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Using Energy to Measure Economic Output, Not Prices

GDP and growth
Since the mid-20th century, economic growth has become a sort of Holy Grail for measuring how economies are doing. But there are real problems using this method as it ignores increasing inequality and worsening environmental problems. Economist Steve Keen suggests an alternative system.

Our guest today is Professor Steve Keen, author of Debunking Economics.

Steve starts off by defining what GDP is. “It is the sum of the total of all goods and services sold in an economy over a year, and it has two components. One of which we call ‘nominal’ and the other we would call ‘real’. In fact, the real is nominal and the nominal is real…”

That the US dollar is used to measure GDP is somewhat confusing in itself. “When we use the dollar, we immediately have confusion, as we have the inflation element, and of course we are looking at one country versus another. A currency might be valued by a factor of two so the US dollar is used to wash out these differences. But the system works extremely badly. …GDP needs to be based not on something as arbitrary and fluctuating as currency values and exchange rates, but based on the amount of energy used to produce output, and the amount of energy equivalents we consume in different categories, so that we can then  make a realistic comparison as to how many effective ‘energy slaves’ we have working for us in comparison to another country, and how many energy slaves did we have working for us just after 1800 when James Watt invented the steam engine…”

Bobby Kennedy once famously said in a speech of GDP: “It measures everything, in short, except that which makes life worthwhile.” «Should charity work be measured as part of GDP? » is a question I out to Steve Keen. He answered: “It is measured in traditional GDP terms as zero if you do that work for nothing. What we are saying, is that if you measure it in terms of the amount of energy you put in, then in that sense it can be measured accurately in terms of energy.”

There is a problem with western economies in that they are supposed to go on growing forever, we have determined that positive GDP is a good thing. This is something, which simply isn’t possible. Steve Keen says that measuring economies in terms of energy puts everything in a different perspective:

“That is what comes out of adopting an energy perspective. Once you talk in terms of energy, you are also talking in terms of waste. Because one essential law of physics is the law of thermodynamics. You can’t generate useful energy without generating waste energy as well. The simple reason for that is that we are exploiting energy resources on the planet, the energy source, and the complete amount of energy in that energy source is relevant to absolute zero degrees kelvin, which is 270 degrees below zero on the Celsius scale.

Because the earth is operating many degrees above that, about 300 degrees of the thing you are exploiting like a lump of coal or uranium you are exploiting, waste gets added to the biosphere. Now as you continue doing that, you are degrading the biosphere. One of the laws again of thermodynamics which is even worse than the no free lunch rule is that the sum use of all energy has to degrade to improve the quality of that energy. And we are doing that in our own biosphere. In that sense, you simply cannot keep on exploiting the resources without giving it time to recover and that is why we are seeing true global warming. Only economists are still denying it.”

Steve Keen says that in the US, for example, records are already been made of the amount of energy being used in sub-sections of the US economy. The unit used is megajoules. Data is also being collected in Portugal, “so we already have the data, it is better to hand information over to engineers and not economists, believe me, I trust engineers more.”

The problem will remain as to how to stop some countries and/or corporations consuming far more energy than they should. Steve Keen comments: “That is a situation we shall have to confront over the next two decades… We know that we are using about 1.6 times the reproductive capacity of the planet, so we have to make changes, and I am afraid to say that if we had done this 40 years ago, if we hadn’t been kyboshed by economists, derailing limits to growth and throwing their garbage, pardon me, like that produced by Nobel prize winner William Nordhaus in its place. Now we are really close to the crunch point and it is becoming obvious how much we have over-extended the boundaries of the planet, people will be forced into rationing. I can see everything being similar to what we went through in the Second World War with military enforcement of rationing, and hopefully, this is undertaken on an international scale so that the burden is born more by Americans than it is by Indians.”

Things could get so bad that we ‘degrowth’, we actually start using less energy than before. “The damage we have done to the environment will make it difficult for us to survive as a species. This is an existential threat, and in this situation, if what you are doing is consuming too much energy, you simply have to reduce it. And of course, that cannot be done by a price mechanism because if you do it by a price mechanism the poor starve. Politically, thank God, that is not conceivable. So the only conceivable way is to ration on a per capita basis.”

The problem with all of this ‘degrowth’ is that it will not be possible for the capitalist system to work in the way that we have become accustomed to it working. Making money on the stock market, for example, would be difficult as few will invest in economies that are shrinking. Steve comments: “I read a brilliant book by a mathematician a few decades ago called ‘Dynamic Economic Systems’ by John Blatt. He had a punch line at one stage saying that what economists had done was so bad that capitalism itself might cease to exist before the dynamics of capitalism are properly understood. That was hyperbole 40 years ago, but seeing the state we are in now and seeing how little economists know now, that is certainly true. When we are forced to go into degrowth it certainly won’t be market mechanisms that make it work, it will be something like a war effort against the Nazis.”

The final theme of the discussion is the ‘doughnut economy’. Steve says: “I would rather call it the wheel economy because even the idea of the circular economy doesn’t get the idea across properly. The wheel doesn’t turn unless it is pushed, and in that sense, a wheel is useless unless energy is pushed onto it from the outside. This is the reality of human society and human economies. So I’d rather say a wheel economy, it's exactly the same idea…”

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