Sustainable Energy and Economics in an Aging Population: Lessons from Japan (Lecture Notes in Energy, 76) 3030432246, 9783030432249

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Lecture Notes in Energy 76

Kozo Torasan Mayumi

Sustainable Energy and Economics in an Aging Population Lessons from Japan

Lecture Notes in Energy Volume 76

Lecture Notes in Energy (LNE) is a series that reports on new developments in the study of energy: from science and engineering to the analysis of energy policy. The series’ scope includes but is not limited to, renewable and green energy, nuclear, fossil fuels and carbon capture, energy systems, energy storage and harvesting, batteries and fuel cells, power systems, energy efficiency, energy in buildings, energy policy, as well as energy-related topics in economics, management and transportation. Books published in LNE are original and timely and bridge between advanced textbooks and the forefront of research. Readers of LNE include postgraduate students and non-specialist researchers wishing to gain an accessible introduction to a field of research as well as professionals and researchers with a need for an up-to-date reference book on a well-defined topic. The series publishes single- and multi-authored volumes as well as advanced textbooks. **Indexed in Scopus and EI Compendex** The Springer Energy board welcomes your book proposal. Please get in touch with the series via Anthony Doyle, Executive Editor, Springer ([email protected]).

More information about this series at http://www.springer.com/series/8874

Kozo Torasan Mayumi

Sustainable Energy and Economics in an Aging Population Lessons from Japan

123

Kozo Torasan Mayumi The Kyoto College of Graduate Studies for Informatics Kyoto, Japan

ISSN 2195-1284 ISSN 2195-1292 (electronic) Lecture Notes in Energy ISBN 978-3-030-43224-9 ISBN 978-3-030-43225-6 (eBook) https://doi.org/10.1007/978-3-030-43225-6 © Springer Nature Switzerland AG 2020 This work is subject to copyright. All rights are reserved by the Publisher, whether the whole or part of the material is concerned, specifically the rights of translation, reprinting, reuse of illustrations, recitation, broadcasting, reproduction on microfilms or in any other physical way, and transmission or information storage and retrieval, electronic adaptation, computer software, or by similar or dissimilar methodology now known or hereafter developed. The use of general descriptive names, registered names, trademarks, service marks, etc. in this publication does not imply, even in the absence of a specific statement, that such names are exempt from the relevant protective laws and regulations and therefore free for general use. The publisher, the authors and the editors are safe to assume that the advice and information in this book are believed to be true and accurate at the date of publication. Neither the publisher nor the authors or the editors give a warranty, expressed or implied, with respect to the material contained herein or for any errors or omissions that may have been made. The publisher remains neutral with regard to jurisdictional claims in published maps and institutional affiliations. This Springer imprint is published by the registered company Springer Nature Switzerland AG The registered company address is: Gewerbestrasse 11, 6330 Cham, Switzerland

Dedicated to my mentors, Nicholas Georgescu-Roegen and Frederick Soddy

Foreword

Professor Mayumi has dedicated this excellent book to his two mentors, Nicholas Georgescu-Roegen and Frederick Soddy. These two brilliant, but neglected, thinkers are also my main mentors. So it is a special pleasure to write a Foreword to Prof. Mayumi’s penetrating and scholarly continuation of the fundamental contributions of the two main teachers we have each independently chosen to follow. We both think that their complementary analyses provide the best basis for understanding and for overcoming the looming bioeconomic crisis—a crisis that the world has already begun to experience— that standard economists fail to recognize. Soddy was a Nobel Laureate in Chemistry who realized that fiat money, a magnitude which uniquely does not obey either the first or second laws of thermodynamics, is a danger to the economy and the world for precisely that reason. Georgescu-Roegen was an economist who saw beyond monetary values to the biophysical foundations of wealth and scarcity, to the thermodynamic roots and limits that were and still are roundly ignored by modern neoclassical economists. Soddy stated the problem succinctly: “You cannot permanently pit an absurd human convention, such as the spontaneous increment of debt [compound interest], against the natural law of the spontaneous decrement of wealth [entropy]” [Cartesian Economics]

Professor Mayumi investigates in detail the reasons for and consequences of the spontaneous increment of debt, both in general and in specific sectors of the economy such as pension systems, government budgets, and the displacement of real production in major corporations by the virtual wealth of money and finance. Energy, agriculture, fisheries, and forestry, offer examples of ignoring the spontaneous decrement of physical wealth by entropy. Claims on future wealth grow while the ability to produce and maintain future wealth declines. Mayumi considers policies for paying down the debt in a way that limits the monetary liens against real wealth to the amount of future wealth that can actually exist. This would avoid a financial crash and ensuing economic collapse.

