In the modern world, our perceptions of reality are largely shaped by economic and financial considerations, and our policy conversations are largely built around intellectual categories and evaluative criteria that pertain to the economics discipline. Yet a long-term view shows that ‘The world in 2018’ is in a significantly different place than what economists typically claim, and than what many of us want to believe.

We human beings build our perception of our personal and collective reality on a number of objective and subjective factors, which vary significantly between individuals and societies, as well as across time and space. However, for a majority of people in the modern world this perception tends to be mostly based on economic and financial considerations: the way we, individually and collectively, at any given moment in time, perceive our material and financial situation and prospects, and our material and financial well-being (absolute and relative), typically dominates our overall perception of our personal and collective trajectory and situation. It also influences the way we think about the other elements that contribute to shaping our worldview: when our perception of our material and financial conditions and perspectives is positive, it tends to foster our individual and collective confidence and security, which influences our views on other aspects of our lives and on our ability to address the challenges we face; when this perception gets more negative, on the other hand, it tends to make us insecure about our ability to deal with issues in other aspects of our individual and collective lives, and can in some cases hamper our ability to address them successfully.

The central role of economic and financial conditions in shaping our perception of reality has long been understood by policy makers the world over, who constantly try to influence the way these conditions are viewed and represented in society. It has also, of course, led them to seek advice from economists to find ways of improving material and financial well-being in their jurisdictions. With the development of economic science over the last century, economists have gained increasing sway over policy-making in industrialised as well as industrialising nations, and economics has become – by far – the most politically influential social science. This influence has only grown in recent decades as the modern economic system was becoming more complex and economic growth was becoming more difficult to achieve. Since the 1980s, economists have largely influenced the design of public policies in many Western countries, pushing in particular ‘neoliberal’ reforms that have increased reliance on market mechanisms and fostered the deregulation of financial markets, the privatisation of parts of the public sector, the liberalisation of trade and the quest for ever-growing economic ‘efficiency’ through faster and faster ways of producing and consuming more and more goods and services.

Economists and economic experts have not lost their influence in recent years, despite the fact that most of them failed to predict the 2007-2008 financial crisis and have since then been struggling to make sense of it and its aftermath. On the contrary, they have probably never had so much influence over the policy conversation than they have today. From the tech boom to wealth and income inequality, from globalisation to the energy transition, from healthcare to banking regulation, from welfare reform to climate change, economists are those who largely set the terms of the debate. It does not mean, of course, that policy makers systematically do what economists advise, nor that this advice is in any way uniform or consistent. It means, however, that the public debate is largely organised around intellectual categories and evaluative criteria that are those pertaining to the economics discipline.

This, of course, has serious and unfortunate implications, because economics has become little more than a belief system that is increasingly incapable of grasping and accounting for the reality it pretends to study – and hence increasingly unable of informing us about the choices we face and the options we have. Since the end of the 19th century the economics discipline – or more particularly its ‘macro’ side – has indeed evolved into a ‘reductionist’ discipline, which tends to limit its field of inquiry to a limitative set of relatively basic components of the economic system, conveniently leaving aside other elements that have a decisive influence over the system’s structure, functioning, and evolution. As a result, most contemporary economic theories are essentially beliefs based on questionable assumptions and simplifications, which only scratch the surface of how the economy works. This is why the alleged ‘rules’ of the economic textbook are far less soundly established than what economists contend, and why they only work in certain conditions, in certain places and in certain times, but not in others. This is why, also, every policy maker, every political side or pressure group, can always easily find economists to tell them exactly what they want to hear, when they want to hear it. This is why, most importantly, the policies advocated by economists often utterly fail to deliver their expected results and typically generate unintended – and often damaging – consequences.

The issues with conventional economic theories and models are many, varied and complex. They include a number of flaws and blind spots, which have been laid bare by the Great Financial Crisis and its aftermath. Most importantly, they include the almost complete ignorance – or rather voluntary omission – of the fundamental biophysical foundations of the economic process. This ignorance of how the flows of energy and matter underpin economic activity – and economic growth – results from the evacuation of the natural world from mainstream economic thought, which occurred in the 20th century, when it suddenly looked like homo sapiens had managed to conquer nature and the curse of resource scarcity had been all but defeated.

Let there be light

To be fair, ignorance of the biophysical underpinnings of the human experience is not limited to economics, but extends to almost all contemporary social sciences. When we reflect about human societies or nations, how they are structured and work, how they came to be and evolved over time, or how they interact, we typically tend to focus on various aspects of the relationships and the balance of power between individuals and between groups (e.g. between the commoners and the elites, the haves and the have-nots, the educated and the uneducated, the labourers and the holders of capital, the natives and the immigrants, etc.), but we largely leave aside the fact that these relationships are built upon flows of energy and matter that are exchanged between these various groups, and between them and the natural environment. Hence, when we reflect about the history and trajectory of homo sapiens, and how it evolved from being just another primate species to the modern-day shaper of the Earth System, we tend to focus on the causes of our ‘progress’ that are intrinsically human, leaving aside the extraordinary help we received and keep receiving from nature.

This vision of homo sapiens as a species that controls its destiny, and of human progress as resulting essentially from human agency (i.e. the choices that humans make and the actions they take as a result), dominates the modern psyche and underpins contemporary historiography. The new superstar historian Yuval Noah Harari, for instance, shot to fame a few years ago with a much celebrated book on human history[i] contending that if we have managed over the last couple of centuries to defeat the triple curse of famine, plague and war, we owe it largely to human ingenuity and scientific development. For some reason, about two hundred years ago and after centuries of economic, social, political and intellectual stagnation or quasi stagnation, human beings found a way of getting their acts together and suddenly embarked on a long-term path of progress. That reason is commonly referred to as the ‘enlightenment’, i.e. the fact that humans started in the 18th century, in Europe first and then beyond, to replace religious dogma by reason as the primary source of authority, legitimacy, reflection and action. This ‘Age of Enlightenment’ was preceded by and closely associated with the scientific revolution, and was marked by an emphasis on the scientific method, hence putting humanity on a path of intellectual and technical progress. It paved the way for the development and spreading of modern humanist philosophy and of modern democracy, putting humanity on a path of social and political progress. It also paved the way for the Industrial Revolution, putting humanity on a path of economic progress and prosperity.

‘Progress’ has not stopped since then. As a result, the world’s population has grown roughly six-fold since the mid-1800s, world output 60-fold, and world trade over 140-fold. Output has grown much faster than population because productivity per worker has been multiplied (by around sixteen-fold since 1890), resulting in rapidly increasing material prosperity and well-being in industrialised and industrialising countries. There have been setbacks, of course, including two world wars in the 20th century, but overall the course of human history in the last two hundred years has been one of quasi-continuous technical, economic, social, and political progress, spreading further and further across the globe. In the Western world, this trend has largely come to be considered as both irreversible and unstoppable. A civil ‘religion of progress’ has progressively won most of the symbolic ground formerly occupied by theistic religions, and the vision of progress as a historical process and destiny is what has been and is still defining our contemporary sense of ‘normality’.

When reality doesn’t seem to conform to our understanding of how the ‘arc of progress’ should bend, we consider it as ‘abnormal’ and hence in need of normalisation. That may be the case, for instance, when material prosperity and well-being stop improving for part of the population, when income and wealth distribution gets increasingly skewed towards a tiny minority of already rich and wealthy, when democracy seems to be in retreat or becoming dysfunctional, or when a Twitter-addicted reality TV buffoon takes the helm of the world’s most powerful nation and governs it in an erratic way. In such cases, many people in the West tend to believe that our perceived deviation from the arc of progress results from a series of erroneous choices, and that getting back on track also depends on choices we can make. Provided we fight and remain true to the Enlightenment ideal of using reason, science and humanism[ii], we shall overcome! Yes we can!

