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Capital, Capitalism, and Climate in Adam
Smith’s Growth Theory
Simon Mair
Centre for the Understanding of Sustainable Prosperity, University of Surrey, Guildford, UK.
s.mair@surrey.ac.uk, @simon_mair
Abstract
In this paper we set out two stylised facts of the modern economy: that the economy is
becoming more energy efficient but economic growth is still tightly coupled to energy use, and
that at a global scale different energy carriers are complements not substitutes. We then develop
a framework based on a reading of Adam Smith’s The Wealth of Nations which explains these
facts. We argue that in Smith’s conception capital is fundamentally about energy. In Smith,
capital accumulation generates growth by supplementing and substituting human energy with
other energy flows, or by enabling more efficient use of existing energy flows. Moreover,
Smith views labour as a form of capital, which is consistent with a view of the economy as an
energy gathering system. Based on this interpretation of Smith’s views on capital, we construct
a causal loop diagram of a simplified vision of Smith’s growth theory. We argue that the
stylised facts of increasing energy use, increasing energy efficiency and a complementary
relationship between energy carriers follows naturally from the dynamic relationship between
capital and markets in a Smithian growth framework. Finally, we conclude by arguing that in
a Smithian framework, ongoing energy use is essential for growth and that renewables will not
substitute for fossil fuels. Consequently, the only way to escape catastrophic climate change is
through a fundamental shift in the social logic of capitalism.
Key Words: economic growth, limits to growth, Adam Smith, history of economic thought,
capital, energy
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1 . How do we tackle climate change?
Tackling climate change requires a break with the historical trends of exponential
growth, a break with the history of capitalism. Capitalist history is a history of exponential
growth: in economic activity, in energy use, and in greenhouse gas emissions. This growth has
raised millions out of poverty. But it has also brought us to the brink of environmental crisis,
particularly climate change (Steffen et al., 2015). To avoid catastrophic climate change, we
have to end one of the long established growth trends of capitalism: greenhouse gas emissions.
This represents a break in economic history, and prompts deeper questions: to avoid climate
change do we also have to break the other exponential growth trends of capitalism: growth in
in energy use? In economic activity, itself? Can capitalism survive such breaks or does it have
a growth imperative (Gordon and Rosenthal, 2003, Jarvis and Davis, 2017, Richters and
Siemoneit, 2017)?
The answer to these questions depends on how we understand the relationship between
energy, greenhouse gas emissions, and growth. We see this in the post-growth versus green
growth debates (e.g. Jackson, 2017, Stoknes and Rockstrom, 2018), which turn on an
understanding of the role of energy in the modern economy. If economic growth requires
energy use, and renewables cannot easily be substituted for fossil fuels then ending economic
growth is the only way to avoid catastrophic climate change. On the other hand, if growth can
be decoupled from energy, (perhaps through rapid energy efficiency gains) or if renewable
energy is a good substitute for fossil fuels then green growth is possible. Therefore, the purpose
of this paper is to explore links between energy and economic growth.
To this end we argue that Adam Smith’s (1776) insights in the Wealth of Nations
provides a useful framework for explaining two stylised facts concerning the role of energy in
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economic growth. Specifically we argue that the interaction between the division of labour
and the role of capital in Smith’s growth theory provides us with a useful way of understanding
the way that social organisation of capitalism drives and is shaped by the increasing use of
energy. Interpreting Smith’s growth theory through an energy lens points to an understanding
of the various elements of the economy as co-evolving with a complex multi-directional system
of causality between growth in energy use and economic growth. Consequently, Smith’s
framework sheds light onto why historically, energy has been closely linked to economic
growth, and different energy forms have not substituted for one another.
The rest of this paper is structured as follows. First we set out the stylised facts linking
economic growth and energy use in more detail (Section 2). Then we explore Smith’s account
of capital, arguing that much of it is about increasing societal access to energy, and that it has
close links to modern interpretations of the economy as an energy gathering system (Section
3). Based on this account we build a causal loop diagram representing a simplified form of
Smith’s growth theory, highlighting the connections between the social organisation
capitalism, capital, and societal access to energy (Section 4). Finally, we revisit the two stylised
facts, explain them with reference to Smith’s framework, and argue that this makes the case
for a post-growth economy in order to avoid catastrophic climate change (Section 5).
2 . Two stylised facts concerning energy and economic
growth
Two stylised facts relating economic growth and energy use are readily observed from
long run data: (1) that economic growth is both becoming more energy efficient yet remains
tightly coupled to energy use, and (2) that energy types are complements not substitutes at the
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global macro scale. The first of these facts is well established (e.g. Brown et al., 2011, Stern,
2011, Jarvis et al., 2015, Jarvis, 2018). It is illustrated in Figure 1, which shows the natural log
of global GDP plotted against the natural log of global primary energy use from 1900 to 2014.
