Amsterdam, 25 October 2016 Content Overview 1. The Current Reality - - PowerPoint PPT Presentation
www.perspectivity.org www.publicpolicy.agency Amsterdam, 25 October 2016 Content Overview 1. The Current Reality 2. Background and Shortcomings of Current Economic Views 3. IIERs Economic Model 4. What it takes to grow 5. Consequences for our
www.perspectivity.org www.publicpolicy.agency
During the past years, growth prediction for almost all economies – and on global level – were constantly
countries grew at a slower pace than anticipated during the recovery since the 2008/9 crisis
90% 92% 94% 96% 98% 100% 102%
2007 2008 2009 2010 2011 2012 2013 2014
1st quitile 2nd quintile 3rd quintile 4th quintile
For most households in advanced economies, real incomes have shrunk or stagnated, in the U.S. since the year 2000, in Europe since 2009
Source: Eurostat (real household incomes)
Dutch real incomes are very much in line with the rest of the Euro zone, after a strong rise until 2008, they have since been shrinking
Source: Eurostat (real household incomes)
90% 92% 94% 96% 98% 100% 102% 2007 2008 2009 2010 2011 2012 2013 2014 2015
Real eal household in incomes es Net ether erlan lands 2007 to to 2015
1st quitile 2nd quintile 3rd quintile 4th quintile
90% 92% 94% 96% 98% 100% 102% 104% 2007 2008 2009 2010 2011 2012 2013 2014 1st quintile 2nd quintile 3rd quintile 4th quintile
Even in Germany, one of the most successful European economies in recent years, real incomes were flat or shrinking for most people
Source: Eurostat (real household incomes)
0% 5% 10% 15% 20% Low incomes Medium incomes High incomes Top 1%
Average CPI numbers mask that core essentials of low income households (and those of the 1%) are appreciating much faster than the average
Source: BLS
30% 62% 8% 34% 58% 8% 14% 85% 1% 18% 72% 10% Better off Worse off The same 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% Japan France Germany United States
When asked about the economic prospects of their children (“how will they be financially?”) a majority expects a shrinking economy
Source: Pew Research 2015
In Inter eres est r rat ates es belo elow in w inflat latio ion Dir irec ect liq liquid idit ity to in instit itutio ions at at r ris isk k (countries/banks) Guar aran antees ees f for cred edit it mar arket kets Ex Explic licit it an and im implic licit it too-big ig- to to-fail g ail guar aran antees ees On On-going g government def efic icit it s spen endin ing Cen entral b al ban ank b k balan alance e sheet eet expansions
10 20 30 40 50 60
1820 1840 1860 1880 1900 1920 1940 1960 1980 2000 2020
*Sources: Angus Maddison, World Bank, IIER
Between the years 1820 and 2010, the global economy grew 77-fold, with
1'000 2'000 3'000 4'000 5'000 6'000 7'000 8'000
1500 1600 1700 1800 1900 2000 2100
*Sources: Angus Maddison, World Bank, IIER
Even more impressive was that during this period, while going from less than 1 billion humans to around 7 billion, per capita incomes also exploded
Almost all economic forecasting is based on variations of a Cobb-Douglas style production function (Y = ALαKβ) where output (GDP) is a product of available factors labor bor and cap apital tal (typically a grouped category for existing and new infrastructure), further enhanced by growing fac facto tor p r producti tivity
consistent with the experience of the past 250 years until 2008. =
To Total tal Fac acto tor Produc
tiv ivit ity Cap apital tal Out utput put Human man Labor bor
Production function
assumes that economic output is primarily driven by human labor, capital, supported by ever-improving factor productivity, ignoring other factors Substitution theory
assumes that there is always an equivalent or better substitute for inputs that become scarcer (too expensive), and that supply and demand always regulate switchovers with a beneficial
Views on finance
has conflicting views on credit. While basic theory sees credit as neutral, other schools (e.g. Keynesian) acknowledge a role in demand generation based
growth Macroeconomic modeling issues
science is not at all integrated except for supply/demand views
dynamics are not integrated
a finite planet are not integrated
0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% 1790 1796 1802 1808 1814 1820 1826 1832 1838 1844 1850 1856 1862 1868 1874 1880 1886 1892 1898 1904 1910 1916 1922 1928 1934 1940 1946 1952 1958 1964 1970 1976 1982 1988 1994 2000 2006
Fossil Renewable Nuclear
*Source: EIA (U.S. energy mix)
All relevant economic theorists (including Smith, Ricardo, Malthus and others)
land productivity as key parameters Macroeconomic systems are ultimately reduced to labor and capital, leading to today’s predominant views During a transitional phase, labor and capital get higher emphasis (e.g. Marshall)
Before the broad arrival of fossil fuels, economic theory was based on land and productivity. Only after the introduction of fossil fuels (equaling to access to millions of years of past biomass production), the limiting aspect of those resources became (we think: temporarily) irrelevant.