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Adding to this basic contradiction is the current Japanese problem of population decline and the resulting shift in age structure toward the elderly, which Mayumi discusses in detail. Since no population can continue to grow forever in order to maintain the youthful age pyramid assumed by many retirement and social security systems, all countries will eventually have to adjust these institutions to the older age distribution required by a stationary population with low death rates. In the face of population decline, this adjustment must be greater, even as the birth and death rates are gradually brought back into equality. Mayumi’s analysis of Japan’s demographic experience and the changing ratio of endosomatic capital (people) relative to exosomatic capital (physical structures), therefore, has bioeconomic lessons for the rest of the world. This book combines theoretical exposition of scientific and economic principles with their concrete institutional implications, including for specific institutions in basic sectors of the economy, especially the Japanese economy. The impressive breadth and depth of the book require that it should be read with elbows on the desk and the TV turned off. This is a book that demands, and richly repays, careful reading. Grateful thanks to Prof. Mayumi for the years of study and hard work that have enabled him to make this important and unifying contribution to bioeconomics, monetary economics, and ecological economics. I think our shared mentors would both be very pleased with this book! Herman Daly Emeritus Professor, School of Public Policy University of Maryland College Park, USA

Acknowledgements

This book is dedicated to my two mentors, Nicholas Georgescu-Roegen and Frederick Soddy. Nicholas Georgescu-Roegen was my supervisor at Vanderbilt University from 1984 through 1988. I am fortunate and privileged enough to have been guided, even now, by his works, works that have always inspired my research in new directions. Frederick Soddy, another giant, is my spiritual teacher. I did not had any chance to be directly guided by Soddy since Soddy passed away in 1956 when I was two years old in Japan. What Soddy’s work astonishes me most by is not his brilliant work in the natural sciences, but his monumental work on the role of money. His work on money was ridiculed by many contemporary economists of his time, excepting, perhaps, by Frank Knight and certain economists of the University of Chicago in the 1930s. In fact, Frank Knight was the influential figure behind the proposal of the Chicago Plan in which a 100% money reserve of checking accounts was proposed to the then president, Franklin D. Roosevelt. The Chicago Plan was based on Soddy’s ideas about the role of money. This book is intended to be a sincere dedication to my mentors, Georgescu-Roegen and Soddy. Professor Herman E. Daly at the School of Public Policy of the University of Maryland has kindly agreed to write a foreword to this book. Professor Daly’s 1980 paper, ‘The Economic Thought of Frederick Soddy’, published in History of Political Economy, aroused my vigorous interest in Soddy’s profound work on money. I believe that Prof. Daly’s foreword and my book are jointly dedicated to our common mentors, Georgescu-Roegen and Soddy. It is my great pleasure to have worked, for almost thirty years with Prof. Mario Giampietro of the Autonomous University of Barcelona. His deep understanding of chemistry, biology, and complex systems thinking, as well as of socioeconomic problems, has always been my intellectual source of inspiration for new ways of thinking. It is none other than Prof. Giampietro who suggested me to investigate the nature of money and capital, shortly after the economic downturn precipitated by the Lehman Brothers bankruptcy in 2008. The origin of money interest in terms of a distinction between functional components and structural components developed in Chap. 4 of this book was based on an idea jointly created with Prof. Giampietro in the book The Biofuel Delusion, published in 2009. Professor Giampietro kindly ix

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gave me the permission to reproduce, in Chap. 3 of this book certain parts of our joint work, ‘Toward Partial Redirection of Energy Policy for Responsible Development’, published in UHE Working Paper 2014. I would like to express my deep intellectual debt to Prof. Giampietro. Professor S. Funtowicz, Prof. M. Giampietro, Prof. J.M. Gowdy, and Prof. J.A. Tainter have kindly agreed to write an endorsement for this book. I very much appreciate the moral support and encouragement that they gave me over the course of my entire research carrier. During the whole period of preparing the present book, two young friends of mine, Prof. John M. Polimeni of the Albany College of Pharmacy and Health Sciences, and Prof. Jesus Ramos-Martin, Rector of the Universidad Regional Amazónica Ikiam, have been kind enough to provide me with necessary data sources, as well as other information that has been absolutely necessary for the writing of this book. I appreciate their great help and friendship. I would like to express my sincere thanks to Prof. Don Sturge of Tokushima University for his tremendous help in the processing of this book’s original proposal to Springer and in checking the language in Chaps. 1 and 2. I would like to express my deep gratitude to Dr. Ansel Renner of the Autonomous University of Barcelona for his precious help in not only checking the whole book manuscript twice but also improving the book structure, as well as stylistic form. Ansel has also provided me with a certain number of useful ideas which I was not familiar with. Without his tremendous help, this book could have never been completed. I am deeply grateful to Dr. Samuele Lo Piano at School of the Built Environment of the University of Reading who gave me permission to reproduce a part of our joint work with two figures and a table used in Chap. 3. Dr. Lo Piano also has allowed me to use in Chap. 3 the materials of our 2017 joint paper published in Applied Energy. His generosity and friendship have been a great fortune to me. I would like to express my sincere thanks to Prof. Hasegawa of Kyoto University, Emeritus, my former supervisor at the Department of Applied Mathematics and Physics of Kyoto University, for his continuous moral support and encouragement from heaven. Former Prof. Hiroaki Koide of Kyoto University Reactor Research Institute generously allowed the author to get access to many important works he accomplished thus far, in particular, a detailed study he presented in Saga Prefecture in 2005, Japan. Professor Koide also allowed the author to use any of his materials including Fig. 2.10 presented in this book. Professor Miroru Sasaki of Ibaraki University has always been very kind in giving proper instructions concerning computer programming and related materials. I have used certain data from the public domain of the following Japanese ministries, agencies, and institutions: (i) the Agency for Natural Resources and Energy https://www.enecho.meti.go.jp; (ii) the Cabinet Office https://www.cao.go. jp/index-e.html; (iii) the Cabinet Secretariat https://www.cas.go.jp/; (iv) the Japan Science and Technology Agency https://www.jst.go.jp/; (v) the Ministry of Agriculture, Forestry and Fisheries http://www.maff.go.jp; (vi) the Ministry of

