of a complex system, though, the use of the invisible hand as an explanatory tool needs to be balanced by an awareness of the situations in which it fails to work. The economics of energy defines one of these situations. Energy, as E. F. Schumacher pointed out,14 is not simply one commodity among others; it is the ur-commodity, the foundation for all economic activity. It follows laws of its own — the laws of thermodynamics — which are not the same as the laws of economics, and when the two sets of laws come into conflict, the laws of thermodynamics win every time.15
For a useful example, consider an agrarian civilization that runs on sunlight, as every human society did until the rise of industrialism three centuries ago. In energetic terms, part of the annual influx of solar energy is collected via agriculture, stored as grain and transformed into mechanical energy by feeding the grain to human laborers and draft animals. It’s an efficient and resilient system, and under suitable conditions it can deploy astonishing amounts of energy; the Great Pyramid is one of the more obvious pieces of evidence for this fact.
Agrarian civilizations of this kind very often develop thriving market economies in which goods and services are exchanged between individuals. They also develop intricate systems of social abstractions that manage the distribution of these goods and services among their citizens. Both these, however, depend on the continued energy flow from sun to fields to granaries to human and animal labor forces. If something interrupts this flow — say, a failure of the annual grain harvest — the only option that allows for collective survival is to have enough solar energy stored in the granaries to take up the slack.
This is necessary because energy doesn’t follow the ordinary rules of economic exchange. Most other commodities still exist after they’ve been exchanged for something else, and this makes exchanges reversible; for example, if you’re the pharaoh of Egypt and you sell gold to buy marble for your latest pyramid, and then change your mind, you can normally turn around and sell marble to buy gold. The invisible hand works here: if marble is in short supply, those who have gold and want marble may have to offer more gold for their choice of building materials, but the marble quarries will soon be working overtime to balance things out.
Energy is different. Once you turn the energy content of a few million bushels of grain into a pyramid, say, by using the grain to feed workers who cut and haul the stones, that energy is gone, and you cannot turn the pyramid back into grain; all you can do is wait until the next harvest. If that harvest fails, and the stored energy in the granaries has already been turned into pyramids, neither the market economy of goods and services or the abstract system of distributing goods and services can make up for it. Nor, of course, can you send an extra ten thousand workers into the fields if you don’t have the grain to keep them alive.
The peoples of agrarian civilizations generally understood this. It’s part of the tragedy of the modern world that most people nowadays do not, even though our situation is not all that different from theirs. We’re just as dependent on energy inputs from Nature, though our inputs include vast quantities of prehistoric sunlight, in the form of fossil fuels, as well as current solar energy in various forms. Atop that foundation, we have built our own kind of markets to exchange goods and services, and an abstract system for managing the distribution of goods and services — money — that is as heavily wrapped in mythology as anything created by the archaic agrarian civilizations of the past.
The particular form taken by money in the modern world has certain effects, however, not found in ancient systems. In the old agrarian civilizations, wealth consisted primarily of farmland and its products. The amount of farmland in a kingdom might increase slightly through conquest of neighboring territory or investment in canal systems, though it might equally decrease if a war went badly or canals got wrecked by sandstorms. Everybody hoped when the seed grain went into the fields that the result would be a bumper crop, but no one imagined that the grain stockpiled in the granaries would somehow multiply itself over time. Nowadays, by contrast, it’s assumed as a matter of course that money ought automatically to produce more money.
That habit of thought has its roots in the three centuries of explosive economic growth that followed the birth of the industrial age. In an expanding economy, the amount of money in circulation needs to expand fast enough to roughly match the expansion in the range of goods and services for sale; when this fails to occur, the shortfall drives up interest rates (that is, the cost of using money) and can cause economic contraction. This was a serious and recurring problem across the industrial world in the nineteenth century, and led reformers in the Progressive era to reshape industrial economies in ways that permitted the money supply to expand over time to match the expectation of growth. Once again, the invisible hand was at work, with some help from legislators: a demand for an expanding money supply eventually gave rise to a system that built a constantly expanding money supply into the foundations of its economy.
That system, taken very nearly to its furthest possible extreme, is the economy that exists today in most nations of the industrial world. Created in response to an age of unparalleled growth, it assumes that perpetual growth on the same scale is an inevitable fact of economic life. The notion that growth might turn out to be a temporary, if protracted, phenomenon of the recent past, and will not continue into the future, will be found nowhere in contemporary mainstream economics or politics. It’s true, of course, that three centuries of statistics support the idea of perpetual growth; it’s not often remembered that those three centuries represent a tiny and very unusual fraction of humanity’s trajectory on this planet, but there is another problem with those numbers. These days, a very large proportion of the numbers are faked.
Lies and Statistics
An economy is a system for exchanging goods and services, with all the irreducible variability that this involves. How many potatoes are equal in value to one haircut, for example, varies a good deal, because no two potatoes and no two haircuts are exactly the same, and no two people can be counted on to place quite the same value on either one. The science of economics, however, is mostly about numbers that measure, in abstract terms, the exchange of potatoes and haircuts (and, of course, everything else).
Economists rely implicitly on the claim that those numbers have some meaningful relationship with what’s actually going on when potato farmers get their hair cut and hairdressers order potato salad for lunch. As with any abstraction, a lot gets lost in the process, and sometimes what gets left out proves to be important enough to render the abstraction hopelessly misleading. That risk is hardwired into any process of mathematical modeling, of course, but there are at least two factors that can make it much worse.
The first is that the numbers can be deliberately juggled to support some agenda that has nothing to do with accurate portrayal of the underlying reality. The second, subtler and even more misleading, is that the presuppositions underlying the model can shape the choice of what’s measured in ways that suppress what’s actually going on in the underlying reality. Combine these two and what you get might best be described as speculative fiction mislabeled as useful data — and the combination is exactly what has happened to economic statistics.
For decades now, to begin with, the US government, like that of most other nations, has tinkered with economic figures to make unemployment look lower, inflation milder and the country more prosperous. The tinkerings in question are perhaps the most enthusiastically bipartisan program in recent memory, encouraged by administrations and congress people from both sides of the aisle, and for good reason: life is easier for politicians of every stripe if they can claim to have made the economy work better. As Bertram Gross predicted back in the 1970s,16 economic indicators have been turned into “economic vindicators” that subordinate information to public relations, and the massaging of economic figures Gross foresaw has turned into cosmetic surgery on a scale that would have made the late Michael Jackson gulp in disbelief.17
When choices are guided by numbers, and the numbers are all going the right way, it takes a degree of insight unusual in contemporary life to remember that the numbers may not reflect what is actually going on in the real world. You might think that this wouldn’t be the case if the people making the decisions know that the numbers are being fiddled with to make them more politically palatable, as economic statistics in the United States and elsewhere generally are.
It’s important,