Hypothesis

Why do we have a perception of wealth that we quantify with currency?

Economics textbooks describe wealth, value, or capital, as a “stock” whose monetary value is sustained by our collective beliefs.

But how do we measure the size of a stock? What sustains our beliefs? Perhaps as a clue, we can look to thermodynamics and physical laws. Wealth may be a human quantity, but we are also a part of the physical universe and equally subject to its universal laws.

Through the Second Law of Thermodynamics, any physical flow is a dissipation of some sort of potential energy. In physics, the size of a “stock” is determined through a perception of some sort of proportional flow. This is how measurement works.

We need energy to power our machines, our telecommunications, to have modern agriculture, and supply the meals that sustain our thoughts and perceptions. Without energy, civilization would no longer be measurable because lacking food we would be dead. The gradient that meaningfully distinguishes civilization from its surroundings would disappear and all internal flows would grind to a halt.

Perhaps the value of the capital stock that we perceive in units of currency is also a flow. Circulations require a dissipative flow of potential energy. Value is only an implicit representation of our estimation of the item’s capacity to facilitate economic circulations.

For more details on the physics and a comparison with traditional models see here. But, if the above is correct then we might expect to see that a very general measure of global economic wealth (or total capital) is tied to global primary energy consumption through a numerical constant. Consuming energy faster means we can have more wealth. Consuming less means sustaining less. Wealth is power.

Hypothesis evaluation

As argued in studies published in Climatic Change, Earth System Dynamics, and Earth’s Future, this simple hypothesis does indeed look to be true. The observed relationship between the current rate of energy consumption or power of civilization, and its total economic wealth, is a fixed constant of 7.1 ± 0.1 milliwatts per inflation-adjusted 2005 dollar.  Equivalently, every 2005 dollar requires 324 kiloJoules be consumed over a year to sustain its value. The log-linear plot below shows wealth in blue, energy consumption rates in red, and the value of the constant in green. In 2010, the global energy consumption rate of about 17 TW sustained about 2352 trillion 2005 dollars of global wealth. In 1970, both numbers were about half this. Both quantities have increased by an average amount of about 1.90% /year since.

The above plot shows a very measure of global wealth (historically accumulated real GDP) and energy consumption. On a log-linear plot, both are growing nearly linearly, i.e. approximately exponentially with respect to time on a lin-lin plot, and at the same rate of about 1.90 %/year on average. The ratio of the two quantities has stayed nearly constant over a time period when both wealth and energy consumption have more than doubled.

Note that the comparison here is not between energy consumption and the global gross domestic product (GDP), as has been erroneously claimed in published criticisms of this work; GDP has units of currency per time. Wealth has units of currency. GDP and wealth are not at all the same thing.

The apparent existence of a constant linking economics to physics has some rather far-reaching implications. Among these is that, at global scales, the real (inflation-adjusted) GDP is tied to how fast civilization consumption of energy is growing.

The product of the global GDP and same fixed constant of 7.1 ± 0.1 milliwatts per inflation-adjusted 2005 dollar is, on average, the growth rate of energy consumption. Over long timescales (perhaps a few years to a decade), we must continue to grow our capacity to consume primary energy reserves just to sustain the existence of a positive real GDP.

It’s not that economic growth can’t continue, it’s only that there is nothing to guarantee that it will. For a water wheel, wood can rot and the river can dry. If continued consumption growth ever becomes too difficult due to reserve depletion or accelerating environmental disasters, for example from accelerating carbon dioxide emissions, all our efforts to produce growth can be expected to be more than offset by decay. Historical studies suggest that any long-term decline in our capacity to consume forebodes hyper-inflation, war, and population decline.