Energy and the End of Growth

Is economic growth coming to an end? That’s been a hot topic of discussion recently (including in this publication), thanks to a paper by Northwestern University economist Robert J. Gordon, Is U.S. Economic Growth Over? It had a simple but striking thesis: “There was virtually no growth before 1750, and thus there is no guarantee that growth will continue indefinitely.”

But before 1750 there were no fossil fuels either. Only once humans tapped the large deposits of coal and oil beneath us did economic growth truly awaken. Every technological innovation since then has depended on fossil fuels. The history of economic growth is, so far, the history of fossil fuels.

This gives us cause to wonder whether economic growth will end when it is no longer powered by fossil fuels. Civilization as we know it is – and has been – fossil-fueled; where society is not energized by fossil fuels, people live in abject poverty, much as most of the world did in 1750.

Hence, there is endless discussion about what will take the place of fossil fuels when they are gone or become too expensive or damaging – and what kind of civilization will use these alternative forms of energy. This is not idle speculation – it is a very practical conversation to have. Long lead times will be necessary to make a transition. Two hundred and fifty years of fossil-fuel based growth and infrastructure development will not be cast aside quickly or easily.

It is also an important conversation for those who study investment opportunity. The biggest opportunities arise when new technologies are born, creating a new social and industrial infrastructure in the process. A major energy transition could entail as great an upheaval in infrastructure as any that our civilization has experienced since 1750. It will not be merely a question of what energy systems to invest in; it will be a question of what the entire global social infrastructure will look like, depending on what energy technologies are used.

The cloistered economics profession

Of course, most economists fail to ask the right questions to be a useful part of this discussion – and Gordon is the latest example.

Gordon’s describes the goal of his article this way:

This paper raises basic questions about the process of economic growth. It questions the assumption, nearly universal since Solow’s seminal contributions of the 1950s, that economic growth is a continuous process that will persist forever.

This opening reveals how cloistered the thinking in the economics field is. MIT professor Robert Solow posited, in a 1956 paper, a very simple model of economic growth based on capital, labor, and a third factor presumed to be technological advances.

The mathematical statement of Solow’s model expresses GDP, or total production, as Solow’s three factors multiplied together – capital, labor, and technology – with two of them raised to an exponent. This appears to be the reason why, as Gordon states, the assumption has been nearly universal among economists since then that economic growth will continue forever – indeed that it will be exponential growth. But there is nothing in Solow’s theory itself that implies – or even offers an argument for the proposition – that economic growth will continue forever.