Nature in general, and energy in particular, do not feature prominently in this story. They are merely tools that enable homo sapiens to accomplish its destiny and human progress to run its course, but they play only a supporting role. This view, however, is extraordinarily short-sighted, and this is where our modern narrative of progress is fundamentally flawed. The Industrial Revolution, which put us on our path of material progress, did not happen just because humans finally saw the light and switched from believing in a God-imposed order to believing in the power of reason. It occurred, also and maybe more importantly, because homo sapiens found ways of accessing and using new sources of energy, which would forever change the course of its history and its relationship with nature.

At the centre of it all…

As shown by British economic and demographic historian Tony Wrigley, among others, energy played a central role in making the Industrial Revolution possible and successful[iii]. Pre-industrial societies only had access to very limited energy supplies: mechanical energy coming principally from human or animal muscle, heat energy from wood, and some wind and water power. These energy limits effectively capped the maximum attainable level of human productivity at a low level. It is the exploitation of a new and much more powerful source of energy in the form of coal that provided an escape route from these constraints of an organic economy and transformed the productive power of societies. It did so by vastly increasing individual productivity, thus delivering whole populations from poverty and setting into motion the economic growth mechanism – a mechanism that is, essentially, energy-based. As a result, the rate of growth of the world’s consumption of primary energy (i.e. energy embodied in sources that can be found in nature and that has not been subjected to any conversion or transformation process) has been closely correlated with the rate of growth of global economic output since then. It has remained remarkably stable (2.4%/year ±0.08% since 1850), and shows no sign of slowing down.

In his account of humankind’s history, Yuval Noah Harari rightly recognises that energy lied at the heart of the Industrial Revolution and of the economic growth mechanism that it set in motion. Prior to it, he says, humans could harness various types of energy (i.e. the mechanical energy obtained from water and wind, or the heat energy produced by burning wood), but these energy sources were only available in limited quantity, not everywhere and not all the time, thus limiting the productive capacity of the human economy. An even bigger problem, Harari however notes, “was that people didn’t know how to convert one type of energy into another”, i.e. heat into movement, or vice versa. The only type of ‘machine’ capable of converting energy was the body, which can “burn organic fuels known as food and convert the released energy into the movement of muscles”. Human and animal bodies were the only energy conversion devices available, and muscle power – including that of human slaves – was thus the key to almost all human activities.

But then the use of coal changed everything: not only did it provide humans with vastly increased supplies of cheap energy, but also with vast supplies of energy that could be efficiently and effectively converted between different usable forms. Its burning indeed produced heat energy, proportionally far more than wood, which could be converted into mechanical energy – and later into electrical energy – far more efficiently and effectively than when using wood. “At heart, the Industrial Revolution has been a revolution in energy conversion”, Harari thus says: humans finally learned how to harness and convert energy effectively, which made it possible to phenomenally raise their productivity. This revolution in energy harnessing and conversion also solved the other problem that was holding back economic growth: the scarcity of raw materials. “As humans worked out how to harness large quantities of cheap energy, they could begin exploiting previously inaccessible deposits of raw materials (…), or transporting raw materials from ever more distant locations”.

From these very salient observations, Harari however draws an erroneous conclusion. The revolution in energy conversion, he says, “has demonstrated again and again that there is no limit to the amount of energy at our disposal. Or, more precisely, that the only limit is set by our ignorance. Every few decades we discover a new energy source, so that the sum total of energy at our disposal just keeps growing. (…) Clearly the world does not lack energy. All we lack is the knowledge necessary to harness and convert it to our needs. (…) During the Industrial Revolution, we came to realise that we are actually living alongside an enormous ocean of energy (…). All we need to do is invent better pumps”. These assertions are, unfortunately, unfounded and misleading. Understanding why requires briefly revisiting some of the fundamentals of what energy is, where it comes from, and what role it has been playing in human history.

An energy primer

First, energy is, just like water, a fundamental requirement for the existence of ‘life’. Living things are physical and chemical systems that exchange energy, as well as matter, with their environment. This ‘metabolism’ (i.e. capacity to convert energy and exchange energy and matter with the environment) is constitutive of life: something can only be ‘living’ if it has one.

Second, energy cannot be created by living things to support their metabolism, but only harnessed from their environment – meaning that the existence of life presupposes that usable forms of energy are present in the environment and also that its development or evolution is contingent on the capacity to use and convert these various energy forms. Humans are no exception, and they can neither create nor destroy energy, but only harness it from the biosphere and transform it between different states, typically from more or less condensed energy sources into useful work on the one hand, and waste heat on the other. A corollary is that the production of work – any work – without energy input is a physical impossibility. Another is that any life form can only expand insofar as its access to usable energy and its capacity to harness and convert it allows.

Third, almost all sources of usable energy present in our environment have a same origin: the Sun. The star at the centre of the Solar System does not only provide us with heat that we can capture and store and with sunlight that we can convert into electrical energy. It also provides us with our food energy, which directly and indirectly (i.e. via the animals we eat) comes from plants that grow by trapping solar energy and converting it into chemical bonds through the process of photosynthesis. We also recover some of this photosynthetic energy by burning plant products such as wood, which breaks the plant’s chemical bonds and releases energy as heat and light. The Sun’s energy also warms the planet’s surface and creates transfers of heat and pressure in weather patterns and ocean currents, which results in air currents that drive our wind turbines. It evaporates water that falls as rain and generate the water currents and deposits that we use to generate mechanical or electrical energy through hydropower. Finally, it is also the source of the much more concentrated forms of energy that are known as ‘fossil fuels’. The production of coal, oil, or natural gas indeed results from the conversion, after millions of years of geological and chemical activity underground, of organic matter that directly or indirectly comes from plants and hence from the solar energy they trapped through photosynthesis. Except maybe energy that can be extracted from basic elements present in the Earth’s crust, such as uranium and plutonium, all energy on Earth can therefore be traced back to the Sun, which is probably why solar deities and Sun worship can be found throughout most of recorded human history, in various forms. We human beings are, symbolically at least, ‘children of the Sun’[iv]…

Fourth, the relation to energy and energy conversion is, deep down, what distinguishes humans from other living things. There’s no established consensus on the question of what makes us special and fundamentally different from other animals, and most accounts typically focus on our mental qualities and cognitive abilities[v]. Yet a possibly much more significant difference is the way we harness and convert energy, and the purposes for which we do it. Animals and plants convert energy in a single way and for a single purpose: they transform energy from sunlight and food or nutrients within themselves, inside their bodies and/or cells, to preserve and sustain their physiological activity. Their metabolism, in other words, is purely ‘endosomatic’ (i.e. occurring within the body). In contrast, humans have, in addition, a second way of converting energy, called ‘exosomatic’, by which they transform energy outside their bodies, through various tools and instruments, with the goal of amplifying the output of useful work associated with their activities. This distinction between ‘endosomatic’ and ‘exosomatic’ energy use, introduced by American biophysicist Alfred Lotka, helps explain why and how homo sapiens, starting as a simple ape-like creature, became the conqueror of nature. While plants and animals, or even simple cellular organisms, only convert ‘endosomatically’ the energy they need to ensure the preservation or spreading of the species, humans harness energy for performing, with the help of exosomatic instruments, a wealth of activities that go far beyond what is required for that purpose.

Exosomatic energy use and conversion is thus the foundation of all those activities that distinguish humans from animals. This is what is figuratively represented in the famous opening scene of Stanley Kubrick’s 2001: A Space Odyssey, when a tribe of hominids discovers how the use of exosomatic instruments (in this case, the use of bones as weapons) gives them power over other life forms and over their environment, setting them on a fundamentally different course than all other species. Consequently, exosomatic energy use and conversion is also the foundation of the production by humans of a variety of goods and services, or in other words the foundation of the human economy. The expansion of the human economy is therefore dependent on humans’ capacity to effectively and efficiently convert energy ‘exosomatically’. This capacity, in turn, is dependent on human ingenuity but also and more fundamentally on the quantitative and qualitative characteristics of the energy that is available in the environment and that can be effectively and efficiently harnessed for that purpose. In order to expand and improve the outputs obtained from their exosomatic energy use, humans thus need to gain access to more and/or better forms of energy inputs. This endless quest is the defining pattern of human history.

