Ed Ellingson's Blog

6. The Economic Engine Falters

Fossil fuels are the fundamental source of the energy that drives our economic engine, and it manifests itself in two ways, 1) replacing human (and animal) power with engines, and 2) economies of scale achieved through a transportation system.  Each of these has their limits.  We know that fossil fuels are finite, and that what we’ve used up to date is the “easy” stuff; we’re transitioning into the “hard” stuff, the deeper pockets with smaller deposits, further away from where it will be used.  It’s going to be more expensive to get that energy.

Replacing human and animal power with engine power has its limits too, it’s when there are no tasks left to be converted!  More accurately, it’s when there’s no task that you could undertake to make a machine to power the work that would actually make money, something that drives the economic engine. I think that history will look back and that the apex of the era of oil was the advent of the leaf blower.

Leafblower; the height of the age of oil

After this, that was no manual-labor job that could realistically be converted to oil power.

One labor-intensive job I can think of is a roof tear-down, removing the old shingles from a roof.  I can’t imagine a realistic way to mechanize this process, but if someone could develop a machine that could do it effectively at a reasonable cost, they could sell it to willing customers and make money, and keep the economic engine going.  There might be other tasks, but there are few manual labor jobs left.  Even if there were tasks to be mechanized that seemed realistic with gasoline at $1 a gallon, they may not look attractive when gas is $3 per gallon.  We seem to have moved beyond a point where we can expect any major new inventions to recharge the economic engine.

Economies of scale are also limited, and we seem to be approaching that limit.  You can only scale up to the entire earth.  If you make beer, you can only scale up to brewing for the total demand on earth.  Regional brewers can merge, consolidate, and operate more efficiently on a national level.  National breweries can merge, consolidate, and operate more efficiently on a multi-national level.  The multi-nationals can merge to form one world-wide brewery, but that’s the limit.  The oil companies operate world-wide, and have continued to merge.  Many products are manufactured on a world-wide scale.  Individual components are manufactured in a place that’s deemed to be the lowest cost in the world.  The components are shipped and assembled in one or more places so that it results in the absolute minimum cost at the selling place.  Every facet of a product is separated out, analyzed, systematized, and contracted out to the lowest bidder.  Each step to reduce the cost of a product effectively increases the profit and adds power to the economic engine.

When will this globalization end?  Perhaps there are some gains to be made yet, but the major products are already scaled up to about the limit.  There will always be some small gains to be made by some businesses by increasing the scale, but the steps that can be taken to really drive the economy have already been done.  Higher energy costs will increase transportation costs too, so that will work to undo some of the advantages of globalization.

How about computer technology?  I remember when the personal computer revolution was just a few years old, and reports started to come out analyzing the productivity increases due to computers; there wasn’t any!  Later reports started to show some productivity increases, but it was pretty clear that initially, businesses were spending (or reinvesting) any savings realized by upgrading and expanding the systems.  That is, just putting all of your workers on PC’s didn’t achieve very much, it was integrating (networking) all of the workers together, utilizing the PC’s that started to create some efficiencies.  This took a huge investment, in the hardware, plus the application software, the Internet connection, plus the setup and learning that went into creating the efficiency. There was a payback, and there could be more, but it seems that the really profitable projects have already been completed, and that the future only holds small improvements.

Another piece of this is that the “information” has always been regarded as more important than the efficiency of use.  One might think that the applications of computer systems would allow businesses to cut back on the number of accountants, for example.  Well, no, this hasn’t happened.  The number of accountants has remained the same, or grown, and the information gathered and analyzed by the computer systems has been used to reduce inventory, coordinate deliveries from all over the globe, etc., basically supporting globalization.

Even though there’s not much potential for continuing the growth of the Economic Engine in the USA, there’s still hope for continuing it on a world-wide basis.  That is, mechanizing the rest of the world could keep the engine running; the same transformation that occurred here could occur in India, China, and a host of other “developing” countries.  They could be induced to borrow money, buy tractors and other equipment, experience huge profits, and continue the growth much was we did in the USA.  I don’t doubt that this could happen, if the world had an infinite supply of very low-cost oil, or a similar energy source.

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