Introducing a new interpretation of the economy


Welcome to Surplus Energy Economics, the web site of analyst Tim Morgan.


Although I’ve spent many years as an analyst of energy, economics and strategy, I’m probably best known for my work as head of research at Tullett Prebon, a role I left in early August.


Though my research covered a wide range of subjects, my main interest is in a wholly new way of looking at the economy.


At its simplest, this radical approach argues that there are two economies, not one.


The first is the real economy of energy, labour, resources, goods and services. This real economy is a function of surplus energy. Mankind began to create surplus energy through the development of agriculture, which freed up a small proportion of the population for non-subsistence activities. A much bigger step forward came when we discovered the heat-engine, which enabled us to tap vast reserves of fossil fuel energy.


The financial economy runs in parallel with the real one. Money has no intrinsic worth, but possesses value only as a claim on the real economy. The financial economy consists of a series of claims on the real economy, claims which include cash, debt and other forms of supposed value.


For the most part, the financial economy has been an indispensible tool for the better management of the real one. Markets allow us to price assets, inputs, outputs, risk and return. They also allow us to undertake essential longer-term projects, such as building a power-station, a school, a road or a house.


But the financial economy has an essential anticipatory character. Every time someone lends, borrows, invests or takes out an insurance policy, he or she has to work to some collective expectation for the future.


Based on 200 years of experience, our default assumption has been that the future will be much like the recent past – that is, it will be characterised by growth in the real economy. If, for any reason, growth does not pan out as we expect, the assumptions underpinning the financial economy system of claims cease to be valid, and claims may prove impossible to honour.


That’s where we are now. We’re nowhere near “running out” of energy, but what is critical here is the surplus energy equation. This is an equation which compares accessed energy with the energy consumed in the accessing process, and is known as the Energy Return on Energy Invested, or EROEI. This ratio is now deteriorating rapidly, and has fallen to the point where growth in the real economy has ceased.


Unfortunately, the accumulation of financial economy claims has continued regardless, meaning that we are now burdened by excess claims – claims, that is, that an ex-growth economy cannot honour. This is most visible, of course, in the vast amount of debt with which the global economy is burdened.


Two things, then, will be obvious. First, we have to get used to an economy that doesn’t grow in the way to which we’ve become accustomed.


Second, excess claims – not just debt, but other forms of supposed value that cannot be honoured – will need to be destroyed.


These challenges are not impossible, but they do need a radical change in how we do things, starting with an imperative need to look at the economy in a very different way.