In my original article on Enerconics I explained how the extremely close correlation between total world energy consumption (including wood for burning) and total world inflation adjusted GDP showed that GDP was controlled by energy.
I now want to broaden the concept: in general we can estimate the size of an economy in many different ways, some more meaningful than others.
We could, for example, count the number of motorcars and that would indeed give an indication of the size of an economy. Countries with a low total GDP will usually have far fewer cars than those with large GDPs. So, in general the number of cars is an indicator of GDP, and as GDP rises, we expect more cars. However, this measure fails for several (many) reasons. Not least, using this “car measure” implies there was no economy before cars, and a small car-free island of billionaires would be deemed to be extremely poor.
Likewise, we could just count the population and assume GDP is proportional. However, that assumes the same level of GDP per person which is clearly not true globally.
So, what makes a good proxy measurement? The key appears to be something that constrains the economy. Indeed, this was the basis of “monetarism”, the theory that economies could be controlled and growth sustained, simply by regulating monetary supply. Thus, because the supply of money regulates and constrains an economy, then it is true to say that it makes a good proxy measure. However, it obviously fails in an economy that has no money, such as that before the invention of money, or modern day barter economies.
But, like money, energy also constrains an economy. That is why energy also makes a good economic measure, albeit focussing on slightly different aspects of the economy.
Another constraint on the economy is labour. However, the value of labour is greatly affected by the economic machinery in place to translate that labour into work. So, for example, a man with a shovel is capable of doing far less work in the same time, than a man with a digger. However, within comparable economies, the size of the economy is to a large extent determined by the size of the workforce.
Net Zero
To move on. Net Zero is an attempt to remove fossil fuel energy from the economy … and the hope that it can be “replaced” by highly inefficient “renewables” many of which are net consumers of energy. As such, the result is a massive constriction of energy availability.
What, therefore, will be the effect? Because energy is a constraint on the economy, to a first approximation, we must expect Net Zero to act like other constraints on the economy, of which Labour or Money supply are the two easiest examples. So, Net Zero will be the same as reducing money supply to a tiny fraction of its former availability. If that doesn’t send shivers down the spine of any economist who might read this, they are no economist.
Lack of Economic Control
Indeed, in any economy that can be constrained in many different ways, there is usually only one dominant constraint at any one time. And, because the economy is being constrained by the one dominant constraint, any attempt to control the economy using other constraints is very likely to fail. So, if the economy is being throttled by decreasing energy availability, then all attempts to boost the economy using monetary of fiscal policy will fail.
The only proviso, is that if a second constraint is severe enough, then it can become the dominant constraint that controls the economy (the basis of monetarism).
That is why Keynesian economics fail: because Keynesian economics attempts to control the economy by controlling demand, but that only works when demand is the dominant controlling factor in the economy. If, instead, energy is in short supply and therefore the controlling factors, then, no matter how much government attempts to stoke up demand, the size of the economy will be determined by energy supply and will not grow. The only way that government may “regain control”, is to so restrict some other factor such as money or demand so that the economy is even smaller than it would be if energy alone were controlling the size of the economy.
Short term versus Long term
However, a complicating factor is that many of the effects of energy are very slow to materialise. So, although over the long term it appears that the size of the economy is solely determined by energy supply, over the short term, the economy by grow or shrink apparently irrespective of energy.