Rise of the exosomatic species

Human exosomatic energy use has known three ‘revolutions’ over the ages. The first was the control of fire by early humans, which occurred before the appearance of homo sapiens and was probably instrumental in setting in motion the evolution mechanism that led to its arrival. Controlling and cultivating fire indeed provided a source of heating, lightning, protection, improvement on hunting and a method for cooking food. It made it possible for humans to expand their activities into the dark and colder hours of the evening, to better protect themselves by intimidating other animals, and to build better tools and projectiles to hunt their preys, thus giving them access to more food energy. It also made it possible for them to start cooking their food, rather than eating it raw like animals, which fundamentally changed their diet, dramatically improved the effectiveness and efficiency of their ‘endosomatic’ metabolism and accelerated the process of their physical and cognitive evolution[vi]. Controlling fire allowed humans to become the ultimate predators, and to progressively expand outside the tropics and disperse across the globe.

The second revolution came with the development of agriculture. Until about 12,000 years ago, most humans were leading hunter-gatherer lifestyles, wandering around and coalescing in small tribes. The purpose of their exosomatic energy use was largely limited to supporting their hunting and gathering activities, with the aim of supplying the food energy needed for their endosomatic metabolism. This all changed with the ‘Neolithic Revolution’, when many human cultures transitioned to a lifestyle of agriculture and settlement, growing domesticated plants and raising domesticated animals – used to produce food and perform work – instead of gathering wild plants and hunting wild animals. This revolution made it possible to develop a more reliable supply of food energy – and then progressively a growing ‘surplus’.

From then on, only part of a human group’s population would have to work to supply the food energy required for the whole group, freeing up a growing capacity to perform other types of activities as well. Because crops and animals could now be farmed to meet demand, the global human population rocketed – from some five to ten million people 10,000 years ago to about 300 million when Jesus Christ was born about 2,000 years ago. Cities appeared and civilisations rose in various corners of the Earth, in which people started to perform an array of previously inexistent activities: architecture and masonry, various types of crafts, public administration, as well as early ‘intellectual’ occupations (priests, thinkers, scribes, and even artists or entertainers). These new activities led to the design and use of an ever-greater range of exosomatic instruments and to their refinement or improvement over time. This triggered the development of what we now call ‘the economy’, i.e. the production and exchange of goods and services to satisfy a variety of human needs and wants, and the emergence of ‘money’ as a means of carrying out transactions involving a medium of exchange. However, since human and animal bodies were the only energy conversion devices available, the development of exosomatic instruments and the exosomatic use of energy remained constrained by the limits of endosomatic metabolism. As a result, and following their early rise after the Agricultural Revolution, global economic output and population numbers stabilised and only grew slowly for several centuries, with regular setbacks caused by war, famine and plague. A long ‘Malthusian plateau’ had been reached, during which average living standards evolved slowly and only varied modestly between various parts of the world. In each place, living standards were governed by the level of the subsistence wage, and thus in large part by common human physiology.

The third and most significant revolution in human exosomatic energy use was, of course, the Industrial Revolution. The combination of a vastly increased energy supply obtained from accessing new energy sources (i.e. millions of years of concentrated solar energy in the form of fossil fuels) and of new energy conversion techniques finally made it possible to lift the secular barriers to output and population growth. New energy sources, forms and uses came online, giving access to more materials and making possible the invention of new and increasingly sophisticated exosomatic instruments (i.e. machines), which in turn made it possible to access ever more energy and matter and to transform them ever more effectively and efficiently. Exosomatic energy use skyrocketed from then on, rapidly lifting human productivity – including in the agricultural sector. It triggered an exponential rise of both economic output and population numbers, in Western Europe first, and then in parts of the New World where its people became the dominant populations, underpinning what some have called the ‘Great Divergence’ between the Western world and the rest[vii]. This exponential rise then progressively spread to other regions of the world, and it continues to this day.

Nature’s invaluable gift

What is most significant in the Industrial Revolution, i.e. the third revolution in the history of human exosomatic energy use, is not so much that coal supplanted renewable energy sources such as water and wind power or biomass as the main source of exosomatic energy use, it is that exosomatic energy use finally overtook endosomatic energy use (i.e. muscle work) as the main energetic underpinning of the human economy. From then on, and through the use of energy conversion devices, energy obtained from fossil fuels progressively replaced manual labour in a growing array of activities. That includes, of course, unpaid manual labour, or in other words the work formerly performed by slaves and serfs. Slavery and serfdom had been a key feature of the economic and political fabric of virtually all human civilisations prior to the advent of fossil fuels, and a major underpinning of the economic system ever since the advent of agriculture. The Industrial Revolution made it possible to change that: from an energetic and economic point of view, human slaves were progressively replaced by much more powerful and efficient slaves, fossil energy slaves, which started to do much of the physical ‘work’ for us. They can be considered as ‘slaves’ in the sense that we do not have to pay these immensely powerful, cheap and abundant workers, which we get from stores of trapped solar energy cooked, pressurized and concentrated underground over millions of years: they come to us as a free gift from Mother Nature. All we have to do is to get them out of the ground and put them to work. That’s what we have been doing for over two centuries, and that’s how the modern world came to be.

The coal-powered economic growth dynamic initiated in the 18th century picked up in the first half of the 19th century, and then accelerated sharply in the second half, when the more widespread adoption of new manufacturing and production technologies triggered a ‘Second Industrial Revolution’. This Second Industrial Revolution was made possible, in particular, by the invention and development of a phenomenal energy carrier, electricity, which quickly replaced steam in industry, and was also widely applied to transportation and communications. The use of electricity accelerated industrial growth beyond what would have been possible with steam, making it possible to move towards mass production. The Second Industrial Revolution was largely an electric revolution.

From an energetic point of view this second Industrial Revolution was essentially the continuation of the first, as coal remained its main energy source. However, it also saw the emergence of oil and gas, fossil fuels that are considerably more concentrated and powerful than coal and that would come to turbocharge the world’s economic growth dynamic in the 20th century. Natural gas was first used for lightning, but at the turn of the 20th century and with the deployment of effective gas transportation networks its use started to expand to home heating and cooking, to manufacturing and processing, and to electricity generation. Oil, the most powerful and versatile of fossil fuels, was also first used for lightning purposes, but additional uses were quickly discovered. In particular, it provided the most important lubricating agents for industrial machines and, most importantly, provided a powerful and convenient liquid fuel that would revolutionise transportation, on land, on water and then in the air, making it possible to move people and goods ways of magnitude faster, further and cheaper than would have been possible without it. Petroleum and petroleum products also became used as an important raw material for various petro-chemical products that progressively became ubiquitous, including asphalts, plastics, soaps, detergents, solvents, glues, paints, drugs, fertilisers, pesticides, explosives, synthetic fibbers and rubbers, or flooring and insulating materials, among others.

In the first half of the 20th century, oil supplanted coal as the critical global energy source for major industrial economies. Extraordinarily convenient, versatile, and affordable, immensely available and highly concentrated, it rapidly multiplied the number of ‘energy slaves’ at the disposal of human beings. By some estimates, one barrel of crude oil contains the energy equivalent of over 10 years of manual labour, meaning that all the mechanical and thermal work done using oil – which in energetic terms represents the bulk of the ‘work’ performed in the modern world – equates to that of millions of unseen, indefatigable energy slaves[viii]. And this immense army of energy slaves is in fact the army that built the world we live in today… More than anything else, the unprecedented energy bonanza we obtained from burning coal, natural gas, and, most importantly, oil, made the modern economy possible and defined the modern world’s order. This doesn’t mean, of course, that other factors did not play a role in building that order. But it means that our world – and our historical trajectory and ‘progress’ – would look extraordinarily different today if there had been no coal, no gas and especially no oil in the Earth’s crust.