Acknowledgements

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Economy, Trade and Industry https://www.meti.go.jp/; (vii) the Ministry of Finance https://www.mof.go.jp; (viii) the Ministry of Health, Labour and Welfare https://www.mhlw.go.jp; (ix) the Ministry of Internal Affairs and Communications http://www.soumu.go.jp/; (x) the Ministry of Land, Infrastructure, Transport and Tourism http://www.mlit.go.jp/; (xi) the Ministry of the Environment https://www. env.go.jp; (xii) the National Institute of Population and Social Security Research www.ipss.go.jp; (xiii) the Portal Site of Official Statistics of Japan https://www. e-stat.go.jp/; (xiv) the Statistics Bureau of Japan https://www.stat.go.jp/; (xv) the Bank of Japan http://www.boj.or.jp/statistics/index.htm/; and (xvi) the Japan Institute for Labour Policy and Training https://www.jil.go.jp/. Unless otherwise explicitly stated, no direct references are put in the reference section concerning the data I have utilized from these public domains. I would also like to express my deep appreciation—for giving me information on necessary data and literature, as well as moral support—to many other friends and acquantances: Malin Forsberg, Kyosuke Fujita, Silvio Funtowicz, Tiziano Gomiero, John M. Gowdy, Wataru Hasegawa, Naoto Hiraoka, Toshihide Ibaraki, Kazuyuki Ishida, Hong Seung Ko, Kengo Matsui, Hideo Miyahara, Shunsuke Managi, Karachepone Ninan, Shozo Naito, Shojiro Nishio, Akihiro Sakai, Shinya Sameshima, James Scruton, Hideo Shingu, Roger Strand, Yoshiki Takaoka, Kensuke Tanaka, Hiroki Tanikawa, Satoko Toda, Raúl Velasco, Tiansong Wang, and Masaru Yamamoto. I would like to express sincere thanks to Prof. Wataru Suzuki of Gakushuin University and Mr. Hideki Nakayama of Toyo Keizai Inc. for giving me permission to reproduce the data presented in Fig. 9.6 of Chap. 9 in the book from Prof. Suzuki’s book, a citation for which is included in the reference section of this book. I would like to emphasize that all the responsibility for the way in which I have taken advice and criticism into consideration remains solely with me. I would like to thank Anthony Doyle, Saranya Kalidoss, and Janet Sterritt-Brunner at Springer for their great help at various stages of writing this book. In particular, Anthony Doyle’s encouragement to write this book is very much appreciated. This book contains some revised versions of previously published papers. Permission to reproduce the materials published in the following articles was granted by Elsevier Science, Routledge, and Autonomous University of Barcelona. 1. Mayumi, K. (1991) ‘Temporary emancipation from land: from the industrial revolution to the present time’, Ecological Economics 4: 35–56. 2. Mayumi, K. and Giampietro, M. (2014) ‘Toward partial redirection of energy policy for responsible development’, Unitat d’Història Econòmica, UHE Working Paper 2014_01: 1–15. 3. Lo Piano, S and Mayumi, K. (2017) ‘Toward an integrated assessment of the performance of photovoltaic power stations for electricity generation’, Applied Energy 186: 167–174.

