• Dario Leoni

The post-growth economy: a reflection on labour productivity and energy production

The ecological crisis is forcing us to utterly rethink the socioeconomic system in which we live. Indeed, many aspects of our society have a radically different outline once we observe them through an ecological framework. One of the most evident examples is economic growth, more specifically, gross domestic product (GDP) growth. Nowadays, GDP is a crucial indicator of a countries’ prosperity and the core variable for the discipline of economics. Even more important is its rate of growth. Much of economists’ work has been devoted to the understanding of the determinants of GDP growth, and most of the policies that governments try to implement need to be consistent with it. In short, GDP growth is generally deemed a necessary and positive collective goal.

However, if we adopt an ecological perspective, many problems start to come out. Indeed, GDP growth means the production of more goods and services of which we can benefit, but also the increase in the exploitation and consumption of resources. The more we consume, the more we produce carbon emissions, industrial waste and many other pollutants. Meanwhile, the stock of natural resources gets smaller and smaller. Thus, the global rush for higher GDP growth and material wellbeing has its dark side, that is, the worsening of climate change and the reduction of ecosystem’s wealth. The necessity to keep the average global temperature below the so-called 1.5°C limit is even more pressing than the exhaustion of available resources. In his famous book ‘Prosperity Without Growth’, Jackson shows that the idea of improved efficiency in the use of resources due to technological progress, usually called decoupling, is a “myth”. Even if it is true that production processes are becoming more and more efficient, in absolute terms the quantity of input employed and carbon dioxide produced is growing every year. In the meantime, the enormous technological and organisational effort needed to remain below the 1.5°C threshold and maintain a constant global GDP growth is not being seriously considered by any advanced nations[3]. Eventually, the unsustainability of consumption growth will undermine the welfare that it has produced.

We are clearly in front of a dilemma, which is likely to be one of the biggest challenges of this century, i.e. the dilemma of growth. Our economies are unsustainable without it, the environment will collapse if we keep pursuing it. Unfortunately, the public debate on the topic is usually distorted. Radical ecological activists do not have a clear picture of the economics behind the transition to a ‘degrowth’ society. On the opposite side, many economists downplay the problem by embracing a blind faith in future (almost miraculous) solutions that should be offered by technological progress. A reliable answer to this dilemma is still missing, but many researchers are actively working to devise a different socioeconomic system that can combine people’s wellbeing and environmental sustainability. This intellectual movement has been called ‘post-growth’ economics, as it is aware of the necessity to go beyond the growth fetishism but also carefully consider the consequences of a socioeconomic system that does not prioritise economic growth. One of the main areas of research for post-growth scholars that I would like to consider in this article is the relationship between growth, energy, labour productivity and employment.

It is common knowledge that during an economic crisis, i.e. when the national GDP experiences a contraction, unemployment surges. As the production of goods and services shrinks, less people are needed by the productive sector. However, excessive unemployment is not a harmless economic phenomenon. It increases social tensions and worsens people’s material and immaterial well-being. Hence, one of the first questions that comes to mind when considering a post-growth economy is: how can we maintain high level of employment without economic growth? This question implies a sub-question on which we should firstly focus, that is: why is economic growth essential for full employment?

With the beginning of the industrial revolution, a new phenomenon has radically shaped our society, i.e. technological progress. Its function is simple. Technology reduces the amount of labour needed to produce goods and services and makes their production more efficient. In other words, it cuts down the costs of production. Entrepreneurs do not just invest in new technologies to substitute workers and maintain the same level of production; they also increase production itself. This is fundamental to survive in a competitive environment as it allows to increase market shares and profits. Thus, firms that invest in new technologies need less workers per unit of product, but as the overall volume of production increases more workers are hired to support this expansion. This process has historically helped to avoid rampant unemployment rates in industrialised countries. In short, GDP growth is the necessary safety valve to keep socially sustainable the relentless increase in productive efficiency brought about by technological progress. There is a very simple ratio widely used in economics that helps us understand the relationship between GDP, technology and employment. Economists call it labour productivity (LP):

Where W indicates the total number of hours worked to produce the GDP. We can also see this under a different angle, that is:

In other words, as labour productivity increases, the number of hours required to produce a certain level of GDP decreases. Therefore, to keep W at the same level, GDP needs to grow at approximately the same rate of LP. The main determinants of labour productivity are usually considered investments in new capital, technological progress and human capital.