In the 20th century, humans also started to harness other energy sources, such as nuclear energy (i.e. the use of nuclear fission to generate useful heat and electricity) and, more recently, ‘modern renewables’ (wind and solar power). However, these new sources have only added relatively small increments to the global energy mix. After a promising start in the years following the Second World War, which largely resulted from the spill over effects of the development of military nuclear programmes, the nuclear power industry quickly reached a plateau when it became clear that it would never deliver ‘too cheap to meter’ electrical energy but rather extraordinarily costly and hazardous energy. The civilian nuclear industry never became viable without massive government subsidies, and responded to rising costs with ever-escalating demands for government support. In addition, it generated multiple security hazards (risks of nuclear reactor accidents and of radioactive waste disposal, and risks of military nuclear proliferation), which in many places eroded political and popular support for its development or even its continuation. As a result, global nuclear electricity production has been stagnant for about twenty years, and has even decreased slightly in recent years following the Fukushima nuclear disaster. Today, nuclear provides less than 5% of the world’s total primary energy supply[ix], and talk of a ‘nuclear renaissance’ is fading as the Western nuclear industry is largely bankrupt and the development of new generation reactors (Gen IV) is running into endless technical issues, delays and cost overruns.

‘Modern’ renewables such as wind and solar, on the other hand, are now growing quickly but still only provide a negligible share of the world’s energy supply. Wind and solar power account for about 5.5% of global electricity production (i.e. half the share of nuclear) and only 1.6% of total final energy consumption (and that’s together with biomass and geothermal power)[x]. The cost of solar and wind power technologies has been dropping fast in recent years, and the world is now adding more renewable power capacity per year than it adds in new capacity from all fossil fuels combined, yet the actual output from ‘conventional’ electricity generation continues to rise faster than that of wind and solar. Fossil fuels, overall, generate about 65% of the world’s electricity, and represent over 80% of the world’s total primary energy supply, a share that has virtually not changed for over four decades.

Therefore, and contrarily to what Yuval Noah Harari contends, the Industrial Revolution and the 200 years that have passed since then have not “demonstrated again and again that there is no limit to the amount of energy at our disposal”, or that this amount just keeps growing and growing as we keep discovering new energy sources every few decades. Unfortunately, they have demonstrated nothing of the sort. What they have demonstrated is that human beings have received from Nature an extraordinary gift, in the form of immense reservoirs of highly concentrated energy resulting from complex geological processes lasting millions of years, that they have been building their world on the basis of that gift ever since, and that their efforts at tapping into other energy sources on a large scale have so far been largely inconclusive.

The energy boost

If fossil fuels in general, and oil in particular, have become and remain the master sources of energy for the modern world, it is not – or not only – because of their relative abundance and affordability. It is also because they have a number of attributes that make them extraordinarily convenient, powerful and versatile: energy density (amount of energy stored per unit volume or mass), power density[xi] (rate of energy flux obtained per unit of spatial area used), fungibility (equivalence and interchangeability of all units), storability (capability to be stored for considerable time without loss of usability), transportability (capability to be moved around by multiple means with limited loss), ready availability, convenience and versatility of use (beyond energy supply, there are over 500,000 known uses of petroleum), and convertibility (notably into electricity). All those attributes make fossil fuels – and oil in particular – more ‘valuable’ than all other known energy sources in economic terms, in the sense that they have a higher capacity to help generate economic value very rapidly, in very diverse ways and on a very large scale.

Related to these physical properties and probably even more important from an economic point of view, fossil fuels are energy sources of exceptional energetic quality (i.e. capacity to be converted into ‘useful work’ that can effectively contribute to the economic process) and energetic productivity (i.e. capacity to provide usable energy in excess of the energy consumed in the extraction/transformation/transport and delivery process). The increasing availability of these cheap, high quality and highly productive forms of energy inputs is what has underpinned productivity and economic growth in industrialised and emerging economies since the Industrial Revolution. It has made possible to obtain far more useful work (also called exergy) than would have been possible with energy inputs from other sources, thus boosting productivity growth in an unprecedented way. And it has also made a phenomenal amount of ‘net energy’ available to society to do other things than finding, extracting, processing, converting, transporting and distributing energy, making it possible to develop an array of activities that would simply not have existed otherwise.

The physical properties, energetic quality and energetic productivity of fossil fuels have laid down the foundations of modern economic growth and made its continuation possible over two centuries. In fact, when integrated into production functions, the production factor ‘energy’ accounts for most of the historical economic growth since the Industrial Revolution that mainstream economists struggle to explain, i.e. the famous and massive ‘residual’ that they conveniently – or lazily – attribute to ‘technological progress’. Most of this residual, in fact, probably results from increased energy use and from historical improvements in energy conversion to physical work[xii]. Most of the economic growth we experienced since the Industrial Revolution, in other words, was the result of a massive ‘energy boost’.

This energy boost reached its peak during the decades immediately following the Second World War, when oil fully became the master energy resource for industrialised economies, feeding a ‘great acceleration’ of the human imprint on the Earth System. During that period, world energy production (on an absolute and per capita basis) grew at a breakneck speed, cheaper and higher quality forms of energy inputs became increasingly available and got converted into useful work ever more efficiently, and the overall amount of ‘surplus energy’ obtained from high net energy resources (i.e. energy resources with a high energy return on investment – EROI[xiii]) shot up tremendously, making possible to expand and diversify mass production and consumption. The combination of these phenomena turbocharged economic activity, in terms of both diversity and intensity.

Losing thrust at high altitude

However, in advanced economies this energy boost started to wear out in the 1970s, for several reasons. First, energy use ran into a classic phenomenon of diminishing returns: the low-hanging fruits of economic growth had been picked first, many large-scale infrastructure investments with a high economic multiplier effect (including electrification) had already been made, and in many industries and sectors maximum machine speed/velocity was already being reached. Just like the average speed of automobiles, motorbikes or planes, the average speed of industrial machines in many sectors increased much faster until the late 1960s/early 1970s than after that. The physical and economic limits to energy-based speed-ups thus probably played a role in the sudden slowdown in productivity growth at the turn of the 1970s. Second, increasing concerns about the atmospheric and ground pollution resulting from fossil energy use – and from material use made possible by fossil fuels – triggered the adoption at the beginning of the 1970s of the first set of environmental regulations in Western countries, which established some constraints on the further expansion of energy use. Third, oil depletion in the U.S. – until then the world’s largest producer – and a subsequent realignment of energy geopolitics lead to a dramatic rise in the price of oil (i.e. the 1973 oil crisis), which rapidly reverberated across the economy. This triggered a considerable slowdown of the rate of increase of energy consumption, resulting in much slower economic growth. The combination of economic stagnation and soaring price inflation came to be known as ‘stagflation’, and lasted until the beginning of the 1980s, when oil prices finally started to decrease. After a sharp growth slowdown in the 1970s, world energy use per capita started to decline slightly in the 1980s and 1990s, an only picked up again at the beginning of the 21st century, as a result of China’s rapid expansion and massive use of domestic coal resources.

Oil depletion and its effects have remained a constant source of concern – and of geopolitical tensions – since the oil crises of the 1970s. The threat of oil supply shortages was partly alleviated in the 1980s and 1990s by the discovery and exploitation of new major oil fields in North America (Alaska) and Europe (North Sea), but it resurfaced in the 2000s when wars disrupted production in the Middle East, oil prices spiked, and fears of an imminent peak and decline of global oil production (‘peak oil’) grew. These fears have since then receded, largely as a result of the exploitation of ‘tight oil’ (also called ‘shale oil’) in North America, using hydraulic fracturing (‘fracking’) and horizontal drilling, as well as to other ‘unconventional’ sources (oil sands, deepwater oil) and to the use of enhanced recovery techniques in conventional oil fields. These are however temporary fixes: shale oil production is expected to peak in just a few years time, and global oil discoveries have fallen to their lowest point since the 1940s, prompting rising fears of a supply crunch – and possible price spike – around 2020.

