The world economy needs to simplify
Economic growth and added complexity sound like they would be good, but at some point, the combination gets to be too much–simplification is needed.
Too much of the world’s income starts going to non-working individuals and to high-earning workers in privileged fields. Ordinary working citizens start to say, “Wait a minute, there is not enough left for my everyday expenses. The system needs to change.” Elections lead to the selection of politicians who want war, or who want to overturn the current system. The system then changes in a way that leads to less spending on healthcare and other complexities.
In this post, I will try to explain a bit of the underlying problem and give some hints at what the simplification might look like. Part of the problem is too little energy supply. This is a problem that cannot be told to the public; it would be too distressing. In this post, I present the result of a recent academic study that has attempted to recalibrate the findings of the 1972 Limits to Growth study with updated data.
[1] Economies of all types tend to operate in cycles.
Economies need both resources and human participants. Human populations tend to increase in number if conditions are favorable. When population grows, resources per capita, such as arable land and fresh water, tends to fall. Adding complexity helps an economy work around falling resources per capita.
With added complexity, it is possible for resource extraction of many kinds to grow, at least for a time. Deeper wells can sometimes add more fresh water supply. Irrigation and fertilizer can be used to increase crop yields. International trade allows the possibility of getting resources from more distant lands. Adding debt allows factories to be built and to be paid for “after the fact,” using the sales of the goods produced by the factories. Ever-larger governments allow more roads, schools, and services of all kinds.
The use of added complexity helps keep economies growing for a long time, but at some point, things start going wrong. Oil wells and other types of resource extraction become more expensive to build because the easiest to extract resources tend to be used first. Pollution becomes more of a problem. Universities start producing more graduates with advanced degrees than there are job openings paying enough to justify studying for those degrees. Healthcare costs become hugely expensive. Increasing interest on debt becomes a huge burden, both for governments and individual citizens.
When added complexity reaches a limit, citizens sense a problem. They tend to vote the current governments out of power. Or they become rebellious in other ways. I think the world has already reached a complexity limit.
[2] At some point, the added complexity trend needs to shift toward simplification.
When added complexity no longer has sufficient payback, the system seems to sense this and starts pushing economies in the opposite direction. Often, the wages of ordinary workers become too low, relative to the cost of living. They rebel and overthrow their governments. Or central governments may collapse, as the central government of the Soviet Union did in 1991. This happened after oil prices were low for an extended period. The Soviet Union was an oil exporter, depending on oil exports for tax revenue. Revenue from collectivized agriculture was underperforming, also. Thus, getting rid of a layer of government, or too many government programs, seems to be one common theme of simplification.
Another issue today is international trade. Crude oil supplies per capita are low. Somehow, international trade (which uses crude oil) needs to be cut back.
With inadequate total oil supplies available, it becomes very desirable to do manufacturing close to home, rather than at a distance. This is a major reason for the competition in manufacturing between the US and China. If the US can manufacture locally, it will provide jobs and save some of the limited world crude oil supply.
Another issue is the oversupply of workers with advanced degrees, relative to the number of jobs requiring such degrees. A study released in early 2024 indicates that only about half of US college graduates are able to obtain a job requiring a college level degree within a year of graduation. In fact, the majority of those who cannot obtain a job requiring a college-level degree within a year after graduation remain underemployed 10 years after graduation. Pretty clearly, the number of college graduates needs to fall.
I showed in Figure 1 that US healthcare costs are very high, but they have recently been on a plateau. Perhaps these high healthcare expenses might make sense if US life expectancies were longer than elsewhere, thanks to all this spending. In fact, US life expectancy at birth is lower than in any other advanced nation. The CIA Factbook ranks the US life expectancy as 49th from the top in 2024.
Figure 3 (above) shows a chart I found several years ago, showing how US female life expectancy has been dropping, relative to other high-income countries.
Figure 4 shows that US life expectancies have continued to fall relative to other advanced economies. Something is clearly going wrong with health in the United States. It is no wonder that Robert F. Kennedy, Jr. wants to “Make America Healthy Again.”
There is also the question of the level of US healthcare spending, relative to GDP. The share for the US, from Figure 1, is about 17%. The shares for the EU, the UK, and Japan are each about 11% according to the World Bank. The share for Russia is about 7%; for China it is about 5%.