The relationship between the logged variables is well approximated by the equation,
(1)
This indicates that the relation between the global GDP and global primary energy use follows
the power law,
(2)
Equations (1) and (2) suggest that a 1 percent increase in global primary energy use generates
a 1.1 percent increase in global GDP. Put another way, equations (1) and (2) suggest a strong
correlation between energy use and economic growth in the global economy and that the
economy is becoming more efficient with respect to energy.
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Figure 1. Pink dots: natural log of Global GDP plotted against natural log of Global Primary energy use from 1900
to 2014. Black dashed line: least squares linear regression. Data from De Stercke (2014). R2 is the Pearson
product moment correlation coefficient.
We can now turn to the second stylised fact: that different energy carriers appear to be
complements at the scale of the global economy. This is less established than the first, as there
is very little work exploring different energy carriers at the global scale. However, Figure 2
plots total energy use 1900-2014 by energy type. We can see that over this time period, energy
types have not substituted for each other at the global economy scale. Rather, each new energy
type has added to the total amount of energy used in the global economy, and use of every
energy type has grown over the last 100 years.
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Figure 2 Evolution of global primary energy use by fuel type. Data from De Stercke (2014).
We can further demonstrate the idea that, over the long run and at the global level,
different energy carriers are complements rather than substitutes using a rough estimate of their
cross-elasticities. Taking the long run data on energy use 1900-2014 from De Stercke (2014),
and running a basic linear regression based on least squares of the logged variables, we obtain
the elasticities found in Table 1. What we can see is that in every case, the elasticity is positive.
Consequently, at the (fairly coarse) level of aggregation presented, there is no evidence that
one energy type has been swapped out for another, at the macroscale.
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Table 1 Cross Elasticities of different energy carriers based on a least squares estimate of
, where is the cross elasticity, and is a constant. Data for 1900-2014 from De Stercke (2014).
Y
Biomass
Coal Products
Natural Gas
Nuclear
Petroleum
Products
Renewables
X
Biomass
-
1.201
4.122
5.989
3.470
4.172
Coal Products
0.809
-
3.405
4.764
2.864
3.469
Natural Gas
0.216
0.265
-
3.387
0.856
1.040
Nuclear
0.130
0.136
0.268
-
0.177
0.239
Petroleum
Products
0.246
0.302
1.160
5.287
-
1.212
Renewables
0.197
0.243
0.938
3.522
0.807
-
In summary, over the last 100 years, energy use in the global economy has been
characterised by a tight link between energy and growth, and energy types have acted as
complements, not substitutes. How we explain these facts will have implications for our
approach to tackling climate change: are these relationships a fundamental part of capitalism,
or they coincidental to it? To explore this, we now turn to Adam Smith’s growth theory, starting
with his account of capital, and its interpretation in terms of energy use.
3 . Capital as Access to Energy in The Wealth of Nations
Smith’s overarching definition of capital in The Wealth of Nations is that it is the part
of the total stock of goods held by society applied to surplus-generating activities. In Chapter
1of Book 2, Smith writes that an individual’s total stock is “distinguished into two parts. That
part which, he expects, is to afford him … revenue, is called his capital.”
1
In other words, for
1
In this paper I use the version of The Wealth of Nations made freely available online by marxists.org.
Consequently there are no page numbers. To help readers find quotations I provide the book and chapter number
corresponding to those found at https://www.marxists.org/reference/archive/smith-adam/works/wealth-of-
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Smith, capital is those parts of society that are applied to activities intended to generate a profit
for their owners (Aspromourgos, 2009). This is a broad, and social, definition of capital that
Smith defines capital in terms of the desires of its owners (capitalists). To begin to see how the
social and the energetic are linked in Smith’s understanding of capital, we must look at the
mechanisms by which capital generates a surplus for its owner in Smith’s framework.
3.1 Fixed capital directs energy towards economic growth.
Smith argues that there are two types of capital which generate surplus in different
ways. The first type, circulating capital, generates surplus through exchange. It is capital
“employed in raising, manufacturing, or purchasing goods, and selling them again with a
profit” (Book 2, Chapter 1). wewill return to circulating capital later to argue that exchange in
a market economy is about accessing energy. However, it is first useful to focus on Smith’s
discussion of fixed capital. This is capital “employed in the improvement of land, in the
purchase of useful machines and instruments of trade, or in suchlike things as yield a revenue
or profit without changing masters” (Book 2, Chapter 1). Of the four types of fixed capital
Smith identifies, three of them (machinery, improvements to land, and the useful abilities of
workers) are systems that “facilitate and abridge labour” (Book 2, Chapter 1), by increasing
access to energy. This is most intuitively demonstrated in Smith’s discussion of machinery.