While concerns about oil depletion – and fossil fuels depletion in general – tend to mostly focus on quantitative aspects (i.e. availability and affordability), qualitative aspects are often overlooked. Yet they are as, or even more, significant. In fact, depletion means that it is getting more and more difficult, costly, resource-intensive and polluting to get oil – and other fossil fuels – out of the ground. It also means that the energetic quality (measured in terms of exergy) and productivity (measured in terms of net energy or EROI) of what is extracted tends to go down, resulting in a decreasing capacity to power useful and productive work, and in a decreasing ability to provide ‘surplus energy’ to society (i.e. energy that can effectively be used for doing other things than finding, extracting, processing, converting, transporting and distributing energy). According to some estimates the EROI of global oil and gas has declined by nearly 50% in the last two decades, meaning that new technology and production methods (deep water or horizontal drilling) help to maintain production but appear insufficient to counter the decline in the energetic productivity of conventional oil and gas. In other words, we are now entering the age of ‘crappy oil’, or at least we are clearly heading that way…

The declining energetic quality and productivity of fossil energy resources has resulted in the last decades in a rising energy intensity of the global energy system. According to the International Energy Agency (IEA), the share of the world’s Total Primary Energy Supply (TPES) used by the energy supply sector (which comprises all energy extraction, conversion, storage, transmission, and distribution processes that deliver final energy to end users) expanded from 24% in 1973 to 31% in 2015, while the share available for Total Final Consumption (TFC) by other sectors of the economy went down from 76% to 69%. Overall, the quantity of energy supplied to end-use sectors (i.e. industry, transport, residential, services, agriculture, etc.) rose by 101% over the period, but the quantity of energy that had to be used by the energy system to supply this energy to end users increased by 196% (source: IEA Key World Energy Statistics 2017). Overall, a rising share of the fossil energy we get out of the ground therefore ends up being used by the energy system itself – or in other words the ‘energy cost of energy’ (ECOE) is rising, and the trend is accelerating. This relative energetic productivity decline not only constrains the growth the amount of ‘net energy’ that the global energy system can make available for use by other sectors, it also increases the share of those sectors’ output that has to be consumed by the energy sector. As the energy sector becomes less productive, it indeed tends to consume not only more energy but also more materials, more labour, more services, etc. A rising share of the output of other sectors has to be dedicated to servicing the needs of the energy sector, which ends up constraining economic growth and eroding economic prosperity (i.e. the capacity for societies to dedicate a rising fraction of economic output to discretionary uses).

Therefore, starting in the 1970s fossil energy progressively ceased to boost global economic growth as it had done since the dawn of the Industrial Revolution, and most particularly during the post-WWII period. The world’s energy-based growth engines, it suddenly appeared, were losing thrust, exposing the global economy to growing and hazardous turbulence while flying fast and at high altitude…

Short-term fix, long-term addiction

The rules of the economic game therefore changed fundamentally from the 1970s onwards. Most economists and policy makers recognised it, though their disregard for – or ignorance of – the biophysical foundations of the economic process prevented many of them from fully understanding the causes and consequences of this change. Their focus since then, hence, has mostly remained on finding ways of obtaining more economic growth from what they mistakenly view as the only growth factors: capital and labour use and productivity, underpinned by technological progress. This is what explains their wide support for the neoliberal turn initiated in the 1970s, for the technological boom (and its accompanying innovation mythology) that started in the 1980s, or for the globalisation of capitalism as of the 1990s. Neoliberal reforms were aimed at removing ‘obstacles’ to the ‘efficient’ functioning of free markets (i.e. most of the regulations and safeguards built into the capitalist system during the years of rising surplus energy and prosperity), with a view to ‘unleashing’ capital formation and productivity. Innovations in information and communication technologies were aimed at increasing labour productivity and developing an array of new activities. Globalisation was aimed at boosting international trade, but most importantly at increasing the volume of available labour while reducing its average cost for a wide array of activities, and at removing obstacles to capital mobility. In fact, globalisation’s main raison d’être was to enable mobile capital to arbitrage labour, currencies, interest rates, regulatory burdens and political favours by shifting between nations and assets – all this being supposed to foster more efficient resource allocation and wealth creation.

Even if they were not necessarily conceived as such, wide-ranging neoliberal reforms, accelerating technological change, and the globalisation process have constituted remediation strategies in a world whose energy-based growth engines were progressively losing thrust. Together, they have triggered an unprecedented ‘time–space compression’, i.e. a compression of spatial and temporal barriers and distances, which for a while boosted economic growth.

The most effective remediation to the global economy’s waning energy boost, however, has not been neoliberalism, nor the tech boom, and not even globalisation. It has been the expansion of debt, in the U.S. first and then across the Western world and beyond. Starting in the 1970s, debt “became the fulcrum on which the economy was levered for the next forty years”, in the words of economic journalist and analyst Jeff Madrick[xiv]. The collapse in 1971 of the Bretton Woods international monetary system, which ended the era of fixed exchange rates based on both gold and the U.S. dollar and ushered the era of free-floating fiat currencies, removed obstacles to the expansion of the money supply. A few years later, a decades-long liberalisation of financial regulation started in the U.S., which rapidly extended to the rest of the Western world and progressively removed obstacles to the expansion of credit. A number of regulatory constraints on the activities of banks and other financial institutions were lifted, with a view to widen the use of financial products and markets to mobilise and allocate resources and to manage and reduce investment costs and risks – in order, ultimately, to boost investment and growth. This liberalisation provided financial institutions with new and less costly ways to raise capital, but it also and most importantly facilitated the lending and borrowing of funds, thus increasing available credit for borrowers. As a result, corporations and households started accumulating debt on an unprecedented scale and at an unprecedented rate, which contributed to fuel and accelerate economic growth beyond what would otherwise have been possible. The global economy, in other words, substituted its waning energy boost with a credit boost.

Financial liberalisation did not only result in a massive build-up of debt, it also triggered the mass commoditisation of debt and made it the fuel of a process of ‘financialisation’ of the economy. It indeed ushered a wave of wide-ranging financial engineering and innovation, which fed an unprecedented growth of the financial sector and profoundly changed the structure and functioning of Western economies. New and increasingly complex types of asset-backed/debt-based financial instruments and products were created and introduced to the market, in a 30-year frenzy of ‘securitisation’ deals aimed at transforming, through financial engineering, illiquid assets or groups of assets into fungible and negotiable financial instruments (‘securities’). This resulted in a mass commoditisation of debt and debt-based financial instruments, ‘collaterised’ by previously low-risk assets, and in a pyramiding of risk and speculative gains that was only made possible by a massive expansion of low-cost credit and leverage.

This mass commoditisation and spreading of debt and debt-based financial instruments fed the growth of money market funds, investment funds and other institutional investors, such as pension funds and insurance companies, striving for ever-higher performance and returns. It also fed the growth of commercial banks, progressively moving away from their traditional lending activity, which occurs in a very competitive environment with tiny profit margins, towards more lucrative proprietary trading and ‘derivative’ trading (i.e. trading of contracts whose value is ‘derived’ from the performance of an underlying entity such as an asset, index, or interest rate).