Another issue mentioned in the introduction is the proportion of government spending that goes toward non-working individuals. The chart below shows how US Federal Government funds are spent. When the budget is prepared, often many of these programs are lumped together as “Mandatory Spending,” so we don’t see precisely what the spending is for.
Typically, the arguments about spending are on the parts of the budget other than mandatory spending. The problem is that all parts need to be funded, one way or another. Social Security describes its program as largely pay as you go. Mostly, the payroll taxes collected from today’s workers are used to pay benefits to today’s recipients.
Keeping the system working as it does today becomes a problem if the total amount of goods and services produced starts falling at some point. For example, if the total food supply at some point (say 2050) becomes too low, there is a question regarding which citizens should get inadequate food rations: the workers, or those receiving benefits under a pension program for the elderly. I would vote for the workers getting adequate food, if we expect them to continue to work. This issue suggests that at some point, the elderly may have to go back to work to get an adequate share of what is being produced.
[3] I see the results of the recent US presidential election to be a call for simplification: getting rid of the unneeded pieces of the system.
Donald Trump and his team clearly have a much different view of how the government should be operated than Joe Biden did. In particular, the new team would like to get rid of what they see as unneeded parts of the system.
There seem to be many other parts of the world encountering somewhat similar political and funding difficulties. Germany is dealing with a collapse of government. France is facing political and budget crises. Even China’s economy is having huge difficulties.
[4] I see the underlying problem as not enough resources, especially energy resources, for the rising world population.
It is not only oil that is in short supply (Figure 2); coal is also in short supply, relative to world’s population (Figure 6).
Uranium is in short supply, as well. The issue for uranium is that the world’s supply of nuclear warheads that could temporarily serve as a supplement to currently mined uranium is running short. These warheads belonged primarily to the US and to Russia, but Russia has sold a substantial amount of its warheads to the US, to be down-blended for use in nuclear power reactors.
Without enough energy resources per person, the world will likely need to produce fewer goods and services in total. Some uses for energy products, and for the goods and services that can be made with energy products, need to disappear.
Now, all parts of the world need to re-examine energy uses that are currently being made and look for uses that the economy can most easily get along without. For example, the step-down in oil consumption per capita that occurred in 2020 seems to be still having some effect. Some people are still working from home, saving oil that would be used for commuting. Some long-distance airline flights were eliminated, as well, particularly in Asia, reducing jet fuel consumption.
The self-organizing economy tends to push the world in the direction of contraction. How this will work is not at all clear. Most people didn’t understand the response to Covid-19 as a way to cut back oil consumption. It is possible that future changes will, to some extent, come from cutbacks directed by government organizations that are as difficult to understand as the Covid-19 restrictions.
[5] The book The Limits to Growth, published in 1972, modeled when world resources would run short, relative to growing world population. A recent analysis provides updated estimates, using the same model.
The original 1972 analysis, in its base model, suggested that resources would start to run short about now. An article called, “Recalibration of limits to growth: An update of the World3 model” by Arjuna Nebel and others was published earlier this year in the Journal of Industrial Ecology. The summary exhibit of their findings is shown here as Figure 8.
On Figure 8, Recalibration23 is the name given to the new model output. The BAU dotted line shows the indications from the base (business as usual) 1972 model. I found the coloring a little confusing, so I added the labels “Industrial Output” and “Population” to better mark what I consider the two most important model outputs. Food Production per capita is the green line, which is also important. The calculations are all made in terms of the weight of physical quantities of materials used, for the world as a whole. The financial system is not modeled.
We do not know how accurate a forecast such as this is. I know that Dennis Meadows, who was the leader of the 1972 Limits to Growth analysis, has said that once peak was reached, we could not expect the model to necessarily hold.
Even with this caveat, I find this forecast disturbing. Industrial output per capita (which would include things like automobiles, farm machinery, and computers) is shown as already steeply declining by 2025 in the updated model. This trend is much clearer than in the 1972 model. By 2050, industrial output per capita is a small fraction of the amount it was at peak.
Food output per capita is shown to start dropping about 2025. Based on my understanding of the 1972 Limits to Growth analysis, this change might reflect a shift away from meat-eating, rather than simply fewer total calories per person.
World population follows a curve similar to that of the 1972 Limits to Growth analysis with a peak in world population at perhaps about 2030.
In the updated model, pollution has been modeled as CO2 levels. This is different from the mix of pollutants used in the original model. The peak comes around 2090.
