Data for 1965 and subsequent) by population estimates, based on Angus Maddison data.

What Are Human’s Options for Living in a Steady State Economy?

I am not sure there are many good choices:

1. If we went back to the period before the ancestors of humans discovered fire, about 100,000 to 200,000 of us could live in the warm areas of the world, eating raw food, and living much as chimpanzees and baboons do today, based on populations of those primates today. The population of humans under such a scenario would fluctuate upward and downward, perhaps as in Figure 1.

At this point the internal organs of human have adapted to eating a diet that includes many cooked foods, so it is not clear that our teeth and internal organs could handle such a diet, unless we happened to live in a part of the world where a soft diet (berries, fish and worms) was available. It would also need to be warm, so our lack of fur would not be a problem. To meet these criteria, the population might need to be even lower.

2. Having no humans at all is by definition a Steady State. I am doubtful that most people would consider this an acceptable Steady State, however.

3. If we did not have globalization, and stopped adding energy supplies, we might continue to have local collapses, as in the 1CE to 800CE or 1000CE period, and sort of approximate a Steady State. Of course, now with globalization, a problem in one part of the world quickly spreads to other parts of the world.

4. If we want 7 billion people to be able to continue to live, we will need some basic level of energy supplies for these 7 billion people. If we assume that as a minimum, people today will need at least the 1820 level of energy consumption (based on Figure 8), we will need total energy consumption of at least 22 gigajoules per capita. This would amount to about 7% of the current energy consumption of the United States. It would not be enough to perform what we now consider basic functions such as maintaining roads, electrical systems, water systems, and sewer systems, so would be a major step down for US residents.

At the 1820 level of energy consumption, we would still need to continue a portion of fossil fuel consumption, since there are now so many of us that biofuels no longer suffice (Figure 8–read across at 1820 level). Also, renewables, including today’s modern hydroelectric and solar panels are made and transported with fossil fuels, so in order to have what we now consider renewables, we would need to continue to have some fossil fuel use. Also, electricity from wind and solar PV needs to be backed up with natural gas electricity generation.

In addition to needing energy to maintain a population of 7 billion people, we would also need a way to

(a) keep population down, and

(b) keep people from using available energy supplies (beyond the 22 gigajoules per capita allotted), to improve their lifestyles.

The way we often hear proposed for keeping population down is more education of women and availability of birth control measures. Unfortunately, this approach is energy dependent. Unless considerable external energy is available, women will have to work in the fields to produce food. This will give them little time for education or the jobs that education would provide.

There are a some cultures that have been able to keep population down by less energy-dependent means. For example, China uses strict controls from above. Cultural and religious practices may also be used, such as delayed marriage and long breastfeeding. In some cases, abortion or infanticide may be used.

Keeping people from using available energy supplies to improve their lifestyles is even trickier. Some central authority can dictate that the US will use only 7% of the energy the population used in the past, meaning that everyone has to give up nearly everything. But enforcing this will be a real trick, unless energy supplies really are constrained.

There seems to be a common belief that cutting down on personal transportation fuel would have a big impact on total energy consumption. In the US, gasoline amounts to about 44% of US oil consumption. If we eliminated all gasoline consumption (even that by police, ambulances, and sales people), it would only reduce US energy consumption  (all types, not just oil) by 16%. On a worldwide basis, much less oil is used for personal transportation, so eliminating all oil for personal transportation would likely reduce world energy consumption by something like 10% to 12%.

Is There a Reason for Aiming for a Steady State Economy? 

At this point, we seem to be headed for collapse, because humans’ growth is so far out of line in relationship to that of other species. In addition, there are many other limits, including the cost of oil extraction, availability of fresh water, and amount of pollution (including CO2 pollution). Also, governments are increasingly poor financial condition, because when there are not enough resources to go around, governments tend to “come up short”. They can’t collect enough taxes relative to the benefits they pay out and all of the government programs they administer.

The only way a Steady State would make sense would be if there were some level of Steady State that humans could fall back to, instead of collapse. Unfortunately, it is hard to see a good place to fall back to. The only period where human population was relatively constant was in the period 1 CE to 800 CE, when frequent collapses kept populations down. It is difficult to see any point at which humans have not increased population, or increased resource use, if resources were available, except when frequent civilization collapse overwhelmed the system.

If our civilization does collapse to a lower level, but not all the way back to 0, it seems likely that humans will again repeat the pattern they have experienced, over and over. They will again grow population and resource use, if resources are available. This pattern seems to be an instinct for all species, which is why it is virtually impossible to eliminate. Humans will then again collapse back, to a more sustainable level.

