Let there be light.

Energy Limits Won't Hold Back Growth

Noah Smith is a Bloomberg View columnist. He was an assistant professor of finance at Stony Brook University, and he blogs at Noahpinion.
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Will the Earth's limited energy supply put an end to economic growth? This is a popular claim made by physicists who criticize economics. For example, Tom Murphy of the University of California at San Diego has been saying this for a while. More recently, my Bloomberg View colleague Mark Buchanan has made a more qualified version of the same claim. Buchanan writes:

Growth inevitably entails doing more stuff of one kind or another, whether it's manufacturing things or transporting people or feeding electricity to Facebook server farms or providing legal services. All this activity requires energy...

Data from more than 200 nations from 1980 to 2003 fit a consistent pattern: On average, energy use increases about 70 percent every time economic output doubles. This is consistent with other things we know from biology. Bigger organisms as a rule use energy more efficiently than small ones do, yet they use more energy overall. The same goes for cities. Efficiencies of scale are never powerful enough to make bigger things use less energy.

I have yet to see an economist present a coherent argument as to how humans will somehow break free from such physical constraints.

Paul Krugman disagreed, and Buchanan responded. To make a long story short, I agree with Krugman.

Gross domestic product isn't about how much physical stuff we have; it's about how much well-being we create for ourselves with our productive activity. Dollars are just a convenient yardstick to measure how much well-being we get from the economy. GDP isn't a perfect metric, of course, so GDP growth doesn't measure the true gain in our standard of living. But let's imagine that there's some true standard of living out there, of which GDP is only a noisy and biased measure.

Does this true standard of living require increasing energy to keep growing? No. As Krugman points out, we can grow our standard of living simply by increasing the efficiency with which we use resources, including energy. Buchanan concedes that this is true, but argues that even if we can grow without increasing energy use, in practice we don't.

But don't we? As writer Ramez Naam points out, Americans use no more energy per person than we did in the 1970s. Our per-capita water and oil consumption have fallen substantially. But since the 1970s, our real GDP per capita has doubled. The only reason the U.S.'s total energy use has increased is that our population has grown.

But population growth isn't necessary for per-capita GDP growth. Japan's total energy use has fallen by about 13 percent since 2000, while its total GDP has grown by more than 7 percent. In other words, Japan has done what Buchanan claims to be impossible -- and the U.S. almost certainly would have, had we not had a large amount of immigration and a fairly high fertility rate.

Now, it is true that the U.S. and Japanese trade deficits grew over this time, meaning that the energy we consume (as opposed to the energy we use to produce things) probably did increase a bit, since we trade with countries that are more energy-intensive than us. But this trade deficit is only a small percent of the U.S. economy -- no more than 3 percent -- and an even smaller percent of the Japanese economy.

So Buchanan's heuristic -- that energy use grows by 70 percent whenever output doubles -- hasn't held for Japan and the U.S. in recent decades. That's not surprising, given that the rule of thumb was drawn from only 23 years of data. The period from 1980 to 2003 isn't necessarily representative of the grand sweep of human history, and there's no reason to think it represents a fundamental physical constraint on human possibilities. As fertility continues to decline and poor countries continue to catch up with rich ones in technological capability, we may see a dramatic slowing in energy use.

Meanwhile, there is a lot of untapped energy out there for us to use -- the sun, for example. Solar power is getting cheaper at a stupendous rate. It may be that in the coming decades, we'll see the exact opposite of "limits to growth" -- a new age of abundance.

This column does not necessarily reflect the opinion of Bloomberg View's editorial board or Bloomberg LP, its owners and investors.

To contact the author on this story:
Noah Smith at nsmith150@bloomberg.net

To contact the editor on this story:
James Greiff at jgreiff@bloomberg.net