For Smith machinery generates surplus by energy of the worker by supplementing the
energy of a worker with a different form of energy. As Kurz (2010, p. 1188) puts it, for Smith
a key growth mechanism comes through machines taking over “larger and larger parts of an
nations/index.htm. However, a rapid alternative is to Google search the quote. More often than not this will lead
to the relevant section of the marxists.org version.
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increasingly complex labour process” and replacing “labour power by machine power”. Smith
considered this an obvious point, writing that it was “unnecessary” to discuss the ways in
which machines made labour more productive (Book 2 Chapter 1). However, his examples of
innovations in machinery make clear that the core way machinery abridges labour is by
swapping or supplementing a human energy source with a non-human source. One of the first
examples of Machinery in The Wealth of Nations is an aporcryphal tale involving a child and
a fire engine:
“In the first fire-engines, a boy was constantly employed to open and shut alternately
the communication between the boiler and the cylinder, according as the piston either
ascended or descended. One of those boys, who loved to play with his companions,
observed that, by tying a string from the handle of the valve which opened this
communication, to another part of the machine, the valve would open and shut without
his assistance.” (Book 1, Chapter 1, emphasis added).
Previously the boy opened and shut the valve, now the machine does it. Likewise, in Chapter
11 of Book 1, Smith explicitly discusses how the use of non-human energy via fixed capital
made cloth production in Italy, much more productive than in England, where traditional foot
treading was used:
“Both in the coarse and in the fine woollen manufacture, the machinery employed was
much more imperfect in those ancient than it is in the present times. It has since received
three very capital improvements…Thirdly, the employment of the fulling mill for
thickening the cloth, instead of treading it in water. Neither wind nor water mills of any
kind were known in England so early as the beginning of the sixteenth century, nor, so
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far as I know, in any other part of Europe north of the Alps. They had been introduced
into Italy some time before.”
The point here is to say that machinery in Smith can very much be understood as being about
access to energy. But machinery is not the only way in which humans access and turn energy
flows towards growth of the economy in Smith’s framework.
Just as machinery directs energy from, say, oil to human ends, so the improvement of
land (another form of fixed capital for Smith) can be understood as the redirection of solar
energy toward the generation of surplus. A good illustration of this is found in Smith’s
discussion of agriculture. Here, Smith writes that
“A field overgrown with briars and brambles may frequently produce as great a
quantity of vegetables as the best cultivated vineyard or corn field.”
As a result,
“The most important operations of agriculture seem intended not so much to increase,
though they do that too, as to direct the fertility of nature towards the production of the
plants most profitable to man. (Book 2 chapter 5)
From an energy perspective, Smith can read here as saying that the accumulation of capital in
the form of improved land enables economic growth by redirecting solar energy flows from a
low value crop to a higher value crop. The key function of capital in this example is that enables
humanity to appropriate or redirect a previously inaccessible energy flow in order to grow the
economy.
Finally, we turn to the useful abilities of workers, which can also be understood as way
society repurposes and uses existing energy flows to pursue its goal of growth. When defining
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the useful abilities of workers Smith refers to dexterity: the skills and abilities acquired by
workers through the repetition and simplification of tasks. When defining dexterity Smith talks
about it in terms of efficiency gains. For example, a worker specialising in the production of
nails will become more skilled in their production, and hence more efficient:
“A common smith, who, though accustomed to handle the hammer, has never been used
to make nails, if upon some particular occasion he is obliged to attempt it, will scarce,
I am assured, be able to make above two or three hundred nails in a day, and those too
very bad ones. A smith who has been accustomed to make nails, but whose sole or
principal business has not been that of a nailer, can seldom with his utmost diligence
make more than eight hundred or a thousand nails in a day. I have seen several boys
under twenty years of age who had never exercised any other trade but that of making
nails, and who, when they exerted themselves, could make, each of them, upwards of
two thousand three hundred nails in a day.” (Book 1, Chapter 1).
Nowhere, does Smith imply that an increase in dexterity is somehow miraculous. And although
it is intimately bound up with social organisation through the division of labour, it is not entirely
divorced from the question of energy. Rather the increase in dexterity, is a function of the fact
that energy flows are being used more efficiently: workers learn the best way to stir the fire, to
heat iron and shape the head of the nail. Consequently more of the energy required for each of
these activities is used in production, and workers appear more productive.