[8] Intuitively, the order of forecast changes for the world economy, shown in Figure 8, seems right to me.
Figure 8 indicates that world industrial production is expected to be the first type of output to drop. This makes sense if energy supply is quite limited or is high-priced. Without adequate inexpensive energy supply, a country is likely to cut back on manufacturing its own goods. Instead, it tries to buy from countries with less expensive sources of energy supply.
For example, US industrial production per capita has been falling since 1973. The year 1973 was the year when oil prices first spiked. US business leaders realized that changes were needed: A larger share of manufactured goods needed to be imported from countries with lower-cost fuel supply. Oil needed to be used sparingly because of its high cost. Coal, used heavily in Asia, was typically much cheaper.
China took the lead in industrial production after it joined the World Trade Organization in 2001, but now it is running into obstacles. One issue is that China’s contribution to the world’s supply of goods is taking away high-paying jobs from other countries. Other countries are left with more low-paying service jobs. A second issue is that the US has become dependent upon China for critical materials, such as those used in military armaments. A third issue is that a great deal of China’s growth was financed by debt. As long as China’s exports were growing very rapidly, this was not a problem. But as growth has slowed, China’s debt has become difficult to repay with interest.
The level of conflict between China and other countries has grown, in part because it has become clear that it is not possible for industry to grow rapidly both in China and elsewhere, indirectly because of fossil fuel and uranium limits. The US applies sanctions against some Chinese companies and China retaliates by hoarding scarce resources. These include minerals such as antimony, tungsten, gallium, germanium, graphite, and magnesium.
The world is increasingly operating in a “not enough to go around” mode for scarce resources. At the same time, countries need to somewhat get along. So we get strange narratives in the press giving rationalizations for actions by both sides, without mentioning the shortage issue.
Figure 8 shows that once industrialization drops, food production also begins to fall, but not as quickly. This makes sense because everyone recognizes that food is essential. The falling calories likely reflect people increasingly moving from meat to vegetable products.
Somehow, world population becomes poorer, but the level of population does not drop nearly as rapidly as the drop in industrialization.
[9] Simplification is likely to take place in significant steps, perhaps at the time of strange events, such as those occurring in 2020.
These are a few ways simplification might take place:
[a] High level government organizations might start disappearing. For example, the European Union might not get enough funding and would stop. Or something similar could happen to the International Monetary Fund or the World Trade Organization.
[b] Programs that we expect to be funded by the US Federal Government might be handed over completely to the states, to be funded or not, as the finances of individual states permit. Examples might include Medicare, Medicaid, and even Social Security.
[c] There could be major banking problems, perhaps simultaneously in many countries around the world. The debt bubble holding up stock markets could pop. Governments would try to compensate, but they might not be able to do enough. Or governments could inadvertently create hyperinflation if there is virtually nothing to buy with the newly printed money created to offset widespread bank failures.
[d] There could be a great deal more sharing of homes and of apartments. The current arrangement of many single people living alone, either in an apartment or a stand-alone house could be replaced by many more roommate situations. Multi-generational families living together may become more common.
[e] Healthcare may become much simpler and local. Instead of seeing an array of specialists at a distance, people may walk to a local health provider. Medications from around the world are likely to drop greatly in quantity. Government programs to care for the seriously disabled elderly seem likely to be scaled back.
[f] Universities may be slimmed down greatly. There is no point in educating a huge number of individuals who cannot get jobs requiring a university degree.
[g] The huge amount of effort that goes into taking care of lawns in the US may disappear. Instead, people will put more effort into growing crops locally. Some people may choose to raise chickens, as well.
[h] International travel for pleasure will likely disappear, except perhaps for the very rich. Even business trips will become very uncommon. The amount of goods and services transported internationally seems likely to shrink.
[i] Many types of optional activities that now take place by car may be replaced by more local versions, which will be reached by walking, or perhaps by bicycle. For example, visits to restaurants may largely disappear, but eating with nearby friends or relatives in homes may increase. Visits to churches may drop greatly, as they did during Covid-19 restrictions, but they may be replaced by groups meeting in homes. Gyms for recreation may disappear, but people may obtain more exercise from their gardens and their need to walk to appointments.
[j] Very strange political leaders may take office. One person rule takes much less energy than transporting many representatives to a central location. Some of these leaders may take over as dictators.
Source: https://ourfiniteworld.com/2024/12/04/the-world-economy-needs-to-simplify/
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