In his latest article, “The Evolution of Inverting Scarcities”, Dr Tim Morgan identifies a fundamental change taking place within the economy.

For most of the industrial age, money was treated as scarce while energy and natural resources appeared to be abundant. We are now moving towards the opposite condition. Money and credit have become plentiful, but the energy and physical resources upon which the real economy depends are becoming increasingly scarce and costly.

This inversion of scarcity helps to explain why localism is likely to emerge as the natural form of the shrinking economy.

Money Is Not the Economy

Morgan begins by distinguishing between two economies.

The first is the financial economy of money, credit, assets and transactions. The second is the real economy of energy, materials, goods and practical services.

Money has no useful value in itself. It is a claim upon the products and services of the real economy. Creating more money does not create more energy, food, housing, water or productive land.

If the supply of financial claims grows more rapidly than the supply of real goods and services, each unit of money commands less. We experience this as inflation.

Since 2005, Morgan calculates that global debt has increased by 150 per cent and broader financial assets by at least 175 per cent. Over the same period, energy consumption increased by only 34 per cent, surplus energy by 26 per cent and material prosperity by 24 per cent.

The financial economy has therefore grown far more rapidly than the material economy upon which it depends.

Governments have tried to compensate for weakening material growth by borrowing and spending more money. This may increase measured GDP, but it cannot reverse the physical causes of economic contraction. It merely creates additional claims upon a limited supply of real resources.

The Growing Scarcity of Surplus Energy

The modern economy was created by access to abundant and inexpensive fossil energy. Coal, oil and natural gas enabled societies to replace human and animal labour with machinery. They also supported mass production, long supply chains, large cities and increasingly complex systems of government and commerce.

But not all energy obtained from nature is available for general economic use. Some must be consumed in finding, extracting, processing and delivering energy itself. Morgan describes this as the Energy Cost of Energy.

He estimates that this cost has risen from 2 per cent in 1980 to more than 11 per cent today.

As the energy cost rises, the amount of surplus energy available to the rest of society falls. Less remains to support manufacturing, transport, health, education, government, consumption and the maintenance of infrastructure.

The result is not simply that we will have slightly less of everything. The structure of the economy must change.

As I have argued, economic growth and economic shrinkage are not mirror images of each other. The economy will not retain its present shape while becoming uniformly smaller. The most complex, energy-intensive and financially dependent activities will become unaffordable first.

From Complexity to Simplicity

During the period of growth, the economy evolved towards greater scale, specialisation, centralisation and complexity.

Businesses became larger. Supply chains became longer. More intermediaries appeared between producer and consumer. Goods became increasingly difficult to repair. Ownership was often replaced by leasing, borrowing and subscription payments.

Complexity appeared efficient because cheap energy carried its hidden costs.

A supermarket can obtain food from around the world only while transport, refrigeration, packaging, warehousing and computerised stock control remain affordable. A centralised care system can operate only while society can meet the costs of buildings, management, regulation, finance, transport and administration.

These arrangements may look productive when measured in money. But a large proportion of their cost does not provide food or care. It supports the complex system surrounding the essential service.

As prosperity contracts, this complexity becomes a burden.

Morgan uses the modern motor car as an example. Manufacturers have added electronic systems which owners and small garages cannot repair. These systems allow manufacturers to retain control after the car has been sold and can create continuing income through subscriptions and dealership servicing.

But people whose discretionary income is shrinking will need vehicles which are cheaper, simpler, longer-lasting and locally repairable. The choice may eventually be between simpler cars and no cars at all.

The same principle will apply throughout the economy. Products and processes will have to become simpler because people will no longer be able to afford the cost of complexity.

Why This Leads to Localism

Morgan explicitly identifies this movement towards simplification and de-financialisation with localism.

Localism shortens the distance between production and consumption. It removes unnecessary intermediaries and reduces dependence upon expensive central systems. It replaces some purchased services with direct provision by families, neighbours and local enterprises.