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4. Mayumi, K. T. (2019) ‘Money, credit and interest in light of unconventional perspective’, in F. E. Cante and W. T. Torres (eds) Nonviolent Political Economy, London: Routledge, 27–44. Before this book will come off the press, I will retire from Tokushima University after 27 years of service and then work for the following institution starting April 2020: The Kyoto College of Graduate Studies for Informatics, 7 Tanakamonzen-cho, Sakyo-ku, Kyoto 606-8225 Japan, [email protected].

Endorsements

Four Book Blurbs “This book is not only timely and necessary, it is also courageous. Kozo Mayumi is not afraid to discuss the uncomfortable facts concerning humanity’s huge challenges ahead, and to propose sensible and practical steps to address them. Although focussed on Japan, the text has nevertheless universal relevance. Complex and rigorous, the book is also recommended and accessible to a broad non-expert audience. Kozo Mayumi has shown us that, reason and technical knowledge can be reconciled with passion and human values.” —Silvio Funtowicz, The Centre for the Study of the Sciences and the Humanities, University of Bergen “It is impossible to talk about this book without talking first about its author. Kozo Mayumi is a unique scientist and only he could write this groundbreaking book. He is a guru in economic theory, but critical with most of it. He is also a fine mathematician, but abhors complicated models (what he calls “formalism non-sense”). He is a leading expert in the application of thermodynamics to the field of sustainability, but does not believe in biophysical determinism. Despite his 30 years of active involvement in the academic arena of Ecological Economics, he managed to maintain his integrity and austerity and his transdisciplinary vision on academics, filtering policy legends, ideologies, and granfalloons (respecting the Buddhist rule “avoid frivolous talks”). This book reflects his lifelong strategy in academics. It presents an extremely sophisticated analysis based on financial, economic, demographic, and biophysical considerations complemented by commonsense. With the innocence earned in a life spent as “academic outsider”, Kozo Mayumi cries “the king is naked” not only in relation to the unsustainability of the existing pattern of economic growth but also in relation to the inadequacy of the scientific information currently used to inform policy. He aptly uses the situation in his home country, Japan, as a metaphor to provide insights in the evolutionary trajectory of capitalist economies in the third millennium. In spite of its scientific sophistication, the book

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is easy to read and extremely instructive for those tired of the vacuous universe of “frivolity” in sustainability analyses.” —Mario Giampietro, ICREA Research Professor, Institute of Environmental Science and Technology, Autonomous University of Barcelona “Professor Mayumi’s work is a welcome relief from the usual “nothing to worry about” commentaries on resource scarcity and social conflict. He provides a solid theoretical analysis of the relationship between the energy/material basis for economic growth, and the global economy’s intensifying class struggles and international conflicts. His theoretical analysis is enriched by concrete examples and policy recommendations for Japan, the country at the forefront of the coming era of a new no-growth, shrinking population, and resource constrained world.” —John Gowdy, Professor of Economics Emeritus, Rensselaer Polytechnic Institute “There is no work in economics quite like Sustainable Energy and Economics in an Aging Population. Grounded in energy and ecological economics, and extensively researched, the book ranges across epistemology, demography, infrastructure, debt, interest, energy, natural resources, pensions, health care, and thermodynamics. Kozo Mayumi applies his analyses to contemporary and future problems in Japan, especially the challenge of an aging and declining population. Mayumi concludes his work with a set of proposed solutions that all Japanese policy makers should consider. Beyond Japan, this book will reward all who read it.” —Joseph Tainter, Author of The Collapse of Complex Societies

Contents

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Introduction: ‘Paradigm Is a Tacit Agreement not to Ask Certain Questions’ (Allen 2003) . . . . . . . . . . . . . . . . . . . . . . References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Scarcity, Promethean Technology, and Future Perspectives for Fossil Fuels and Uranium . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.2 Reconsidering the Meaning of Scarcity for Sustainability . . . . 2.2.1 Reconsidering Scarcity in Relation to Limitless Wants . 2.2.2 Reconsidering Scarcity in Relation to Resource Substation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.2.3 Reconsidering Scarcity in Relation to Inter-generational and Intra-generational Equity . . . . . . . . . . . . . . . . . . . 2.3 Energy Transformation, Promethean Technology and Reexamining the Transition of Energy and Materials During the Industrial Revolution . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.4 Coal, Oil, Natural Gas and Aviation Fuel: The Present Situation and Future Perspectives . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.4.1 Coal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.4.2 Oil . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.4.3 Natural Gas . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.4.4 Aviation Fuel . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.4.5 The Future Perspectives for Shale Gas and Methane Hydrates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.5 Uranium and Nuclear Technology . . . . . . . . . . . . . . . . . . . . . 2.6 Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