20 40 60 80 100 120
Globa
in t n trillion
1990$ from
1820-2050 2050
*Sources: Angus Maddison, World Bank, IIER, OECD, The Economist Intelligence Unit
Even most conservative macroeconomic forecasts project more than a doubling
0 A. A.D. D. 50 500 10 1000 00 15 1500 00 16 1600 00 17 1700 00 18 1800 00 19 1900 00 20 2000 00 21 2100 00 22 2200 00
Eco conomic s ic sys yste tem s size ize Year
During the industrial age we humans have come to believe that exponential growth is the norm, mistaking part
Global GDP patterns from 0 A.D. Source: Angus Maddisson, IIER calculations
IIER Economic Systems Model (Consumption and Investment)
Human Behavior Indivi- duals Groups Markets Insti- tutions Financial Systems (Money, Credit) Trade and Exchange Technology (access enabling) Biophysical Processes Natural Resources Energy
Energy and Natural Resources Credit Availability Behavior
*Ener Energy/ gy/Res Resour
ce ret etur urn on Ener n on Energy gy Inves nvestment ent determines the output received from one unit of energy input. This amount is irreversibly declining
100 200 300 400 500 600 700 800 900 1970 2010 2050
GDP Natural Resources Energy Sources: World Bank, UNEP , IIER modelling
Economic growth is directly related to resource and energy conversions, with very limited potential for quick efficiency gains. An (unrealistic) 2% growth target would almost double their use by 2050.
20 40 60 80 100 120 140 160 180 2000 2007 2013/14 Globa
Non
inancia ial C l Credit it t trillio illion U US$* Households Companies Government
189% of global GDP 197% of global GDP 221% of global GDP *Source: McKinsey Research
Y1 Y2 Y3 Y4 Y5 Y6 Y7 Y8 Y9 Y10 Y11 Y12 Y13 Y14 Y15 Y16 Y17 Y18 Y19 Y20
In most production environments, we are used to constantly shifting price curves, leading to lower and lower cost for goods, based on improvements in technology and efficiency. For resources requiring extraction, the pattern is different. After the easy finds have been used and extraction technology has matured, cost only goes up.
Typical marginal cost curve for manufactured goods Typical marginal cost curve for extracted materials
1 marginal unit price 2 demand driven price 3 cost of marginal units at lower demand point 4 (as 3) 5 undershoot on price
The key drivers behind the (dependent) Cobb Douglas variables can be identified as 1. natural resources (including energy), 2. credit availability and, to a certain degree 3. technology progress =
To Total tal Fac acto tor Produc
tiv ivit ity Cap apital tal Out utput put Human man Labor bor
A gr group of
pects dr driving f ng factor
produc
(inc ncludi uding ng efficienc ncy, but but also s
ubstitut utions
be between l n labor bor a and m nd mecha hani nical ene nergy gy, gl globa
ng, ne new r resour
uses) Credit it a availa ilabilit ility and c nd cos
Ene nergy gy a and r nd resour
availa ilabilit ility a and c cost
Ultimately, economic activity is hard-limited by current and past land availability and productivity, which has very limited elasticity.
