July 23, 2011

Classical Economics and the Limits to Growth

The following extract comes from an essay by Tony Wrigley, a Cambridge economic historian who has a new book on Energy and the English Industrial Revolution (2010)

The most fundamental defining feature of the industrial revolution was that it made possible exponential economic growth – growth at a speed that implied the doubling of output every half-century or less. This in turn radically transformed living standards. Each generation came to have a confident expectation that they would be substantially better off than their parents or grandparents. Yet, remarkably, the best informed and most perspicacious of contemporaries were not merely unconscious of the implications of the changes which were taking place about them but firmly dismissed the possibility of such a transformation. The classical economists Adam Smith, Thomas Malthus, and David Ricardo advanced an excellent reason for dismissing the possibility of prolonged growth.

They thought in terms of three basic factors of production, i.e. land, labour, and capital. The latter two were capable of indefinite expansion in principle but the first was not. The area of land which could be used for production was limited, yet its output was basic – not just to the supply of food but of almost all the raw materials which entered into material production. This was self-evidently true of animal and vegetable raw materials – wool, cotton, leather, timber, etc. But it was also true of all mineral production since the smelting of ores required much heat and this was obtained from wood and charcoal. Expanding material production meant obtaining a greater volume of produce from the land but that in turn meant either taking into cultivation land of inferior quality, or using existing land more intensively, or both. This necessarily meant at some point that returns both to capital and labour would fall. In short, the very process of growth ensured that it could not be continued indefinitely. This was a basic characteristic of all “organic” economies, those which were universal before the industrial revolution. Adam Smith summarised the problem as follows:

In a country which had acquired that full complement of riches which the nature of its soil and climate, and its situation with respect to other countries, allowed it to acquire; which could, therefore, advance no further, and which was not going backwards, both the wages of labour and the profit of stock would probably be very low. (Smith 1789)

He went on to spell out in greater detail what his statement implied for the living standards of the bulk of the population and for the return on capital. When Ricardo tackled the same issue he came to the same conclusion and was explicit in insisting that the resulting situation “will necessarily be rendered permanent by the laws of nature, which have limited the productive powers of the land” (Ricardo 1817). . . .

Access to energy that did not spring from the annual product of plant photosynthesis was a sine qua non for breaking free from the constraints afflicting all organic economies. By an intriguing paradox, this came about by gaining access to the products of photosynthesis stockpiled over a geological time span. It was the steadily increasing use of coal as an energy source which provided the escape route. . . .

In recent years, it has become possible to quantify the phasing and scale of the energy revolution since scholars in a number of European countries have agreed a common set of conventions for the description and measurement of energy consumption. They have produced illuminating data. . . . [A]s more information becomes available for other European countries the strong similarities between all countries whose economies remained organic is striking. None could break free from the constraint which Adam Smith described unless they turned to the accumulated product of photosynthesis in the past rather than depending on the annual cycle of current photosynthesis. . . . .

The implications of the new age, which were invisible to the classical economists, were only fully appreciated much later by the generation of Karl Marx. He and his contemporaries saw clearly that output was rising rapidly and that it was reasonable to expect it to continue to do so, though they differed widely about the implications of this new situation.

* * *

In Greek mythology, Pandora was created by Zeus to enable him to punish Prometheus for having stolen fire from the sun to animate his man of clay. Zeus intended that Pandora should marry Prometheus and had given her a jar with the instruction that she should present the jar to the man she married. She was ignorant of its contents. Prometheus was suspicious and repulsed her. She instead married his brother Epimetheus, who ignored a warning about acting imprudently and opened the jar. In so doing he released into the world a host of previously unknown and malign forces.

The story has parallels with the occurrence of the industrial revolution. Contemporaries were not aware of the radical and irreversible nature of the changes which were in train. The analogy is not, of course, exact. On balance, the forces released by the industrial revolution may be thought beneficial rather than malign but the balance is a fine one.

Every increase in the powers of production has been offset by a matching increase in the powers of destruction, exemplified perhaps most vividly by the atomic bomb. And the possible impact of the massive increase in the burning of fossil fuels on the environment may also call in question the future stability of the gains which have been made in productive power.

The great bulk of the literature about the industrial revolution has been devoted to explaining how it began. This has been to the neglect of the equally important question of why the growth did not grind to a halt as all previous experience suggested was inevitable. It is in this context that the history of energy usage is critical to the understanding of the changes which took place.

Societies whose productive capacities were limited by the annual product of photosynthesis operated within severe and seemingly immovable constraints. Societies which switched to depending on the stored products of photosynthesis in the form of fossil fuels were released from these constraints, though whether the immense benefits which were thus made possible will prove durable and stable remains an open question.

 h/t: Early Warning

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