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Credibility of Scientific Analysis, and Assessment of PV Systems and Ethanol Production . . . . . . . . . . . . . . . . . . . 3.1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.2 MuSIASEM Applied to the Evaluation of PV Systems . . . . . . 3.3 Large-Scale Ethanol Production from Corn and Sugarcane Reconsidered: The Case of the United States and Brazil . . . . . 3.4 Scientific Analysis and Assessment in the Era of Post-normal Science . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.5 Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Beyond the Conventional View: Reconsidering Money, Credit and Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.2 The Myth of Barter, Money and Credit . . . . . . . . . . . . . . . 4.3 The Origin of Money Interest from the Perspective of Structural and Functional Decay . . . . . . . . . . . . . . . . . . 4.4 Debt Creation and Control: Miscellaneous Problems . . . . . . 4.5 Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

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Capital Interest, the Financial Sector and Debt Expansion: Toward a More Sustainable and Equitable World Order . . . . 5.1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.2 The Origin of Capital Interest: An Alternative Theory . . . . 5.3 Capital Interest: Forward-Looking Is Essential . . . . . . . . . . 5.4 The Financial Sector of Certain Manufacturing Companies: A Lucrative Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.5 The World Bank and the International Monetary Fund Reexamined . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.6 Running Solvency World: Who Can Create Debt? . . . . . . . 5.7 Expansion of General Liquidity and the Unavoidable Repetition of Financial Instability . . . . . . . . . . . . . . . . . . . 5.8 Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

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Aging Population, Vacant Dwellings and the Compatibility Problem Between Human and Exosomatic Populations . . . 6.1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.2 The Aging Population of Japan . . . . . . . . . . . . . . . . . . . 6.3 Vacant Dwellings in Japan . . . . . . . . . . . . . . . . . . . . . . 6.4 Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

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Reconsidering Agriculture, Forestry and Fishery in Japan: Searching for a Responsible Development Pathway . . . . . . 7.1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.2 Reconsidering Agriculture Versus Manufacturing . . . . . . 7.3 Japanese Agriculture and Its Basic Problems . . . . . . . . . 7.4 Japanese Forestry and Its Basic Problems . . . . . . . . . . . . 7.5 Japanese Fishery and Its Basic Problems . . . . . . . . . . . . 7.6 Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

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Budget Deficit Problems and Reexamining Soddy’s Schemes of Compound and Simple Redemption . . . . . . . . . . . . . . . . . . . . 8.1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8.2 The General Principles of Public Budget . . . . . . . . . . . . . . . . 8.3 Budget Deficit Problems of Japan: Expanding Special Account Budgets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8.4 Outstanding National Bond Problems of Japan . . . . . . . . . . . . 8.5 Reexamining Soddy’s Scheme of Virtual Capital Redemption . 8.6 Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Collapsing Social Security Systems Medical Care and Elderly Nursing 9.1 Introduction . . . . . . . . . . . . . . 9.2 Japan’s Pension System . . . . . 9.3 Japan’s Medical Care System . 9.4 Japan’s Nursing Care System . 9.5 Conclusion . . . . . . . . . . . . . . . References . . . . . . . . . . . . . . . . . . .

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in Japan: Pensions, Care . . . . . . . . . . . . . . . . . . . . . 189 . . . . . . . . . . . . . . . . . . . . . . . . . 189 . . . . . . . . . . . . . . . . . . . . . . . . . 191 . . . . . . . . . . . . . . . . . . . . . . . . . 197 . . . . . . . . . . . . . . . . . . . . . . . . . 199 . . . . . . . . . . . . . . . . . . . . . . . . . 202 . . . . . . . . . . . . . . . . . . . . . . . . . 205

10 Conclusion: An Alternative Vision for the Future of Japan and the World . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 207 References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 213 Index . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 215

Chapter 1

Introduction: ‘Paradigm Is a Tacit Agreement not to Ask Certain Questions’ (Allen 2003)

The definition of paradigm, offered by the great biological theorist of complexity Timothy Allen and reproduced in the title of this introduction, is apt in the context of reconsidering sustainable energy and economic policy. Today, many policy makers seem to idolatrously believe in a well-established narrative influenced by the conventional form of scientific investigation. Their narrative holds that alternative ‘clean’ primary energy sources (PES) will easily replace fossil energy and sustain the consumption patterns of modern societies. They believe that ‘clean’ alternatives will mitigate climate change and prevent monetary systems from entering into ‘running solvency’—a precarious state—in which total capital assets just barely exceed total liability. As a result of this shared narrative, researchers, authorized by the policy makers’ acceptance, are enabled to ignore disturbing voices and alternative points of view, whenever those points of view are not compatible with their scientific orthodoxy. In this way, the allegiance to a given paradigm serves as an intellectual wall that effectively filters out unpleasant information and legitimate contrasting perspectives. Reliance on well-established but flawed paradigms is not restricted to the present day. Years ago, Nicholas Georgescu-Roegen and Frederick Soddy challenged well-established paradigms otherwise appreciated by contemporary researchers of their time. Georgescu-Roegen was against the Newtonian mechanistic epistemology of conventional economics—the epistemology stating that the economic process is reversible. Instead, Georgescu-Roegen proposed an entirely different theoretical edifice in which the second law of thermodynamics represented the essence of the irreversibility of the economic process (Georgescu-Roegen 1971). While certain natural scientists strongly endorsed his ideas (e.g. Cloud 1977; Avery 2015), GeorgescuRoegen’s ideas were ignored by conventional economists, those who simply could not appreciate their importance. Georgescu-Roegen also emphasized the importance of mineral resources and their indispensable role in the construction of every type of durable material structure in the economy. To pay belated homage to his contribution, in this book, all durable things are proposed to be termed as exosomatic population. In this way, the population of durable things is distinguished from the human population. If the stock size of a created exosomatic population (the population which © Springer Nature Switzerland AG 2020 K. T. Mayumi, Sustainable Energy and Economics in an Aging Population, Lecture Notes in Energy 76, https://doi.org/10.1007/978-3-030-43225-6_1