This financialisation process was most spectacular in the United States – and this is where it was the most consequential as well, since the U.S. is the world’s largest economy and the epicentre of the global economic and financial system. It could actually be argued that financialisation is probably rooted in America’s particular form of capitalism, in which credit is seen as the engine of enterprise and the fuel of the consumerist ‘American Dream’[xv], and in which finance has for a long time triumphed over industry and made the U.S. economy, in essence, a ‘speculation economy’[xvi]. Speculation and credit indeed form an integral part of the fabric of American capitalism, which historically developed through a series of boom and bust cycles that almost always ended up in a financial crisis. Financial excess was only tamed for a few decades with the adoption of restrictive regulations during the 1930s New Deal, which are precisely the regulations that were repealed in the 1980s and 1990s in order, officially, to ‘unleash’ economic growth – with the return of financial instability and financial crises as a not-so-surprising corollary

Modern financialisation has however not been confined to America. It has been a global phenomenon and has actually been concomitant with a process of financial globalisation, characterised by a steep increase of cross-border flows of financial capital and by a growing integration of global financial markets. This global financialisation/financial globalisation process has dramatically increased the size of the financial services sector in developed economies and inflated the global stock of financial assets (i.e. the value of stocks, bonds and all types of securities), which quadrupled in size relative to global GDP between 1980 and the financial crisis. Also, and even more fundamentally, it significantly altered the patterns of profit making and the distribution of corporate profits across the economy. The financial sector came to capture a growing share of all corporate profits (e.g. around 30% in the U.S. today, vs. around a 10% thirty years ago) and supplanted manufacturing as the biggest profit centre in the economy. A rising share of corporate profits thus shifted from a high-employment industry towards a relatively low-employment one, thus concentrating earnings and, ultimately, wealth, in fewer hands.

The phenomenon was compounded by the growing financialisation of non-financial corporations, which increased their dependence on earnings obtained through financial channels (as opposed to operational ones), and diminished labour bargaining power in income distribution. As a result, corporate profits have tended to decouple from economic growth and to reflect instead the ability of companies to engage in financial engineering. Meanwhile, the operational profitability of many non-financial corporations was increasingly being maintained or enhanced by slashing jobs, off-shoring some and using computerisation and high-tech machinery to replace others. The process of financialisation, therefore, led the whole of the corporate world, well beyond the boundaries of the financial sector, towards a high-profit, low-employment template that weighs on aggregate demand by holding back income growth for a rising share of the population.

The financialisation process has also tended to subordinate real capital formation in the realm of goods and services to finance, and to sap productivity growth by misallocating resources – in particular human resources. In fact, the financial sector’s growing share of profits – much of which arise from various forms of rent extraction rather than productive investments – has enabled financial services firms to offer (much) higher salaries than other sectors, making it harder for genuinely innovative firms to attract the best talents and invest in new technologies. Industries that compete for resources with finance ended up being damaged by the financial sector’s growth. Specifically, manufacturing sectors that are either R&D-intensive or dependent on external finance suffer disproportionate reductions in productivity growth when finance grows. By draining resources from the real economy, financial sector growth therefore probably acts as a drag on real growth. The dynamic of finance growth can even be considered as a ‘parasitic’ phenomenon, which if left unchecked can potentially ‘kill the host’, i.e. destroy the real economy from which it extracts value[xvii]. These risks and damages are made worse by the growing political and regulatory influence acquired by an increasingly profitable financial sector – particularly in the U.S., where corporate funding of politics is a central element of political life, corporate lobbying is ubiquitous, and the permeability between government and business through ‘revolving doors’ is higher than in most other advanced economies.

Overall, the financialisation process initiated at the turn of the 1980s ended up delivering a sluggish economy with growing inequality, extravagant rewards for some and stagnant or even declining incomes for the masses, and an overload of debt for all. The amount of debt produced and pushed around by the financial sector rapidly started to exceed the real economy’s ability to produce a large enough surplus to pay it back, becoming a drag on real growth and making a financial breakdown inevitable. This breakdown finally occurred in 2008, and nearly brought down the global economy. It became clear, then, that the global economy’s credit boost had only been a short-term fix to the end of the fossil energy boost, but that it had generated a long-term and dangerous addiction to debt – an addiction that persists to this day.

Falling into a trap

Debt has in fact continued to grow rapidly across the world since the 2008 financial crisis. Far from being brought down significantly, global debt has continued to expand faster than the economy, resulting in rising debt ratios in both advanced and emerging economies. According to the Institute of International Finance (IIF), global debt rose to a record $US233 trillion in the third quarter of 2017, representing almost 320% of global GDP. Global levels of debt held by households, governments, financials and non-financial corporations jumped by over $US70 trillion in the past decade, and are now much higher than before the financial crisis. In advanced economies only the financial sector has somehow ‘deleveraged’ after the crisis, as banks and other financial institutions cleaned up and sometimes contracted their balance sheets through restricting credit creation and selling assets – or, more particularly, ‘offloading’ risky assets to the U.S. Federal Reserve and other central banks engaging in ‘quantitative easing’ (QE) policies. Household and non-financial corporate debt only went down slightly in the immediate aftermath of the crisis due to debt defaults or write-offs and to the sudden tightening of credit conditions, but this private sector deleveraging was largely outstripped by the rapid growth of government debt, caused by the sharp increase of expenditure required to contain the effects of the crisis, combined with a sudden drop in tax revenues as economies fell into recession. Overall, total debt (private plus public) never really ceased to rise in advanced economies, and private debt quickly started to grow again – even if more slowly than before the crisis. In the U.S., virtually every class of debt – sovereign, corporate, unsecured household/personal, auto loans and student debt – is now at record highs, and debt levels are also rising steadily in Europe, and shooting up in Canada or Australia.

Most importantly, global debt accumulation has since the crisis been mostly driven by emerging economies, especially China, where a semi-public and government-backstopped financial system has been pumping exponentially increasing amounts of credit into the economy as part of a deliberate, state-driven stimulus programme. Formerly a low-leverage economy growing through global labour arbitrage and thanks to the wide availability of cheap coal, China morphed after the crisis into the fastest debt accumulator in human history, using credit to invest relentlessly in expanding capacity in many industrial sectors as well as in construction and infrastructure. Its total debt as a proportion of economic output has doubled since 2008, rising to an estimated 317% at the end of 2017 (or 282% excluding financial sector debts, compared with 158% at the end of 2008). China’s debt-fuelled over-investment, over-capacity build-up has not only underpinned the country’s continuous expansion since the crisis, it has also been the major engine of global growth in recent years. There are mounting concerns, however, that China’s growing credit dependency might rapidly make its debt trajectory unsustainable[xviii] and generate important stability risks for the global financial system.

A decade on from the beginning of a financial crisis that was caused by an excess of debt, the world’s economy therefore continues to be fundamentally based on fairly similar patterns of debt-fuelled economic expansion, with few indications that this trajectory of rising leverage may fundamentally change in the near future. On the contrary, credit creation is becoming an ever less productive driver of growth, meaning that the world needs to accumulate more and more debt to obtain ever less output growth. As the ‘normal’ process of debt erosion via higher prices and incomes remains impaired by the persistence slow growth and low inflation (‘lowflation’), indebtedness levels are rising and will continue to do so until the eruption of the next debt crisis – a matter of when, not if.

While the global economy did not reverse its addiction to debt after the crisis, it also did not interrupt its relentless financialisation. Legislation passed after the crisis to curtail excessive risk taking in the financial sector only marginally affected the process. The U.S. adopted one of the most complex pieces of legislation ever written, the Dodd–Frank Wall Street Reform and Consumer Protection Act, which brought the most significant changes to financial regulation in America since the regulatory reform that followed the Great Depression, affecting almost every part of the financial services industry. However, even if it imposed some constraints on banks’ trading operations, Dodd-Frank fell far short of re-establishing New Deal financial safeguards and largely failed to make the financial system safer. The banking sector got more concentrated as the ‘too big to fail’ institutions became even bigger, to the point of representing even bigger systemic risks and becoming, according to many, ‘too big to save’. In addition, risks piled up outside of the traditional banking sector. Banks indeed reduced their credit creation activity in markets in which they faced more capital and regulatory constraints, but the gaps were partly filled by the ‘shadow banking system’, which is not subject to similar regulations. Shadow banks, including ‘fintech’ lenders, have grown dramatically since the financial crisis, playing an increasing role in funding businesses and individuals and becoming a vital source of capital for the private sector. The regulations and reforms aimed at protecting American consumers and safeguarding the banking system have, in fact, driven a rising share of the lending activity into the shadowy corners of speculative credit.