Here we have sketched some of the ways that three of Smith’s types of fixed capital
can be understood to drive growth by increasing human appropriation of energy. Machinery is
described by Smith in terms of its ability to generate surplus by substituting a non-human
energy source for a human energy source. Likewise, improved land and the abilities of works
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may also “be regarded in the same light as those useful machines which facilitate and abridge”
(Book 2, Chapter 1). But instead of directly supplementing or substituting human energy for
another form of energy, these fixed capitals generate surplus by allowing existing energy flows
to be used more efficiently. Through the abilities of workers, we can also begin to see how
access to energy via capital interacts with the social organisation of capitalism in Smith’s
theory. To build on this link it is useful to dig into another of Smith’s assumptions which links
closely to energy systems analyses of the economy: that workers are a form of capital.
3.2 Workers are capital, and market exchange is about access to energy.
When viewing the economy as an energy system, labour and capital can be treated as
performing the same fundamental role in economic processes. This is because all elements of
an economy can be viewed as interdependent parts of an energy gathering system. For example,
Hall and Klitgaard (2012, p. 117) draw on Polyani’s substantive definition of an economy to
argue that all economic activity is the application of work to transformation natural resources
into goods and services. In the past most of the work of transformation was done through
muscle power, but today muscle power is a much smaller proportion of total work carried out
because of the development of machinery which allows us to supplement our muscles with the
“‘large muscles’ of fossil fuels”. In his thermodynamic models of the economy Garrett (2011,
2012, 2014) treats labour as a part of capital on the same grounds: labour produces by accessing
energy, just as other forms of capital do. He goes on to argue that “the component of economic
production that is traditionally termed consumption is in fact an investment in sustaining and
growing humanity” and when viewing the economy as a system for gathering and using energy,
“investments in sustaining labour cannot be selectively subtracted from the production of new
capital because humans are part of the whole”. These ideas are all echoed in the discussion of
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machinery and the abilities of workers in Smith’s fixed capital. But the link goes deeper, and a
close reading of Smith reveals that he see’s workers as capital who must be invested in and
sustained.
Smith introduces this conception of labour, when he argues that wages are a form of
capital which is effectively an investment in labour (Aspromourgos, 2009, Kennedy, 2008).
For example, in Book 2 Chapter 1, Smith writes that circulating capital of a farmer “is employed
in the wages and maintenance of his labouring servants”. It is clear that this constitutes an
investment, Smith writes that the purpose of ‘maintenance’ is not only to sustain but also to
grow the labour force:
“A man must always live by his work, and his wages must at least be sufficient to
maintain him. They must even upon most occasions be somewhat more; otherwise it
would be impossible for him to bring up a family, and the race of such workmen could
not last beyond the first generation.”
Implicit here is the idea that workers are a capital to be invested in and used to generate a
surplus like any other capital.
Elsewhere Smith more explicitly compares workers to other forms of capital. For
example, Smith writes that to a farmer, “labouring servants” are akin to cattle. Cattle are “a
fixed capital in the same manner as that of the instruments of husbandry. Their maintenance
is a circulating capital in the same manner as that of the labouring servants.” It follows that
if Cattle are fixed capital that need maintaining with circulating capital, then labourers who
also need maintaining with circulating capital must also be a form of fixed capital. Here Smith
is relying on the idea that capital is something that makes a surplus. So, it follows that, just as
in the energy systems model, if people enter into the production process directly (in Smith
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people also enter indirectly, which is a distinction we turn to below), they are a form of capital
and, just like machinery, they must be maintained using other forms of capital.
To make the link to energy more explicit, it is worth reflecting on what it means to
sustain and grow humanity. At the most basic level the sustaining of a worker is about energy:
food is an energy source. Likewise, in order to grow humanity and extend a family, more food
(energy) is required. Abstracting from this slightly, access to shelter can also be interpreted as
energy. From an energy systems perspective, a house uses various types of energy to replace
metabolic energy to keep a family warm and sheltered. This might be the energy used in the
heating system of the house (wood on a fire, electricity in a heater), or the energy used to
produce the building materials, which keep the wind and rain out.
However, the link to energy systems analysis is not perfect. Unlike Garrett, Smith does
subtract some consumption from capital, namely that used to satisfy immediate needs. A
notable example is in fact housing. In a pure energy system framework this can be understood
as capital because of the points made above and because as a kind of energy infrastructure: the
oil rig extracts oil and the house provides shelter to the oil rig worker, without the worker oilrig
would not run (Jarvis, 2018). Smith, however, argues that housing is not part of capital because
it is not intended to be used to generate surplus, but to provide immediate shelter. However,
the wages which pay the rent, or the mortgage, or which purchase the house are a part of the
capital, so the distinction is not so clear cut. The core point to make is that in Smith’s
framework, labour is treated as a form of capital, and like other types of capital a clear role is
given to capital to maintain and sustain humanity and this points to an interpretation of capital
as being about access to energy
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It is worth reflecting here on the fact that in Smith the fact that labour is a kind of
capital, is a function of the social organisation of the economy and of the social function of
capital itself. On the one hand, in a market economy, workers will be put to work to generate
a surplus for capitalists. Therefore they fall under Smith’s definition of capital, and this is why
in a market economy “the whole produce of labour does not always belong to the labourer. He
must in most cases share it with the owner of the stock” (Book 1, Chapter 6). On the other
hand, where workers depend on the market to survive they must be able to access goods from
the market. The only way that most workers can do this is through wages advanced to them by
capitalists. Smith’s reasoning is that workers in a specialised economy cannot live off their own
produce. Instead they have to purchase what they need from the market, but:
“this purchase cannot be made till such time as the produce of his own labour has not
only been completed, but sold. A stock of goods of different kinds, therefore, must be
stored up somewhere sufficient to maintain him, and to supply him with the materials
and tools of his work till such time, at least, as both these events can be brought about.”