Successful Industriali- sation Steady energy services Low cost energy Credit availability Steady resource prices Low ecological standards High societal stability
Industrial Economy Steady energy services Low cost energy Credit availability Steady resource prices Low ecological standards High societal stability
Industrial Economy Steady energy services Low cost energy Credit availability Steady resource prices Low ecological standards High societal stability
Successful Industriali- sation Steady energy services Low cost energy Credit availability Steady resource prices Low ecological standards High societal stability
Successful Industriali- sation
Steady energy services
Low cost energy
Credit availability
Steady resource prices Low ecological standards High societal stability
*Source: Angus Maddison, World Bank EIA, IIER models
Once more difficult-to-extract fossil resources and renewables come into the energy mix at larger scale, they begin to push our economic system down
10 20 30 40 50 60
Renewables Fossil fuels Nuclear
Find Extract Buy Heat Plant Harvest Prepare Cook Extract Enrich Condense Align demand
share grew from 10% to 90%, moving manufacturing away from Europe;
this market takeover;
the cheapest non-renewable inputs (energy and resources) available globally;
improvements have taken place by now.
the needs of stable grid-based electricity unless heavily mitigated (“enriched and condensed”);
the largest part of the cost won’t be the manufacturing of panels, but the mitigation of fluctuations and provision of fallback capacity and storage.
With shrinking solar PV panel cost, many people believe that eventually, we will arrive at a “zero cost energy” environment. Nothing is further from the truth:
Extract Enrich Condense Align demand
30% 62% 8% 34% 58% 8% 14% 85% 1% 18% 72% 10% Better off Worse off The same 0% 10% 20% 30% 40% 50% 60% 70% 80% 90%
Japan France Germany United States
While a majority intuitively guesses that the times of growth are over, most politicians still focus on “restarting the growth engine.”
Source: Pew Research 2015
20% 25% 30% 35% 40% 45% 50% 55% 60%
% of respondents who “tend to trust” in
The EU National Government Trend Trend
Source: Standard Eurobarameter 84 (2015)
New abundant low-cost energy sources
A new unlimited energy source provides enough power to “catch up” We will be able to continue our lives and even fix the environment
Governments slowly take control of most markets, preventing collapse We will run into a continuous frustration with high risks for social cohesion
Important supply systems collapse after a currency break- down If unprepared, leads to societal collapse where literally the lights go out
<10% 70-80% 10-20%
The Institute for Integrated Economic Research, founded in 2007, is a non-profit research
IIER tries to re-focus economic research away from individual subsystems, towards a broader understanding of the larger forces driving overall progress or retreat. The global economic crisis that began in 2008 is a good example of why this is necessary - traditional economic science neither provided the ability to predict the current downturn, nor does it sufficiently explain the mechanisms at work. IIER is an academia-type institution without a political or economic agenda, bound to science rather than opinion. Over the past decade, IIER has developed a macroeconomic model that works, and is building tools to help society plan for a resource-constrained future. IIER has been right about almost everything in economics during the past 10 years, including resource/energy price dynamics, failure of economic systems to fully recover despite continued heavy-handed interventions, and, unfortunately, the quick rise of extreme parties. In order to curtail negative implications on society, IIER is currently starting a more public
based economic planning and modeling tools with sub-models for water, energy, land use, and agriculture
Stanford and Imperial
approach for sharing and patenting low-tech inventions that can be implemented in poor areas around the world
implementation plan
prizes fore young economists who integrate economics with natural and behavioral sciences, as well as finance
funding
as part of a renowned university, with a full curriculum and master textbook, plus online courses for free study
project educating people about resource constraints affecting growth and “living with less”, creating a positive spin on limits
campaign aimed at deflecting people’s urge to blame someone for growing anxiety about the future.
funding for pilot