Fleeing Vesuvius. Gillian Fallon
develops unless sales expand. The mechanization of sock and lace production in the English midlands led to such widespread job losses that riots broke out in 1811 and 1812. Troops were sent to the area to stop the Luddites, as the bands of destitute working men were called, from breaking into the new factories and destroying the machines. Indeed, had the Napoleonic War not ended in 1815 allowing the factories to increase their sales in Europe and elsewhere, the disturbances might have become serious enough to kill off the industrial revolution. Without wider markets, firms using powered machinery would have either consumed themselves in a competitive frenzy, or seen their technologies banned as a result of popular unrest.
Eventually, however, British exports put most continental craft producers out of business and left the remainder with no alternative but to adopt more fossil energy-intensive methods too. A sales pyramid developed. The early participants in a sales pyramid get rich because they receive commission on the goods they sell to people whom they have persuaded to become dealers too; dealers who, in turn, can earn a commission from others they induce to join the pyramid as dealers later on, who themselves recruit and stock further dealers. And so it goes on, setting up a situation in which everyone in the pyramid can only fulfil their income aspirations if the pyramid does the impossible and expands indefinitely, eventually involving infinitely more people than there are in the world.
The fossil fuel-based production system became dominant by expanding on exactly the same lines. Just as British factories had needed to take over the markets previously served by craft-scale manufacturers in Europe to survive, industrial Europe had to oust artisanal producers elsewhere in the world, and the British sold them the machinery to do so.
Tariff barriers were maintained to allow the new continental industries to build themselves up until they could not only compete with their British rivals but had acquired export markets in which to sell themselves. It was the need for exclusive external markets to solve the problem of mass unemployment at home that led the European powers to scramble to assemble competing empires and eventually to confront each other in the First World War.
As each successive group of countries was forced to adopt mechanized production methods themselves in the hope of escaping poverty, so those who had mechanized earlier sold them the equipment. The pyramid this created grew and grew until it reached the point some years ago when there were no more markets supplied by craft producers to take over. This left firms in the pyramid with no–one to displace but each other, and since then, international competition has become so intense that only certain specialized types of manufacturing such as armaments, aerospace and pharmaceuticals thrive in high-wage countries, arguably because of the subsidies they receive through government contracts or patent protection.
How the Economy Came to Rely on Economic Growth to Avoid Collapse
The use of fossil energy not only displaced sustainable manufacturing methods, it also made the economy dependent on economic growth. In a stable, stationary economy, there is no net investment and no net saving. Everything produced in the course of a year either gets consumed or goes to replace things that have worn out. The return on capital is so low — somewhere between 2 and 3% — that it’s only just worth using part of the sales income to maintain the buildings and equipment rather than the business owners spending it on themselves. In other words, the average rate of profit is just enough to balance the society’s desire for income now against its desire for income in the future.
Suppose a new technology — steam power, perhaps — is introduced to this stable economy which enables much higher profits to be made in a particular business sector. The firms in the sector will race to adopt it because those that get it first will be able to cut prices a little and drive the laggards out of business. The would-be leaders won’t be content to wait until they have saved up enough of the money they would normally have spent on maintaining the old equipment until they can afford the new type. No, they will want to borrow the money they need to get ahead. But where is the money they wish to borrow to come from, since their society has no net savings and no spare resources? The answer is that the money and resources can only come from those that would have been spent on maintaining capital equipment in other sectors. The output from the other sectors will therefore shrink, shortages will develop and prices will rise, putting up the return on the remaining capital until it reaches the rate that the sector with the new technology is able to offer.
The arrival of a new technology in one sector therefore increases the rate of return on capital in all sectors. Profits in excess of those needed to maintain production appear for the first time and workers get a reduced share of the amount the society produces. Moreover, the profits belong to the business owners. This creates a capitalist class with potential investment power. I say potential because what happens next depends on whether other innovations follow the first. If they don’t, once the investment needs of the new technology are met, prices will fall and profits drop to the level set by people’s time preference, the 2 or 3%. If, on the other hand, there is a stream of innovations, profits could grow to become a substantial part of national income.
This creates the problem noted by Major C. H. Douglas, the founder of the Social Credit movement, who realized that the wages paid to workers could not buy everything that they had produced and that if there was to be full employment, the profits firms produced had to be spent back into the system. It doesn’t matter how it is spent, but people whose lifestyle is already satisfactory will probably either save it or use it for more investment. If they save it, someone else needs to borrow it and spend or invest it instead.
The situation in a typical country today is that just over 20% of its income needs to be invested back each year as, if it was all saved, 20% of the workforce would find themselves without jobs. But the people doing the investing demand a satisfactory return and only if economic growth takes place and incomes increase will they be able to get one. If the broad mass of investors fails to get a return one year, they will not invest the next. Unemployment will increase and prices will fall, pulling profits down with them. The amount available for investment will be reduced and the economy will move along a low-growth or no-growth path until another series of innovations comes along.
For the past 200 years, however, a flow of innovations has brought about rapid growth. Many of these innovations have involved the substitution of fossil energy for energy from human, animal and solar sources because, if a worker’s efforts can be supplemented in this way, he or she can produce much, much more. An averagely fit man can apply about 75 watts to his work. If he is assisted by a one-horsepower motor, the sort you might find on a hobbyist’s circular saw, he can apply ten times more power to the task and consequently work much faster. A positive feedback develops, with the greater productivity leading to higher profits and incomes and additional investment and energy use. The income gap between those using fossil energy and those who don’t gets wider and wider. In 1960, the average income in high-fossil-energy-using countries was 30 times that in low-energy countries. By 2001 it was almost 90 times larger. Moreover, the 20% of the world living in high-energy, high-income countries enjoyed 80% of world income, investment and trade.
It is therefore reasonable to say that the use of fossil energy facilitated a greater division of income and wealth than was usual between worker and business owner in artisanal societies. It also led to industrial capitalism and the development of the banking system because, once some enterprise owners were making more profit than they needed to plow back into their own companies, a mechanism was required to take their savings and lend them out to people who did want to invest. A structure was also needed to handle the profit-sharing part of those investment funds — the limited liability company.
I need hardly say that, just as the use of fossil fuels drove people out of manufacturing, it also drove them off the land. The use of fertilizers, tractors and sprays made each farm worker much more productive so less labor was required. In 1790, at least 90% of the US labor force worked in agriculture. In the year 2000, less than 1.4% did while still producing enough to meet home and export demand. The average American farmer produced 12 times more an hour in 2000 than his predecessor did in 1950.2 Again, these changes were irresistible. Food prices fell by about 90% in relation to average incomes between 1920 and 1990. This meant that farmers had to increase their output by at least 1,000% for their income to keep up with the rest of society. As this could only be done by using fossil