We can now go back to the first question: how can we maintain high level of employment without economic growth? The most common solution among ecological economists is to reduce working hours without cutting wages. The reason behind this is quite simple to see using the labour productivity formula. Total number of hours worked W can be rewritten as the number of people employed (EMP) times their working hours (h):

Thus, if governments, for instance, reduce the maximum weekly working hours, a growing LP will be compensated by a decreasing h and employment, EMP , will remain equal. This solution has a similarity with the general idea that in the next decades machines will substitute most of the jobs and humans will have to work much less. Indeed, they both start from the assumption that labour productivity will keep its unceasing pace fuelled by labour-saving technological progress.

However, recent developments in ecological economics show that we can obtain a completely different picture once we adopt an environmental perspective. Several scholars point out the strong positive correlation between energy consumption and labour productivity. The intuition is that by substituting workers with machinery (or robots, software etc…), firms are replacing the ‘energy of labour’ with energy produced by other sources, for instance fossil fuels or renewable energies. Therefore, as long as energy is easily available, it is convenient to pursue this transition toward a more energy-intensive (and less labour-intensive) productive system. But this abundance of energy is exactly what it might be missing in the next future.

An increasingly studied measure among ecological economists is the energy return on energy invested (EROEI henceforth), i.e. “the energy delivered from a process divided by the energy required to get it”. The empirical evidence shows that the EROEI of fossil fuels, above all oil, is declining. The reason behind this decline might be that the exploitation of these resources is making them less available and of lower quality. Therefore, the energy invested (the EROEI denominator) for searching, extracting and refining activities is increasing. The implications of a declining EROEI for the productive sector are relevant. What is important for the economy is the level of net energy, which is the difference between gross energy and the energy consumed by the energy sector. In other words, net energy is the quantity of energy available to the productive sector once we account for the energy employed to produce the energy itself. A lower EROEI implies that more energy must be invested in its production, thus net energy decreases unless more gross energy is produced. However, higher rates of exploitation of fossil fuels may accelerate the decline of the EROEI. Eventually, we will be back to the starting point.

Source: Court and Fizaine (2017)

The only energy source that can solve this conundrum is, at the time of writing, coal. Indeed, its reserves are still so vast that it will assure a very high EROEI for approximately the next 100 years. However, there is a climate-related issue with coal. Its use is highly pollutant and would tremendously speed up global warming, leading to disastrous scenarios in few decades. Unfortunately, most studies agree on the still unsatisfactory EROEI of renewable energies like solar panels. Therefore, without big technological innovations that will increase the EROEI of renewable energies, a likely future scenario is that net energy will decrease as EROEI keeps falling, and thus the reduction of available energy for the productive sector will hinder the process of substitution of labour with energy-consuming capital. What may happen is that instead of a highly automated energy-intensive economy, in the future we will have a more labour-intensive productive system. This would mean that a post-growth economy would be perfectly feasible in terms of occupation, as the absence of steady labour productivity growth will not bring about unsustainable unemployment rates.

In conclusion, this article has discussed the urgency of a thorough rethinking of our socioeconomic system to make it environmentally sustainable and has presented one example of how looking at economics adopting an ecological perspective can shed new light on the topic of unemployment and technological progress. However, much work is still needed to understand the dynamics of energy and labour productivity. Therefore, the idea expressed in this article should be interpreted more as an insight on a possible scenario rather than a conclusive description of the future outlook of the economy.

Dario Leoni is a graduate of the Economics MSc program at the University of Leeds and a PhD candidate at the University of Surrey.