Gail Tverberg's picture

Thank Gail for the Post!

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Discussions

Rick Engebretson's picture
Rick Engebretson on May 18, 2013 12:31 am GMT

Perhaps there are some options, if not solutions, if we allow some different ideas to enter the dialog.

First, burning biomass is no more an energy technology than boiling water. Yet some clever people decided to couple a piston and gears to PressureVolume boiling water steam energy, then more clever people built factories, steam ships, and a goofy machine that rolled on steel rails. The oil industry obtains PressureVolume work from InternalCombustion.

So today we have unprocessed oil (used for many innovative products besides fuel) selling for $100/barrel with roughly the same hydrocarbon energy content as one large tree. Yet many declare absolute certainty that we can’t do much of anything with a tree except burn it.

Please consider that we cut a tree with a steel blade saw. The edge is sharp so we amplify applied force/area (=pressure). Thus we know the yield strength of wood does not exceed the yield strength of steel. The only limitation for high pressure containment vessels is the yield strength of steel (mild steel = 60,000psi). Virtually pure carbohydrate extrusion is within reach.

Finally, the US had a long history of forest development. It ended about the last time we sent a man to the moon. And was forgotten the last time we sent a man into orbit. Yes, we are in decline, perhaps collapse. But there were/are options.

Gail Tverberg's picture
Gail Tverberg on May 18, 2013 1:53 am GMT

I think the limit we run into is financial. Oil and coal and gas can do great things (given the right technology), but the potential buyers have to be able to afford the end products (railroads, cars, fancier houses, new roads) and those companies making the railroads, cars, fancier houses, and new roads have to have a way of financing their new investment. So we end up with a lot of debt financing. 

Debt fianancing works fine as long as there is economic growth. When there is economic growth, the future is nearly always better ecoonomically than the past. On average, then, there is enough to pay back the debt, plus the interest on the debt. 

The problem arises when things start going wrong. How do things go wrong? 

1. We start needing more investment to get the same amount of oil, so there is more front-end financing  needed, so debt needs start increasing. See Our Investment Sinkhole Problem.

2. The cost of oil goes up, but wages do not, giving common citizens less discretionary income to pay debt (plus interest) back with. Even if there is economic growth, the extra money doesn’t make it into workers’ discretionary income.

3. Governments get poorer and poorer, because wages are not rising much, and taxes are mostly based on wages. At the same time, the many programs for retirees and for laid-off workers must be funded. There may also be subsidies for renewables. Government find themselves increasingly in debt. QE is used to keep interest rates artificially low, to stimulate the economy, and to keep interest affordable, but this cannot be maintained indefinitely.

4. Economic growth slows, especially in the parts of the world that use the most oil and gas, and thus have the highest cost of production (and thus are least competitive). Renewables also tend to raise costs. Europe is front and center in this area. 

At some point, something has to give. It becomes increasingly difficult to borrow all of the money needed to keep the whole system going and QE cannot keep on increasing. When debt cannot continue to increase, it becomes impossible to keep demand up, and the system crashes. It doesn’t matter how much oil and gas and coal is in the ground–it stays there if no one can afford to pay for it.

(But this is next week’s post, perhaps.) 

 

 

Rick Engebretson's picture
Rick Engebretson on May 18, 2013 3:23 am GMT

I don’t know much about the financial industry, Gail. But we’ve all seen what happens when real estate is used for poker chips in the financial industry. I tend to appreciate your warnings in this regard.

My comment reflects my experience. Sure, there is oil, etc. in the ground somewhere. The price of gas in Minnesota just jumped to $4.25, the state is asking the largest tax increase in our history, wildfires are already a problem, and the average farmer I know is about 80 with a pacemaker. So pick your scenario; go broke, burn up, or starve. Mostly I’m happy to be nearly done burning off biomass hazard for the year and wish there was a better way. Maybe a gravel pit or corn field is the only way.

People sitting in the city with nothing to do, who need food, energy, shelter, water, air, might learn finance has limits.

Tim Havel's picture
Tim Havel on May 18, 2013 12:14 pm GMT

The only way we’re ever going to reach any kind of a steady state is if we can figure out a way to bake it into our ecconomic system, right on down to the underlying monetary system. I think that’s a fascinating and almost completely open field of study, which I would encourage you to look (more deeply?) into. Here’re a few links to get people started (NB: I am not endorsing the content of these links, but merely putting them out as food for thought): CASSE, http://steadystate.org; New Economy Institute: http://neweconomicsinstitute.org; New Economics Foundation: http://www.neweconomics.org; American Monetary Institute: http://monetary.org; Public Banking Institute: http://publicbankinginstitute.org. Enjoy!