(Book 2, Introduction).
So an inventory of goods on which specialised workers can survive is necessary for workers to
be able to work in a specialised economy. Moreover, these goods must not only exist, but must
be accessible to the workers. Hence, wages in Smith’s political economy are a form of
investment by capitalists in workers, to ensure that workers can survive, reproduce and
therefore be put to work generating surplus. Moreover, markets are themselves created by the
accumulation of capital. Market exchange presupposes a division of labour. But, because
specialised workers need to be able to purchase goods from the market in order to survive, “the
accumulation of stock must, in the nature of things, be previous to the division of labour” (Book
2, Introduction). In other words, capital creates the market economy, which transforms workers
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into a form of capital, used by capitalists to access energy and generate economic growth. In
order to further explore these links between capital, energy and social organisation, we now
develop an account of Smith’s growth theory based on this account of capital.
4 . A causal loop analysis of links between capital, energy
and the social organisation of capitalism.
Smith’s growth theory is characterised by complex and multi-directional causality
between capital and the social organisation of the economy, notably with the division of labour
and markets (Lavezzi, 2003). Having set out an understanding of capital that encompasses both
its social function to generate a profit for capitalists, and that it does this by enabling access to
energy we can connect this more directly to the other social organisational aspects of Smiths
growth theory to explain our two stylised facts. To this end, in this section of the paper we
build a causal loop diagram depicting my interpretation of Smith’s growth theory from a capital
as energy perspective. In causal loop diagrams, arrows depict causal relationships between two
variables and signs on the arrows indicate the nature of the relationship. For example, a positive
arrow between X and Y indicates that all else held equal an increase in X leads to an increase
in Y. Causal loops are referred to as reinforcing when an increase in variable X leads (through
a series of other interactions) to further increases in X. For more on causal loop diagrams see
Sterman (2000).
4.1 Capitalists accumulate capital in order to make a profit.
The first causal loop (R1, Figure 3) describes Smith’s beliefs about the relation between
the accumulation of capital, and the desire of capitalists to make a profit on the stock that they
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own. For Smith there are three sources of revenue available to a person “Whoever derives his
revenue from a fund which is his own, must draw it either from his labour, from his stock, or
from his land”. (Book 1 Chapter 6). The revenue that comes from the application of stock is
“is called profit”. Smith sees the desire to make profit as a deep set natural tendency present
in some of the population, writing in Book 1 Chapter 6 that “as soon as stock has accumulated
in the hands of particular persons, some of them will naturally employ it … in order to make a
profit.” This population we can call the capitalist class. The employment of stock in order to
make a profit, is investment, so an increase in the desire to make a profit leads to an increase
in investment. In turn, investment increases the capital stock. Smith believes that “every man
of common understanding will endeavour to employ whatever stock he can command in
procuring either present enjoyment or future profit.” As a result, as long as stock is growing
and the desire for present enjoyment is relatively constant against the desire for profit, then
capital will always be fully utilised, and the desired or expected profit level of the economy
will continue to grow (Eltis, 2000) leading to more investment in order to accumulate capital
and generate profits.
Figure 3 Reinforcing loop 1 (R1), Accumulated capital increases the desired profit level, which increases
investment, which adds more capital.
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4.2 Capital accumulation expands markets
The second causal loop (R2, Figure 4) introduces the first way that the energetic and
social elements are intertwined in Smith’s growth theory: an increase in capital accumulation
leads to the expansion of markets, which leads to further increases in capital. Starting at capital
accumulation, the diagram depicts the argument set out in section 3 that an increase in capital
will increase the stock of energy that is available to society. All else equal, access to more
energy increases the productive capacity of the economy, which Smith defines in terms of the
productivity of labour (Eltis, 2000). This results in an increase in the output of the economy
which constitutes an expansion of the market from the supply side. Assuming these additional
goods are purchased (a point we return to below), this increases revenues. Smith assumes that
most people have an innate desire to save (Aspromourgos, 2009):
“the principle which prompts to save is the desire of bettering our condition, a desire
which, though generally calm and dispassionate, comes with us from the womb, and
never leaves us till we go into the grave. …in the greater part of men, taking the whole
course of their life at an average, the principle of frugality seems not only to
predominate, but to predominate very greatly.” (Smith, 1776, Book 2, Chapter 3).