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includes, for example, highways, bridges and railways), becomes large enough, a relatively huge amount of energy and mineral resources must be allocated for maintenance purposes. It is then also concerning to point out that, exosomatic population is either very difficult or nearly impossible to transform directly into goods for immediate consumption (Soddy 1926). Thus, in a stable society, exosomatic population should be compatible in size and structure with human population. Systematically extending ideas of Lotka (1956) and Russell (1927), GeorgescuRoegen made a number of observations that prove quite important for both the economy of his day as well as the economy of the present day (Georgescu-Roegen 1977). Following Lotka and Russell, Georgescu-Roegen noticed: (i) humans plays a crucial role in using fossil fuels to manufacture exosomatic population; and (ii) humans act as a sort of geological transformation agent that, in the words of Russell, ‘transforms the surface of the globe by irrigation, cultivation, mining, quarrying, making canals and railways’ (Russell 1927, p. 30) so as to ‘transform as much as possible of the matter on Earth’s surface into human bodies’ (Russell 1927, p. 31). In addition to these two observations, Georgescu-Roegen saw three crucial predicaments not seriously considered by conventional economics. These three predicaments should be understood as, bioeconomic predicaments of global significance, and they will remain relevant as long as humans maintain an exosomatic mode of existence. In no particular order: 1. The energy and mineral resources predicament—a predicament referring to the human addiction to energy and minerals, two resources that, provide unprecedented comfort. 2. The class struggle predicament—a predicament referring to the social class struggle resulting from skewed access to goods, services and wealth. 3. The international conflict predicament—a predicament referring to the eternal conflict among nations as they each demand ever greater shares of fossil fuels and mineral resources for themselves. Complementing the wisdom of Georgescu-Roegen was Soddy. Soddy was the 1921 Nobel prize winner in chemistry, having been awarded for this discovery of isotopes in relation to radioactive decay, i.e. an atomic transmutation. In addition to his work in the field of radiochemistry, Soddy, like Georgescu-Roegen, expressed strong views that economic activities have a biophysical foundation. Perhaps, among ecological economists, Daly (1980) is the first scholar to examine Soddy’s profound work on the physical basis of economics and the role of money in the economy (Daly 1980). He examined it brilliantly. Soddy made unique contributions regarding the role of money and the defect of banking systems, advocating for attention to be paid to a money and banking system predicament. Economists of the time mocked Soddy’s analysis. For example, the economic historian Henry Higgs, who oversaw the new edition of Palgrave’s Dictionary of Political Economy in the 1920s, reviewed Soddy’s Cartesian Economics: The Bearing of Physical Science upon State Stewardship in the Economic Journal, and wrote: ‘it is sad to see so distinguished a physicist transformed into a pitiable purveyor of economics fallacies’ (Higgs 1923,