 
Schalk Cloete's picture
Schalk Cloete on May 18, 2013 12:42 pm GMT

Gail, I was wondering what you think about the potential of negative real interest rates to facilitate a relatively smooth economic decline in the face of resource limits. Many countries are already borrowing at negative real interest rates which is a direct admission that the future will be smaller than the present. It seems like investors are willing to see slightly negative yields on their investments if they understand that the alternative is catastrophic losses. 

Just like positive interest rates demand that the future is bigger than the present, negative interest rates allow the future to be smaller than the present. Sure, it will be difficult to manage, but a prolonged negative real interest rate environment could theoretically keep our economy stable in its current form even as real GDP declines. 

Gail Tverberg's picture
Gail Tverberg on May 18, 2013 2:05 pm GMT

The issue is that our economy has no “reverse gear,” even if interest rates go negative and cash held loses value over time.

Businesses invest with the idea that they can make a profit on their investment. If the economy starts going backward, the “fixed costs” become too high relative to sales. This means the unit costs must ramp  up significantly, to make the same amount of profit. The ways of fixing this all lead to a lot less employment in the US – (1) Make a smaller sized company and lay off employees, (2) Automate, and lay off employees, or (3) Outsource portions that can be handled chealy to a country with lower labor/fuel costs. Any of these results leads to many more unemployed.

More unemployed leads to government funding problems. Governments can’t collect enough taxes from teh employed, and the unemployed want government benefits of various types. Banks may also fail because of debt defaults on loans taken out by laid-off workers.

Gail Tverberg's picture
Gail Tverberg on May 18, 2013 2:10 pm GMT

The catch is that the banking system has to mirror the underlying reality.

It is cheap energy that runs the world, and we are running short of cheap energy. Going to a Steady State would require that we have a steady supply of cheap energy–something we are rapidly losing.

The closest thing would be a system where money loses value each year (negative interest rate), but as I explained in another response, that leads to lots of laid off workers.

Rick Engebretson's picture
Rick Engebretson on May 18, 2013 2:39 pm GMT

Thanks Tim Havel for the links. I was surprised and pleased, especially CASSE.

Who knows where we are going. But I remember standing in a hallway about 1980 with Otto Schmitt, inventor of digital electronics, and asked him where we were heading during those hard times. His response was, “We will have to hit rock bottom, I mean rock bottom, then people will learn to work together.” Then I saw a new booklet by AT&T on fiber optics when I went to the library to read WWII propeller designs because people pushed windmills then, too.

My role is dubious, but my effort was notable. Since then the internet happened, Berlin Wall fell, longest stretch of peacetime prosperity in history. I’m not sure where the next game changer is, but those links you provided sure give a lonely Biophysicist in the boondocs some hope. Thanks again.

Schalk Cloete's picture
Schalk Cloete on May 18, 2013 3:41 pm GMT

Sure, but what if the business can borrow at negative real interest rates? In this case, the average business can pay back its loans even if future profits decline (as they must in a contracting economy). Businesses can then keep their employees, but just gradually lower their salaries (in reality, salaries will probably still go up, but at a slower rate than inflation). This will keep employment steady, but give each employee less purchasing power (demand) matching the declining output (supply) of the overall economy. 

As salaries decline, employees will also require negative interest rates on their home loans in order to keep on servicing their debts. Lower salaries together with high oil prices will also make offshoring less attractive and increase local employment. 

The structural unemployment resulting from automation could be a problem though, allowing skilled and/or connected individuals to keep on increasing their purchasing power while unskilled individuals will be unable to earn a living. Some controversial wealth redistribution plans will be necessary in this case – probably funded by governments borrowing at negative real interest rates. 

Tim Havel's picture
Tim Havel on May 18, 2013 4:16 pm GMT

Regarding cheap energy, all I can say is that I’m more of techno-optimist than you! We’ll certainly have to cut back considerably on how much energy we use per capita, but we’ll live better nonetheless. The human race will also get it’s population down eventually, making the energy problem just that much easier to solve. Last but not least, the best of solar is still ahead of us. What concerns me most, actually, is how much irreparable damage we inflict upon our planet before we get things under control. Much too much, at the rate things are going. Which is why I laud your efforts to wake us to our peril.

Gail Tverberg's picture
Gail Tverberg on May 18, 2013 5:19 pm GMT

The negative real interest rate thing is one we would need to think through very caretully. What would be the business model for a bank offering a mortgage at a negative real interest rate? The bank has its own expenses to cover, including the risk of default of the loan, and these coasts are very definitely positive. So the interest rate the bank can offer will by defition be higher than the cost of money it borrows (as it is today). So unless its cost of borrowing is quite negative, I would expect the interest rates on for home moretages would be quite negative.