As a result, increased revenues will increase saving. And, because Smith assumes savings
automatically become investments (Blaug, 1990, Thomas, 2015)
2
, this will increase
investment, completing the feedback loop.
2
Smith’s saving as investment doctrine is a key weakness in his overall framework. As Aspromourgos,
(2009) argues, this assumption allows Smith to sidestep the issue of how supply and demand are co-ordinated in
a decentralised economy where saving and investment are undertaken by different economic agents. Smith was
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Figure 4 Adding Reinforcing loop 2: Capital accumulation increases access to energy which expands markets,
which increases investment, leading to more capital.
4.3 The division of labour and market expansion
The third causal loop (R3, Figure 5) is primarily concerned with the social organisation
of a capitalist economy, describing the relation between capital, markets and the division of
far from the only economist to do this (Eltis, 2000), but since Kalecki and Keynes we know that causality runs
the other way: the level of investment is determined by profit seeking firms. So, following Kalecki we might
remove savings from R2 and replace it with lagged profits. But for the purposes of this analysis, we need only
note that there must be some link between an increase in sales (the extent of the market), and investment decisions
in order to complete this loop. Therefore, we remain within Adam Smith’s framework for savings..
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labour. Although Smith largely provides us with a theory of how the productive capacity of an
economy might be able to grow, he does discuss demand side issues (Thomas, 2015, Lavezzi,
2016). On the demand side Smith summarises his core argument in the introduction to Book
2:
“In that rude state of society in which there is no division of labour… exchanges
are seldom made… Every man endeavours to supply by his own industry his own
occasional wants as they occur. When he is hungry, he goes to the forest to hunt; when
his coat is worn out, he clothes himself with the skin of the first large animal he kills:
and when his hut begins to go to ruin, he repairs it, as well as he can, with the trees
and the turf that are nearest it.
But when the division of labour has once been thoroughly introduced, the
produce of a man's own labour can supply but a very small part of his occasional wants.
The far greater part of them are supplied by the produce of other men's labour, which
he purchases with the produce, or, what is the same thing, with the price of the produce
of his own.”
Essentially, the division of labour creates demand for goods from the market, because workers
can no longer supply all their own needs. In this way, the division of labour expands the market
from the demand side. In the causal loop this comes about because the increase in demand for
goods increases demand for wages, which (as discussed above) are a form of capital in Smith’s
framework. Consequently, the increased demand for goods increases investment and thus
accumulated capital. Because in a monetary economy with specialised labour it is wage capital
that enables workers to actually access markets, it is this increase in capital which increases
demand and creates more opportunities to be able to sell goods. The loop is closed because
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increased wage capital (demand) encourages more goods to be brought to market and in this
way encourages further divisions of labour:
“It is impossible there should be such a trade as even that of a nailer in the remote and
inland parts of the Highlands of Scotland. Such a workman at the rate of a thousand
nails a day, and three hundred working days in the year, will make three hundred
thousand nails in the year. But in such a situation it would be impossible to dispose of
one thousand, that is, of one day's work in the year” (Smith, 1776, Book 1, Chapter 3).
Smith’s point here is that unless there is sufficient demand for products on the market, then
there is no incentive to specialise. So, an expansion of demand for goods will increase the size
of the market on the demand side, and increase the division of labour. In this way we can see
that the demand side expansion of markets is intimately bound up with capital.
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Figure 5 Adding reinforcing loop 3 (R3): Expansion of markets enables greater division of labour which increases
demand for goods and therefore wage capital which expands markets from the demand side.
