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Energy, Economy and the Pursuit of Happiness

by: Paul Kando

The essence of Fourth of July - holding truths to be self-evident, that all men are created equal, with unalienable rights, including the right to freely pursue happiness - makes me ponder the economy, without which rights mean precious little. The Greek words "oikos" (household, estate, community) and "nomos" (distribution or management) suggest an ordering of human affairs. Since ancient Greece, the word "economic" was understood to mean the management necessary to ensure adequate provisions to a community - a conscious adaptation of means to ends, the avoidance of waste in the day-to-day affairs of people, their livelihood. This suggests a close nexus to energy. After all, what resources are there to manage and distribute if not material goods and energy?

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If so, a real-world economy is subject to the natural laws to which matter and energy are subject: (1) Energy and matter can neither be created nor destroyed, they can only be transformed. (2) In any such transformation the capacity of energy to do useful work is diminished. The energy does not disappear but it becomes less capable of being useful. The term "entropy", coined by Rudolf Clasius in 1865 to describe this degraded condition, allows a more succinct restatement of these laws: "Within a thermodynamically closed system, energy is conserved but entropy increases".

One might wonder how these laws of thermodynamics square with economic theories which purport that 'rational' 'market actors' and 'market forces' make optimal economic decisions, without even acknowledging the natural laws to which the very resources being decided about are subject. How does an economic system dependent on endless consumption and boundless growth (and therefore limitless waste) square with these laws? How can respected economists like Robert Heilbroner (The Economic Problem, 1968) state that the [economy's] flow of output is circular, self-renewing and self-feeding because outputs of the system are returned as fresh inputs? Does he really mean a perpetual motion machine, impossible under the above laws of nature?

In reality, an economy extracts matter and low entropy energy from the environment and returns to it "waste" and high entropy, degraded energy. The waste-matter could be endlessly recycled (using more energy), but there is no way of avoiding entropy: energy cannot be recycled. Thus energy is the limiting factor on the generative side of an economy. There are also limits on the waste side, since the planet's capacity to absorb our wastes is finite.

Economists don't much write about this, in spite of much criticism on this score by scientists of all kinds. Nobel laureate British chemist Frederick Soddy, for example, describes the economy as simply a system of energy use, subject to the laws of thermodynamics. The mechanism by which economists deny this truth is the monetary system; a system of virtual wealth and debt. Money, a symbol of the bearer's claim to real wealth, is virtual wealth, which resists entropic decay. Debt, is an asset held by those who lend money; a claim on real wealth produced in the future. In contrast, real wealth consists of physically useful objects the economy has produced. It has its origins in low entropy and it is subject to decline in usefulness, i.e. entropy.

When money is lent at compound interest, claims on the future production of real wealth increase exponentially. Meanwhile real wealth can only grow incrementally, through an expansion of the economy's matter-and-energy throughput, or by increasing efficiency. The monetary system encourages debt, which grows faster than the economy can grow to pay it back. In time the system develops an unavoidable need to deal with the growing debt. In the virtual world of money this may come in the form of inflation, bankruptcy, foreclosures, bond defaults, stock market crashes, bank failure, wiped out pension funds, and the loss of paper assets. In the real world of people it comes as lost livelihoods, wrecked lives, a growing gap between rich and poor, hunger, homelessness, lack of health care and education access, imposed austerity, curtailed public services, failing infrastructure, and so on.

Aggressive expansion of the economy's matter-and-energy throughput can raise hopes and expectations of real wealth. Such hopes and expectations make growth through debt seem normal, delaying the inevitable financial reckoning for a time, until the expansion of throughput reaches a limit. Then confidence falters and the system "de-leverages" into collapse. Sounds familiar?

How long can economic theories continue to ignore real world limits and natural laws yet speak of a working, even successful, economy? How does all this bode for the human holders of those self-evident truths, including rights to life, liberty and the pursuit of happiness? It seems, economic theories are of little help for pursuers of happiness, since they deal only with the management of virtual wealth - money - and debt, its derivative. Managing real wealth that ultimately matters, is subject not to theories but proven laws of matter and energy.

In the spirit of those who, at great personal risk, signed the Declaration of Independence, it should be possible for us to build an economy more in keeping with managing this real wealth. Nature's own way of managing and sustaining conditions under which life flourishes on Earth offers some clues. So might a deeper look at the impact energy has on real wealth formation.