Another issue is that we are not dealing with a steady state. We started with farily high available interest rates, and they have gradually become lower, as economic growth becomes lower and lower. We are heading toward negative economic growth, and in fact, Europe seems already to be there–the reason for its negative interest rates. The situation gets worse over time. Energy supplies will require a greater share of the world’s investment capital, as we move from the cheap sources of oil and natural gas to the more expensive sources of these products. This will leave less for other investment, causing shrinkage, and quite often defaults on existing debt, which is not at a negative interest rates.

Also, the structural unemployment is a permanent problem for the government. It collects less taxes, and needs to pay out more in benefits. If it raises taxes, it makes the problem worse, because citizens will cut back in discretionary spending, and this will throw people in discretionary industries out of jobs. This loop is self-reinforcing, so it is hard to fix.

Thomas Garven's picture
Thomas Garven on May 18, 2013 7:01 pm GMT

Hi Gail:

Really enjoy your postings but am wondering – Will you be posting something that gives hope for the future?  You know; something like: if we do this then this could or might happen.  Or if we do this instead of that we might be better off.   I find potential solutions more valuable than our financial system is going to collapse, LOL.  

Maybe some type of plan that we can all get behind for the sake of our children and grandchildren.

Thank you

Tom G. 

 

 

 

Schalk Cloete's picture
Schalk Cloete on May 18, 2013 10:21 pm GMT

To my mind there is little doubt that the average discretionary consumption in the developed world will decline over the coming decades. The question is just how we can manage this process so that it is relatively smooth and we don’t end up in a hyperinflationary/deflationary collapse.

Such a collapse will create massive wealth transfers from the poor and middle class to the wealthy, leading to enormous inequality and potential conflict. We really have to do our best to avoid this. If we can use negative interest rates to manage this decline, average wealth will still decline, but in a more equitable manner, thereby hopefully preserving societal integrity. 

It will also give the labour market time to gradually readjust away from discretionary sectors more towards essentials. An economic collapse will result in massive structural unemployment as the demands of society as a whole will change totally almost overnight. Such a situation can be very chaotic and is to be avoided. 

Lewis Perelman's picture
Lewis Perelman on Jun 2, 2013 4:29 pm GMT

I share Gail’s skepticism about the feasibility or desirability of a ‘steady state’ economy. See:

http://www.scribd.com/doc/61318837/Speculations-on-the-Transition-to-Sustainable-Energy-1980

But her suggestion that populations are bound to overshoot and collapse seems a bit too Malthusian and overlooks examples where species regulate and maintain populations for an extended period if not permanently. Some animals reduce their fertility when food is scarce. Indigenous human tribal cultures have a variety of mechanisms by which they regulate the size of their populations.

It is well known among demographers that economic prosperity leads to a demographic transition where fertility rates fall sharply, often to below replacement level. This has already happened in most of the industrialized countries and is increasingly happening elsewhere. The human population is likely to peak by the end of this century and then gradually decline.

It’s worth noting that nuclear power is not generally considered ‘fossil’ energy, and has the potential to be substantially expanded. Development of feasible fusion power would expand that potential greatly. The problem with expanding supplies of nuclear or other non-fossil energy supplies is primarily one of cost. There is no evident reason to presume that further innovations could not eventually reduce the cost of alternatives to a level on a par with fossil fuels.

Also, the declining energy intensity of economic output means that economic growth can be continued, for some time at least, without proportional need for more energy inputs. Greater efficiencies in other material resource use, combined with the shift toward more ‘intangible’ forms of economic utility, can further alleviate some of the constraints Gail assumes. Overall, the picture is less gloomy than she suggests.

However, the exchange between Gail and Schalk raises an important issue that is generally not getting much/enough attention in policy circles. That is, the modern economy is on track toward a major technological inflection point that some call The Singularity: when automatons become capable of performing nearly all forms of labor cheaper and often better than humans can. That trend is already visible and may reach its consummation by mid-century. Yet no existing economic theory offers a model for distributing wealth and income other than mainly through human labor, and secondarily via capital investment. At least not at a global scale. Rent-based economies, such as those of major oil-producing states, often suffer from various sorts of social morbidity from the decoupling of income from labor. Kurt Vonnegut’s 1952 novel, “Player Piano,” offers a troubling scenario of how degrading a prosperous but labor-free economy could be.

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