Overall, finance’s share of the U.S. economy dropped slightly after the crisis, but its hold on the economy continued to tighten. The process by which financial motives, financial markets, financial actors and financial institutions take an increasing role in the operation of the American economy continued to run its course. Private equity and hedge funds continued to extend their grip on productive capital as they piled up assets on the cheap in the wake of the financial crisis, and businesses in all industries continued to emulate finance, and to engage in elaborate financial engineering to obtain growing earnings through financial channels. Capital and profits continued to be increasingly funnelled towards those engaging in opaque, debt-fuelled financial processes and trades. Finance and its way of thinking continued to reign supreme and to dominate corporate culture. Bankers and other financiers’ money continued to flood political parties and candidates, to which the financial sector remains far and away the largest source of campaign contributions. Far from ‘draining the swamp’ in Washington, DC, the new U.S. president filled it with former financial sector executives, who are now busy rolling back financial regulation once again. Financialisation is alive and well in America, and more damaging than ever[xix].

A similar phenomenon is at play, even if not as openly and extravagantly, in other advanced economies such as the UK and the Eurozone. There too, significant changes were introduced to the regulatory and supervisory system after the crisis to make the financial sector safer and more responsible – and, in the case of the Eurozone, to try to fix some of the design flaws of Europe’s monetary union. There too, financial risk has in fact been moving from traditional banking to a rapidly growing shadow banking sector since then. There too, financialisation has continued to run unabated overall. There too, trading money, debt, risk and associated products has remained more profitable and continued to outpace trading goods and services for capital accumulation. There too, commodity markets, natural resources management, and more and more aspects of everyday life (pensions, health, education, housing) have become increasingly exposed to financial markets and subject to financial engineering.

Financialisation, in fact, is the inevitable consequence of debt-fuelled growth and credit dependency. Unsurprisingly, it is now spreading to emerging economies that have been frantically piling up debt since the crisis – in particular China. In the past decade China’s broad financial sector – including finance, insurance and real estate (FIRE) – has grown tremendously, now representing well above 10% of GDP, and capturing a rising share of profits. Its non-financial industries have been raking in more and more of their profits from financial channels, while their operational profit rate has been declining. Just as happened in the West, capital in China is flowing to the more lucrative financial sector, non-financial industries are getting increasingly focused on obtaining profit from financial operations, the pricing mechanism of more and more goods and services is getting exposed to financial mechanisms and speculation, and the income distribution gap is widening as a result. Just like other debt-fuelled economies, the Chinese economy is rapidly falling into the trap of ‘excessive financialisation‘, and is progressively discovering the cost of letting finance take such a central place in its economy.

Overall, the global financialisation – and financial globalisation – process has thus continued after 2008. The global stock of financial assets has continued to grow since then, though at a slower pace than in the run-up to the crisis. This stock was estimated at $294 trillion in 2014 by Deutsche Bank, or over 375% of world GDP, of which 3/4th was some form of debt and less than 1/4th was equity (i.e. the value of global stock market capitalisation). The real stock of global financial assets is however even greater, as a massive amount of assets is created and traded in the ‘shadow’ financial sector, and is thus not accounted for. The shadow financial sector comprises the shadow banking system (i.e. credit creation involving entities and activities outside of the regular and regulated banking system) as well as over-the-counter (OTC) trading systems (i.e. trading of financial assets and securities that takes place outside of regulated exchanges, including in so-called ‘dark pools’). The size of the shadow financial sector is not precisely known, as much of its operations goes unregistered, but it represents a massive part of the global securities market. And there is growing evidence that this huge shadow finance sector is massively being used through offshore financial centres (i.e. tax havens), and therefore acts as both a recipient and mechanism of tax avoidance/evasion and of illicit financial flows, which are growing significantly faster than GDP.

In developed as well as in emerging economies, the resumption and continuation of debt-fuelled growth and of the financialisation process after the 2008 financial crash has only been possible because of the extraordinarily expansionary monetary policies enacted by the world’s main central banks. Massive monetary stimulus, in the form of ultra-low interest rates and quantitative easing (i.e. asset purchases by the central bank using newly-created money), is what has maintained the global debt-based financial edifice standing after the crisis, before maintaining it on life support and then propping it up for several years. Led by the U.S. Federal Reserve, the world’s biggest central banks have slashed interest rates and injected an estimated US$13 trillion or so into the global financial system since 2008. Global central bank purchases of financial assets (including sovereign bonds, corporate bonds and stocks) reached a peak in early 2017 at over $300 billion a month. Without this extraordinary, historically unprecedented and sustained monetary stimulus, the global pyramid of financial assets that underpin the global economy would have been at risk of unravelling, which could have triggered an uncontrollable ‘debt deflation’ phenomenon and sent the world’s economy into a downward spiral.

The flood of cheap new central bank money, however, has largely remained in the financial sphere and has only dripped in a limited way towards the real economy. Furthermore, it has fundamentally ‘deformed’ the global financial system by destroying price discovery and risk pricing mechanisms and by preventing the market clearing processes from operating. In doing so it has fundamentally undermined market discipline, caused widespread capital misallocation and unproductive investment, inflating or re-inflating multiple and massive asset bubbles (in bonds, stocks, real estate, as well as in luxury assets or, more recently, cryptocurrencies) and flooding some industries (venture capital, private equity, technology, shale oil and gas, and many others) with far more financial capital than what their current of prospective profitability would justify in more ‘normal’ financial conditions. It has, also, exacerbated inequality by channelling income streams and wealth gains towards owners of financial assets.

Obviously, a lot of people in the financial services industry would deny that there could be anything wrong with today’s asset price valuations – or with the income and wealth distribution patterns that these valuations entail. Yet the fact remains that the price of almost all financial asset classes is at record highs and has grown far faster that underlying economic reality. That includes, of course, the price of stocks, which in relation to corporate earnings is almost higher than it has ever been, and far higher than historical average. By suppressing interest rates and flooding the financial system with liquidity, central banks have forced all asset classes to reprice to artificially and absurdly low levels of risk, and have thus pushed their prices ever higher, way beyond whatever intrinsic values they may be considered to have. Central bankers have created a world awash with cheap financial capital, where in the financial sphere too much money is chasing too few assets, which is why these assets cost ever more and return ever less, and where in the real economy too much money is chasing too few ‘good’ (i.e. profitable) ideas, which is why it often ends up funding some very bad (i.e. speculative) ones.

Central banks, in fact, have palliated the financial crisis by inflating an ‘everything bubble’[xx], or in other words a set of multiple, massive and compounding asset bubbles, which now constitute the financial backbone of the global economy. Any assessment of the global economic situation and prospects that does not take this fundamental foundation into account constitutes, in essence, little more than a work of fiction. Even if these bubbles have proved to be more persistent than what many people predicted in recent years, they will eventually end up doing what all bubbles do. No one knows when or in what sequence they will burst, and trying to guess is actually quite futile, but burst they will. The trigger is likely to be central banks’ attempts to ‘normalise’ their monetary policies by raising interest rates and shrinking their balance sheets. The global debt-based financial edifice, and the global pyramid of trades in financial markets, have in fact become far too dependent on a continuous flood of cheap money to hold very long if monetary policy ‘normalises’ in any meaningful way. Cheap credit, financialisation and monetary activism have pushed the world into a trap from which there is no easy and painless way out.

Where are we now?

Overall, and with the benefit of hindsight from the last decades, it therefore appears that the relentless expansion of debt and financialisation process, together with the concomitant and related processes of globalisation, liberalisation and ‘technologisation’, have constituted very inadequate remediation strategies to the global economy’s waning fossil energy boost. They have delivered economic growth, for sure, but growth that is weak, fragile, ephemeral, and that comes at a significant and rising cost – i.e. in terms of debt accumulation, but also of rising inequality, economic insecurity, financial instability, as well as social and cultural tensions and, increasingly, invasion of privacy. They have given rise to a ‘bubble economy’, in which GDP grows essentially as a result of debt-fuelled asset bubbles being blown, and periodically goes up in smoke when those bubbles burst.