4.4 The Division of Labour and Investment Enable Energy Efficiency.
We can now add three causal (R4-R7), which show how energy efficiency enters the
system via the division of labour. Starting with the division of labour, we have two ways that
the division of labour increases energy efficiency. The first (R4), is Smith’s argument that the
division of labour directly increases dexterity by simplifying the tasks workers have to perform,
and reducing the number of those tasks. In this way the division of labour enables them to learn
23
how to perform them more efficiently. Smith articulates this most explicitly in his famous pin
factory example:
“a workman not educated to this business … could scarce, perhaps, with his
utmost industry, make one pin in a day, and certainly could not make twenty. But in the
way in which this business is now carried on, not only the whole work is a peculiar
trade, but it is divided into a number of branches, of which the greater part are likewise
peculiar trades. One man draws out the wire, another straights it, a third cuts it, a
fourth points it, a fifth grinds it at the top for receiving, the head; to make the head
requires two or three distinct operations; to put it on is a peculiar business, to whiten
the pins is another; it is even a trade by itself to put them into the paper; and the
important business of making a pin is, in this manner, divided into about eighteen
distinct operations, which, in some manufactories, are all performed by distinct
hands, … Each person, therefore, making a tenth part of forty-eight thousand pins,
might be considered as making four thousand eight hundred pins in a day. But if they
had all wrought separately and independently, and without any of them having been
educated to this peculiar business, they certainly could not each of them have made
twenty, perhaps not one pin in a day; that is, certainly, not the two hundred and fortieth,
perhaps not the four thousand eight hundredth part of what they are at present capable
of performing, in consequence of a proper division and combination of their different
operations.
As we have argued above, it is a mistake to not look beyond the social organisational element
of this increase in labour productivity. As Hall and Klitgaard (2012) put it, these organisational
changes improve productivity by changing the way the muscles of factory workers are used.
This is difficult to see in the dominant modern depictions of production. Where labour is
24
considered as a unique input to the production process, usually seperable and additive from
capital, and where no distinction is made between the work done by labour and the social
organisation of labour. But Smith does not assume labour is separable from capital: as
discussed above he views labour as a form of fixed capital maintained by circulating capital.
Viewed in this way we can more easily make the links between the social organisation of
capitalism and energy. When re-organised, fewer people are needed to produce the same
amount of pins, and this means less energy needs to be used sustaining workers in this particular
piece of production.
R5 adds another impact the division of labour has on energy efficiency, depicting the
link between the division of labour and innovation in Smith’s framework. In a number of
commentaries, Smith has been accused of underplaying the role of machinery and
technological innovation in economic growth (e.g. Hall and Klitgaard, 2012). But, as others
have pointed out (Aspromourgos, 2012) Smith is actually very clear that machinery is key
growth, and technological advancement is a fully endogenised part of his framework. In Book
1 Chapter 1, Smith writes that labour productivity gains come about because of “the invention
of a great number of machines which facilitate and abridge labour, and enable one man to do
the work of many.” He goes on to say that:
“the invention of all those machines by which labour is so much facilitated and
abridged seems to have been originally owing to the division of labour. Men are much
more likely to discover easier and readier methods of attaining any object when the
whole attention of their minds is directed towards that single object than when it is
dissipated among a great variety of things. But in consequence of the division of labour,
the whole of every man's attention comes naturally to be directed towards some one
very simple object. It is naturally to be expected, therefore, that some one or other of
25
those who are employed in each particular branch of labour should soon find out easier
and readier methods of performing their own particular work, wherever the nature of
it admits of such improvement.”
Moreover, as labour divides and specialises new professions emerge “whose trade it is not to
do anything, but to observe everything; and who, upon that account, are often capable of
combining together the powers of the most distant and dissimilar objects.” These people,
according to Smith, are responsible for much technological progress. As discussed above with
reference to the fire engine, these improvements in machinery are best understood in a Smithian
framework as facilitating a substitution of energy and by making capital more efficient.
R6 connects the potential energy efficiency gains from R5 with actual energy gains: in a
Smithian framework, investment enables potential innovations to be realised. Discussing the
role of machinery, in Book 2 Chapter 2, Smith (1776, Book 2, Chapter 2) writes,
“In a farm where all the necessary buildings, fences, drains, communications, etc., are
in the most perfect good order, the same number of labourers and labouring cattle will
raise a much greater produce than in one of equal extent and equally good ground, but
not furnished with equal conveniencies. In manufactures the same number of hands,
assisted with the best machinery, will work up a much greater quantity of goods than
with more imperfect instruments of trade.”
Here he makes the point that investments in new machinery, and in maintenance of existing
machinery is required to increase (or even just maintain) the productive capacity of the
economy. In this way capital accumulation is not driving the division of labour, but is realising
some of the labour productivity gains that come from the division of labour: without the
accumulation of capital technical progress would not translate from the minds of workers to
26
the material production processes. This is an idea Nicholas Kaldor makes central to his growth
theories, with his technical progress function which postulated a relationship between the rate
of investment and the rate of technical progress, with the rate of innovation mediating between
the two (Kaldor, 1961). This is what we attempt to represent here: investment is a key factor
in increasing the energy efficiency of capital because it is the central way in which potential
innovations are made to interact with the productive capacity of the economy in the form of
new machinery. Or, looked at from the other side, as Smith argues in the above quote, without
the use of circulating capital to maintain existing machinery, the efficiency of the total capital
stock will fall.
27
Figure 6 Adding loop R4, R5, R6 and R7. R4, R5 and R6 demonstrate links between the division of labour and
energy efficiency. R7 links increases in production to energy use.
