Does physics succeed where mainstream economic growth models fail?

© TIM Garrett 2014

This work is licensed under a Creative Commons Attribution-NonCommercial 4.0 International License.

Using physics as the basis for an economic model provides profound advantages to mainstream macroeconomic growth models. It allows for falsifiable hypothesis testing; it does not rely on mere opinion; and offers the potential for long-range forecasts of the global economy. On the other hand, it’s certainly not what most economists do. So, perhaps can the two approaches be reconciled? It would be nice to think so. Unfortunately, I don’t think this is possible without some simple but important adjustments.

Mainstream economic models take the approach that we should separate humans and their short-term “consumption” of things like food and entertainment from long-term “investments” in physical capital.

In a physics-based model on the other hand people are not all that special, at least there’s nothing in the fundamental equations of physics that says “people”. So it makes most sense to subsume people into a very general physical representation of worth, capital, or wealth that includes all components of civilization. After all, we are just sacks of matter that enable electrical and fluid flows down potential gradients; and it sure has been hard for neuroscientists to find any evidence for free will; so perhaps people are really no different than any other physical component of civilization, acting as conduits for energetic and material flows just like communications networks or roads.

Not treating people as special might seem strange at first, but let’s go with the possibility that our egocentrism doesn’t really matter. Then, the consumption/investment dichotomy of traditional models disappears. Everything that lasts, including us, is an investment in the future. Equally, everything to last must consume resources to be maintained.

The model I’ve introduced in these pages is based on the very simple premise that global economic worth, including us, must be sustained by a proportionate amount of global primary energy consumption. Turn off all the power and civilization is worth nothing; more wealth requires more power. In principle, this hypothesis can be disproven in which case the model would be wrong. Yet it turns out it is strongly supported by the data: 7.1 ± 0.1 milliwatts of continuous power consumption are required to sustain the worth associated with every inflation-adjusted 2005 dollar. 

Traditional macroeconomic models lack such falsifiability. They employ equations for the GDP, or “production functions”, that are dimensionally inconsistent formulae that can be “tuned” to match observations of labor and capital. And they always are. It is not possible to falsify these moving theoretical targets because they can always be made “right” by adding layers of social complexity or by tweaking the production function exponents. If conditions change and the formula no longer works, economists just tune again and call it a “structural break”! This is crazy, at least if the goal is understanding how things work. It would be abhorrent to imagine a basic physics equation being adjusted as time progresses or for the situation at hand. The speed of light in a vacuum doesn’t get to be different for you than for me or for last year versus this year.

Consumption versus production

Still, don’t economists have a point that consumption is a key element of the economy? From an accounting point of view it makes a lot of sense to selectively subtract household and government consumption from economic output (or GDP) to obtain a capital investment that adds to previously accumulated capital. Capital investments are then independent and additive; it is assumed that the whole is the sum of its parts. If saving an ounce of gold adds $1000 then it seems obvious that saving two ounces adds $2000.

But a little added thought suggests it’s not quite so straight-forward. Neither labor nor physical capital means anything without the other. “No man is an island, Entire of itself. Each is a piece of the continent, A part of the main...” An ounce of gold has no intrinsic worth (it’s just a rock), but it acquires value by acting as a part of society. Physically, it facilitates society’s global energy consumption through banking system networks, which in turn are maintained by the accumulated knowledge capital of bankers, all of which require primary energy to be sustained, either by feeding the bankers or by powering electronic transactions. If the ounce of gold was left abandoned and forgotten in the middle of the desert it would currently be worthless. It only has value as part of a larger energy consuming society.

And if everyone else tried to sell their gold for $1000, the value per ounce would fall, including the ounce you kept . Value, therefore, does not lie in individual “things” or people by themselves. True value lies in a larger global network and the role we and our structures play in it. Physiological, social, computer, communication, and transportation networks are all part of the living organism we call civilization. Capital value is not strictly additive because no element is completely independent of any other.

To better understand consumption by the whole, and its relationship to the economy, it helps to think of a subsistence society at near steady-state where nothing can be stored for the future: food rots quickly; the society maintains a more-or-less fixed population; and in its purest form there is no currency and no GDP. Even though the society has to consume food, the consumption is not part of any measurable economic output.

I have personally experienced something like a subsistence society working as a Science and Physics teacher for a couple years in the beautiful, remote tropical South Pacific island group of Ha’apai, Tonga. Even though there was a little money to go around for luxury items, it was almost totally impossible to buy traditional foods like coconuts, taro, and octopus that anyone could access. Only revolting imported “specialties” like canned beef and mutton flaps were readily found in small shops. Any given root crop was more or less available from whomever had it; everyone except a handful of foreigners had direct or indirect access to a fixed, finite quantity of fertile land where they could grow throughout the year -- if you didn’t have a yam, get your own or ask. The local mantra was “Ha’apai is good; food is free”.

Matters are different in an expanding civilization where products can be acquired and stored for the future. Food is treated quite differently as it is a real commodity -- in most homes we have a fridge, freezer, and larder. Owning money gives us a right to buy access to something, whether a house or a tasty sandwich. We tend to like sandwiches, and buying access to a sandwich is an investment in our well-being. It offers the future potential to be content, better able to interact with others, and more productive in our jobs. Crucially, over time, this productivity even enables us to gradually desire and afford even nicer sandwiches. Each purchase is a means by which we and our Western civilization can grow.

Nothing about this purchase of food is “consumed” in a way that becomes totally lost to the past as expressed in standard economic models. In a growing civilization, food acquisition is an investment in an access right, even if it lasts only the seconds it takes to transfer the sandwich from the deli owner to our mouths. Over longer times, food sustains us as human capital and motivates us towards further engagement with the rest of civilization.

Thus, the instant of monetary exchange represents an investment in a future privilege that gets tallied in the GDP and gets tallied in our wealth: the wonderfully consumptive process of actually eating the energy and raw materials in the bread, mayo, lettuce, ham and cheese is not actually part of the GDP since it happens at a later stage than the point of financial transaction. And long after we eat, the sandwich adds to and sustains our personal wealth, both by providing fuel for our bodies and by providing a lingering memory of sublime satisfaction that spurs future purchases to come.

Viewed more generally for civilization as a whole, all financial transactions that count in the GDP are really just monetary expressions of small, instantaneous increments in the growth of civilization’s networks of connection and access. For totally arbitrary accounting purposes, the GDP is usually tallied over an arbitrary interval of one year. After adjusting for inflation and depreciation (and these turn out to be linked), all aspects of the real GDP add to overall capital. Total capital wealth (units currency) is just the summation of these increments approximated in chunks of annual, real GDP (units currency), and tallied since the beginnings of history. More strictly, capital wealth (units currency) is the time integral of every little differential increment in productivity (units currency per time).  Even the most ancient inflation-adjusted economic production has to some degree sustained us through to our activities today. Subsistence cavemen did nothing for our wealth today -- we should expect the GDP was zero. But growing cavemen societies, if they persisted, did.

And if one takes this approach, it leads to the rather wonderful result that 7.1 ± 0.1 milliwatts of continuous power consumption is required to sustain the worth associated with every inflation-adjusted 2005 dollar of civilization, year after year after year. Simply put, consumption of energy and raw materials sustains all of civilization’s previously accumulated value as calculated by the summation of all prior economic production adjusted for inflation. This value or wealth must be sustained by a proportionate amount of energy consumption.