We are now in the tail end of what arguably constitutes the biggest bubble in economic history, the ‘everything bubble’ that has been blown in response to the Great Financial Crisis. This ‘everything bubble’ concerns all asset classes, and its effects directly or indirectly extend to the whole of the global economy. There is no single activity, sector, firm, household or public body in advanced economies – as well as in most emerging economies – whose current economic and financial situation is not either determined, underpinned or heavily influenced by the ‘everything bubble’, and not a single of them will remain unaffected when the bubble pops. To some extent, it could be argued that it’s the global economic and financial system itself that has now become the bubble. Most of us fail to understand or acknowledge it, probably because the bubble is so massive and so extended this time that it is paradoxically more difficult to recognise than more circumscribed and classic asset bubbles. Probably, as well, because our collective intoxication with technology and with the promises of a techno future is increasingly blinding us to the reality of the economic system we’re living in. Probably, also, because the consequences of our global economy being predicated on the existence and perpetuation of an all-encompassing financial bubble are too uncomfortable to contemplate. Yet we are inevitably approaching the unavoidable denouement of our bubble cycle, and the slight economic recovery about which we have been rejoicing of late might now be bringing us there faster as it puts pressure on central banks to tighten monetary policies more rapidly and decisively, thus getting us closer to the point where the bubble edifice starts to unravel.

Debt accumulation and financialisation, globalisation, liberalisation and ‘technologisation’ have thus largely failed, over the last four decades, to adequately compensate the global economy’s waning fossil energy boost. They have nevertheless lifted economic growth enough to continuously push up the use of fossil fuels and of other natural resources, as well as the environmental damage resulting from this use. Half of all oil burned by the human race has been burned since the collapse of the Soviet Union, and almost one-third of all human emissions of greenhouse gases occurred in the last twenty years. After remaining flat during the 2014-16 period, these emissions started to rise again in 2017 as economic growth was picking up. CO2 concentrations in the atmosphere have been rising increasingly fast over the last decades, destabilising the planet’s climate system and setting in motion a climate change dynamic that we only partly understand, that we cannot control, and that we already know we will be unable to fully mitigate. And if climate change is probably the major threat facing humanity, it is also just one of the symptoms of the destabilisation of the Earth system that is occurring and accelerating as a result of homo sapiens’ relentless activity. Every year we consistently increase our use of non-renewable resources, thus drawing down our reserves, degrading our environment and crowding out other life forms ever faster. Earth Overshoot Day (EOD), i.e. the date on which humanity’s resource consumption for the year exceeds the planet’s capacity to regenerate those resources that year, now falls in early August, vs. the end of December at the beginning of the 1970s. Our demand for renewable natural resources and the services they provide is now equivalent to that of more than 1.5 Earths, and is on track to require the resources of two planets well before mid-century. All this, it needs to be remembered, is only occurring because of the burning of fossil fuels and the energy and material input into human activity that it makes possible. Scaling back our use of fossil fuels as quickly as possible, and eradicating it before the end of the 21st century, has now become the only way for humans to avoid terminal environmental catastrophe.

Ever since the dawn of its history, the road that our exosomatic species has been travelling has thus consisted in a continuous search for more and/or better forms of energy inputs, with a view to expand and improve the outputs obtained from using our exosomatic instruments – from the rudimentary tools used by our hominid ancestors to today’s robotic machinery and quantum supercomputers. Over the last two centuries we have been able to leverage energy inputs on an unprecedented scale, obtained from energy sources that are incomparably more abundant, powerful, economic, convenient and versatile than anything we had been able to use until then, and than anything we have discovered since then. The energy boost we received from fossil fuels is the foundation upon which the modern world was built. It provided the essential basis for the development and growth of the modern human economy, but also for the advancement of human ‘progress’ in all its dimensions. In fact, contemporary human progress has fundamentally been a fossil-fuelled process. Yet we have now reached the point when our fossil energy boost is waning, and when the bill for our fossil energy binge – and all the growth and progress it has made possible – is coming due.

‘The World in 2018’, hence, is a world that has been unable to find adequate substitutes to the long-term economic boost it received from exploiting fossil energy, and that has merely managed to substitute genuine economic growth with debt accumulation and financial manipulation. It is a world that has been deceiving itself through financial leverage about the essence of its economic growth and progress, and that is still very much in denial about the scale of the consequences of the energy and resources binge this growth and progress have entailed. It is a world that has now left itself just a few decades to stop using the energy sources that underpin its modern economy and even modern civilization – or that risks seeing this modern economy crashing down and modern civilization burn itself to the ground. All this, of course, is not exactly how economists and policy makers typically talk about the state of the world or of the economy. It is also not exactly what dominates most people’s perceptions of their economic and financial conditions, which remain largely based on shorter-term considerations. Yet it is nevertheless the reality of our world – a reality that increasingly influences and shapes the course of events around us, and that will increasingly impose itself to all of us over the coming years. A reality, as well, that determines or at least significantly constrains the economic, social and political prospects and options we now have. We will start looking at these prospects and options in more details in the next instalment of this series.

To be continued…

[i] Sapiens – A Brief History of Humankind, by Yuval Noah Harari, Harper Collins, February 2015

[ii] Enlightenment Now: The Case for Reason, Science, Humanism, and Progress, by Steven Pinker, Viking Books, February 2018

[iii] Energy and the English Industrial Revolution, by Sir Edward Anthony Wrigley, Cambridge University Press, September 2010

[iv] Children of the Sun: A History of Humanity’s Unappeasable Appetite For Energy, by Alfred W. Crosby, W. W. Norton & Company, January 2006

[v] The Gap: The Science of What Separates Us from Other Animals, by Thomas Suddendorf, Basic Books, November 2013

[vi] Catching Fire: How Cooking Made Us Human, by Richard Wrangham, Profile books, September 2009

[vii] The Great Divergence: China, Europe, and the Making of the Modern World Economy, by Kenneth Pomeranz, Princeton University Press, 2000

[viii] State of the World 2015: Confronting Hidden Threats to Sustainability, by The Worldwatch Institute, Island Press, April 2015

[ix] Key world energy statistics, International Energy Agency, 2017 edition

[x] Renewables Global Status Report, REN21, 2017 edition

[xi] Power Density: A Key to Understanding Energy Sources and Uses, by Vaclav Smil, MIT Press, May 2015

[xii] The Economic Growth Engine: How Energy and Work Drive Material Prosperity, by Robert Ayres and Benjamin Warr, Edward Elgar Publishing, December 2009

[xiii] Energy Return on Investment: A Unifying Principle for Biology, Economics, and Sustainability, by Charles A.S. Hall, January 2017

[xiv] Age of Greed: The Triumph of Finance and the Decline of America, 1970 to the Present, by Jeff Madrick, Vintage, June 2012

[xv] The Engine of Enterprise: Credit in America, by Rowena Olegario, Harvard University Press, February 2016

[xvi] The Speculation Economy: How Finance Triumphed Over Industry, by Lawrence E Mitchell, Berrett-Koehler Publishers, Inc., November 2008

[xvii] Killing the Host: How Financial Parasites and Debt Destroy the Global Economy, by Michael Hudson, ISLET, August 2015

[xviii] China’s Great Wall of Debt: Shadow Banks, Ghost Cities, Massive Loans, and the End of the Chinese Miracle, by Dinny McMahon, Houghton Mifflin Harcourt, March 2018

[xix] Makers and Takers: The Rise of Finance and the Fall of American Business, by Rana Foroohar, Crown Business, May 2016

[xx] The Everything Bubble: The Endgame For Central Bank Policy, by Graham Summers, CreateSpace Independent Publishing Platform, October 2017