Food provides a clear example. Between the farmer and the household now stand processors, wholesalers, distributors, supermarkets, transport companies, advertisers and financial interests. Each stage adds costs for energy, buildings, packaging, refrigeration, administration and profit.

A more local food economy would not eliminate trade or specialist production. It would reduce the number of stages between producer and consumer wherever this was practical. More food would be grown, processed, sold and consumed within the locality.

The same reasoning applies to care. Supporting elderly and disabled people in their own homes can avoid much of the cost of residential institutions. Public money could be concentrated upon training, respite care, equipment and direct support instead of being absorbed by property costs, corporate administration, borrowing and profit.

Local workshops could repair tools, machinery, clothing and household goods. Small businesses could make simpler products suited to local requirements. People displaced from discretionary and administrative employment could move into food production, care, maintenance, repair and other essential activities.

Human labour would begin to replace some of the external energy upon which the industrial economy has depended.

De-financialisation

Localism also involves a gradual reduction in the role of money.

This does not mean that money will disappear. It means that a growing proportion of useful activity may take place outside conventional commercial systems.

Families already provide care, childcare, cooking, gardening, maintenance and transport without recording these activities as financial transactions. Neighbours exchange help. Volunteers support community organisations. Small producers sometimes exchange goods and services directly.

Such activity contributes to real wellbeing even though it is largely absent from GDP.

During economic growth, many informal activities were drawn into the commercial economy. Tasks once performed within families or local communities became paid services. Property, insurance, regulation, management and finance were then added around them.

In a shrinking economy, this process is likely to reverse. People will have less money, but they will still possess time, practical knowledge and the ability to help one another. Informal and reciprocal activity will become more important because it can provide essential value without carrying the full financial cost of commercial provision.

The relative scarcity of money within households may therefore encourage arrangements which use fewer monetary transactions but provide more direct practical value.

The Limits of Centralisation

Large central systems depend upon reliable revenue, complex administration and substantial energy use. As the economy contracts, governments will struggle to maintain everything they presently promise.

This does not mean that central government will disappear. Some functions must remain national. These include defence, taxation, telecommunications, intercity transport and highly specialised medicine.

But many everyday needs can be provided more economically within the locality. Food, basic care, routine maintenance, some education, small-scale energy and many forms of transport need not always be organised through distant institutions.

Central government will increasingly have to support local provision rather than attempt to deliver everything itself. Its role may become one of setting basic standards, distributing limited resources and maintaining the essential national framework within which local economies can operate.

An Evolution, Not a Political Programme

The importance of Morgan’s argument is that localism does not depend upon governments being persuaded to adopt it.

It will emerge because the alternatives are becoming unaffordable.

Long supply chains will shorten when their energy and financial costs can no longer be carried. Over-complex products will lose their markets. Some large organisations will fail when falling sales leave them unable to cover their fixed costs. Commercial intermediaries will disappear when consumers can no longer afford their margins.

At the same time, people will still need food, warmth, shelter, care and useful work. These needs will encourage the formation of simpler, more direct and more local arrangements.

Localism is therefore not an attempt to recreate the past. It is the likely economic response to a future in which energy and material resources are scarce while money and financial promises have become excessive.

Preparing for What Comes Next

Morgan concludes that the real economy may be capable of contracting in a reasonably manageable way. The greatest danger lies in the failure of the complex financial system built upon expectations of perpetual growth.

Preparation should therefore concentrate upon the real economy.

We need to strengthen local food production, practical skills, repair businesses, domestic care, small workshops and local sources of energy. Products should be durable and repairable. Systems should be understandable. Essential provision should not depend upon long chains of borrowing, transport and administration.

The industrial economy evolved towards centralisation because abundant cheap energy made centralisation possible. As surplus energy declines, the direction of evolution will reverse.

The future will favour the simpler over the complex, the useful over the financial, and the local over the distant.

That is the relevance of inverting scarcities to localism. Localism is not merely desirable. It is the form that economic life is likely to take as the real world reasserts its limits.