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p. 101). Higgs perhaps could not understand the biophysical basis of economic systems, so beautifully described by Soddy in Cartesian Economics. In what would perhaps have been surprising to Higgs, Soddy’s recommendations to abandon the gold standard and introduce the flexible exchange rates are now in effect. It is, in fact, not well known that the ideas of the Chicago economists on banking reform in the early 1930s were heavily influenced by Soddy’s proposal of a 100% reserve for demand deposits. Phillips explicitly states ‘Knight agreed with Soddy that the fractional reserve banking system raised the price level and created a potentially unstable situation’ (Phillips 1995, p. 46). In fact, in the face of the widespread banking holidays following the 1929 crisis, eight Chicago economists, including Knight, prepared a six-page memorandum on banking reform that was to provide a long-term solution to the banking problem. Many of Soddy’s original ideas were reflected in that memorandum. Unfortunately, the plan was never implemented. Despite their great contributions to energy, mineral resources and money, neither Georgescu-Roegen nor Soddy could envision how novel predicaments such as an ageing population and budget deficit would ultimately affect developed societies. Rapid economic development in modern societies is due to the use of high-quality fossil fuels and money systems that promote business activities via large-scale economic transactions and speedy worldwide capital formations. The inseparable driving wheels1 of fossil fuels and money are crucial in accelerating an additional four formidable predicaments: 1. The demographic predicament—a predicament referring to shrinking population size and related inverted population pyramids, due to a high material standard of living, sufficient medical care and drastic change in human time allocation, in addition to increasing late marriage and decreasing new-born babies. 2. The industrial structure predicament—a predicament referring to a rapid shift in industrial structure towards, an increase in the secondary and tertiary industries and a decrease in primary industry employment. The shift in question is accompanied by employee ageing and is due in part to, easy capital transfer and easy labor replacement thanks to the worldwide transportation network and information technology. During this rapid structural shift, the most important sector for sustainability (agriculture, forestry and fishery, besides energy and mining sectors) is losing long-term biological productivity and stability in association with net primary production activity on Earth. 3. The budget deficit predicament—a predicament referring to the issuing of public bonds to cope with persistent budget deficit, putting developed societies into a sort of running solvency situation together with heavy interest payments. 4. The social security predicament—a predicament referring to the imminent collapse of social security systems due to a decreasing economically active population accompanied by sluggish GDP growth. I argue that these four predicaments are the inevitable consequences of both the superiority of fossil fuels, and of money and money substitutes. N.B. Money refers to M1 money stock and encompasses physical currency and coin, demand deposits,

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traveler’s checks and other checkable deposits. Money substitutes, on the other hand, refer to all other monetary assets exchangeable in the market2 . Japan provides a striking example of the inevitable predicaments created, primarily by fossil fuels and money. Between 1980 and 2010, the number of newborn babies in Japan reduced substantially from about 1.58 million capita to 1.07 million capita (a 32% decrease in 30 years). During that same time period, total population increased. However, since the year 2010 or so, the population of Japan has been in steady decline. It seems that unless drastic measures are introduced, population decline will continue. Illustrating the point, the population size of 2010 was reported to be about 128 million capita. The National Institute of Population and Social Security predicts that the Japanese population will fall to roughly 90.2 million capita in 2060, 30% down from its 2010 level. While population size in itself is an important driver of demographic problems in any country, population structure is more crucial than population size in the case of Japan. The percentage of the population represented by individuals over 60-years of age in Japan increased dramatically from 12.9% in 1990 to 30.7% in 2010. Consequently, current social security systems are in grave danger. The population of individuals over 75-years of age will likely increase, in relative terms, from 12.8% in 2016 to 25.7% in 2060, despite the fact that the total population size in 2060 is predicted to have decreased by more than 29% in comparison to the 2016 level. Colin Grant Clark once developed a theory of industrial structural change associated with economic development. His theory comes in handy in conceptualizing demographic changes such as those currently observed in Japan. Clark’s theory claims as its basis ‘W. Petty’s law’ (Clark 1940)3 , the law which associates economic progress with the transfer of the workforce from primary industry to secondary and tertiary industries. Clark’s theory and W. Petty’s law observe that workforce movement is usually accompanied by a positive correlation between a higher average level of real income per capita and a higher proportion of the workforce in secondary and tertiary industries. To confirm Clark’s theory, let us start by remarking that the number of Japanese workers in primary industry in 1952 was more than 16 million capita, a total which represented 46% of the 1952 workforce. However, by 1980, the percentage of primary industry workers dropped to just 10%. In 2010, the workforce share reduced further to 4%. Moreover, primary industry’s share of GDP reduced from 3.16% in 1980 to 1.2% in 2010. The population aged between 15 and 64 years in Japan, a proxy of the workforce, experienced a steady decline between the years 1996 and 2015. Specifically, it declined from about 87 million capita, perhaps the largest number in Japanese history, to about 76 million capita. Accordingly, the average annual GDP growth rate over that 20-year period—less than 1%— was not rosy. Due to said great lack of GDP growth, tax revenues accounted for slightly over 55% of the general budget expenditure in an impressive six of the twenty years ranging 1996–2015. The Japanese government had already started issuing national bonds to supplement tax revenue. In 1998, outstanding national bonds amounted to JP¥295 trillion (US$2.95trillion at JP¥100 per US$1). Furthermore, the outstanding national bond amount increased to