4.5 Energy Efficiency Increases Energy Use
Having discussed each of the three ways that energy efficiency is derived from either
the division of labour, or from investment, we can now look to close these loops. The
28
immediate effect of an increase in the energy efficiency of capital is to reduce the amount of
energy used in production, this effectively increases the total pool of energy available to
society. Energy that has not been used up is still available. However, recall that (1) a core
assumption of Smith’s is the full utilisation of capital in production (because of the desire of
the capitalist class to generate surplus), and (2) the primary purpose of capital is to increase
access to energy. What this implies is that an increase in the energy efficiency of capital will
simply increase the level of production, and in turn trigger further increases in investment, the
division of labour and so on, which further increase production via the other feedback loops.
To emphasise that production is based on energy use, we can connect any increase in
production back to energy use (R7 in Figure 6), completing the causal loop diagram of Smith’s
growth theory.
5 . In a capitalist economy, economic growth and energy
growth are inextricable and renewables will not
substitute for fossil fuels.
In our interpretation of Adam Smith’s growth framework, energy efficiency drives
further energy use, and will continue to do so unless there is a fundamental change in the desire
of the capitalist class to earn a profit. In our framework, energy use appears as a function of the
production level and the energy efficiency of capital. These are the two factors typically
considered by those who argue that a decoupling of energy use and growth is possible. A
combination of these loops would see energy use fall if either energy efficiency gains rise by
more than the production level. However, in our framework, this is impossible because the
energy efficiency of capital increases the total available energy use, which increases the level
29
of production. This happens automatically in our framework because of Smith’s assumption
that capital will always be fully utilised. This is a strong assumption, but has its roots in a
weaker one: that capitalists accumulate capital in order to generate a surplus that they can live
off. Essentially Smith is saying no more than capitalists use their capital to generate revenue:
and that as long as most capitalists wish to earn money from their capital, they will continue to
accumulate capital and put it to work accessing energy and using it to transform resources that
will be brought to market. The only way to stop this behaviour is to reduce the desire to
accumulate a profit, which will reduce capital accumulation allowing energy efficiency
measures to reduce energy usage. However, reducing capital accumulation also means doing
without growth.
As set out in Section 3, in a Smithian framework, capital creates surplus by expanding
the productive capacity of the economy, and it does this by appropriating energy flows and
directing them to human ends. Consequently, economic growth requires growth in energy
usage. While this is initially started by the accumulation of capital and capitalist desire to
generate revenue, it becomes a part of the logic of the economy: expansion of capital and
energy use expands markets, which make labour evermore specialised and reliant on the market
itself. Consequently, we can identify a growth imperative inherent in the social organisation of
capitalism.
These dynamics also explain observation that alternative energy carriers complement
rather than substitute for one another. Growth in revenue, in our interpretation of smith, comes
from an increase in energy use, facilitated by an increase in capital. Again this is the result of
the desire to generate revenue and the assumption that capital will be fully utilised. This implies
that if the energy is available, there is an incentive to use it, and this incentive is reinforced by
30
the ongoing expansion of markets and of the division of labour, which add their own pressures
to grow.
6 . Conclusion
In this paper we have argued that Smith’s use of the term capital lends itself to an energy
based reading of his framework. His discussion of fixed capital (as machinery, improvements
in land, and as the useful abilities of workers) revolves around the either the substitution of one
energy form for another (i.e. machine for human), or around the more efficient use of energy
(as in dexterity). Likewise, Smith’s treatment of labour as a form of fixed capital to be
maintained by circulating capital (like machinery) also lends itself to a view of the economy as
an energy based system, with labour as a way to access that energy that can be treated as form
of capital.
Mapping this interpretation of capital to a more general reading of Smith’s growth
theory then allows us to see the links between energy use, growth, and the social organization
of the economy. There are two stylised facts of modern economies emerge that then emerge
naturally from the interplay of capital and markets in this framework. In the proposed
framework capital is only able to generate surplus by using energy. Moreover, energy
efficiencies derived from the ongoing division of labour, realised primarily through
investments, do not translate into reductions in energy use, because they increase the stock of
available energy and prompt increases in production levels in order to meet the capitalist class’s
desire to obtain revenue. This prompts further division of labour, production, which prompts
further expansion of capital and energy use. A similar chain of events explains why energy
types are not substitutes but complements. In short, when a given energy type stops being used
for one purpose it will be applied somewhere else in order to continue the transformation of
31
resources into goods and create revenue for capitalists and support workers who are dependent
on the market for their survival. Together this suggests that tackling climate change will require
not just a breaking of the historical trend for growth in greenhouse gas emissions, but also the
changing of the logic of accumulation and a move away from economic growth itself.
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