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roughly JP¥902 trillion in 2015. In addition to the bond issue, the total amount of borrowed money from private banks, short-term government securities and governmentguaranteed bonds reached more than JP¥200 trillion in 2015. In the general budget in 2018, the budget size was about JP¥98 trillion where total tax revenue was only JP¥59 trillion. At the same time, the social security and the national bond interest payment jointly amounted to JP¥56 trillion. The situation described by such numbers shows that the expenditure for social security and interest payment was nearly equal to tax revenue, meaning that there was insufficient tax revenue left for other categories of expenditure unless national bonds were issued. In reality, Japan is in a condition properly termed running insolvency, not running solvency. Before presenting the content of each chapter and embarking on this book’s journey, it is worthwhile to consider the double-edged nature of fossil fuels and money, the proper understanding of which is necessary to grasp the whole entirety of the ideas and motivations behind this book. By double-edged nature, I mean to say that two related edges act in two distinct ways—a first, one acting in a positive fashion and subsequent one acting in a negative fashion. The double-edged nature of fossil fuels and money is an inseparable pair of driving wheels which plays a crucial role in accelerating the four formidable predicaments previously mentioned. Let’s first discuss the nature of fossil fuels in the double-edge of fossil fuels and money. There are three severe limitations related to expanding production scale in traditional agricultural society: (i) low land productivity; (ii) waiting time, required to accommodate natural cycles; and (iii) insufficient motive power, required for moving and transporting materials and humans. First of all, the most severe constraint in traditional agricultural society is low land productivity. This statement is true since: (i) land receives solar energy at a rate that humans cannot freely manipulate; and (ii) land grows agricultural products through photosynthesis. In fact, net primary production (NPP), the master ‘food’ resource here on Earth, provides a basis for the maintenance, growth, and reproduction of all heterotrophs (Vitousek et al. 1986). If the primary objective of economic activity is to preserve the human species, as Georgescu-Roegen believed was the case (Georgescu-Roegen 1971), purely biological products supplied in the form of NPP are inextricably indispensable for sustainability. More serious attention to the basic sectors related to biological production, sectors such as agriculture, forestry and fishery, must be reconsidered. Unfortunately, conventional economists, perhaps who are preoccupied mainly with the monetary valuation of GDP and who do not realize the biophysical foundation of economics do not seem to appreciate the importance of agriculture, forestry and fishery and the close relation between those sectors, NPP and the climate change debate. For example, Nordhaus paints a rosy picture of technological innovation and the market mechanism in his now famous statement that ‘ninety percent of U.S. economic activity has no interaction with the ecological changes. Agriculture, the part of the economy that is sensitive to climate change, accounts for just 3% of national output. That means there is no way to get a very large effect on the U.S. economy’ (reported in Roberts 1991, p. 1206). For Nordhaus, only

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Table 1.1 The mileage covered by five means of domestic transportation 1965–2015: compiled from the data in EDMC (2018) Year

AASK

PTK

TTK

TK

PCK

1965

4,954

4,279

4,112

47,259

39,902

1970

12,362

5,292

4,143

102,844

145,352

1975

31,328

5,879

2,951

100,430

191,851

1980

45,844

6,221

2,160

143,792

249,905

1985

55,808

6,113

1,169

179,522

280,713

1990

70,843

7,176

1,483

226,064

353,513

1995

107,081

7,679

1,162

230,713

492,357

2000

126,077

7,761

1,162

230,713

492,357

2005

129,464

8,150

1,190

215,972

506,538

2010

115,749

8,304

1,067

204,923

503,063

2015

129,814

8,542

1,109

201,294

519,825

Million kilometers AASK (Available Airplane Seat-Kilometers); PTK (Passenger Train-Kilometers); TTK (Tonnage Train-Kilometers); TK (Truck-Kilometers); PCK (Passenger Car-Kilometers)

money matters. On the other hand, the ecologists Matthews and Lubchenco properly argue that the panel of U.S. National Academy of Science ‘underestimates the extent to which human economic activity is dependent on natural systems’ (reported in Roberts 1991, p. 1206). In fact, the scale of NPP is heavily constrained by the low productivity of land and based on solar energy, a constraint that is fully maintained unless additional production factors such as machines, fertilizers, pesticides are systematically introduced. Secondly, due to dramatic changes in mechanized agricultural production (in particular in the United States), it may be easy to forget that people must wait for the duration in which natural cycles work in order to produce NPP. As Adam Smith keenly noted, ‘in agriculture too nature labours along with man [….] a great part of the work always remains to be done by [nature]’ (Smith 1976, p. 363). Nature dictates when an agricultural production must start if it is to be successful. Therefore, reducing waiting time is crucial in order to expand agricultural production. Lastly, agricultural operations performed by humans and livestock in traditional society consist mostly of moving and transporting materials. However, the scale of transportation by humans and livestock is not sufficient for the realization of a tremendous expansion of agricultural production unless an alternative additional mechanism is available. In an attempt to understand the development of transportation in Japan in recent decades, Table 1.1 summarizes in quantitative terms the mileage covered by five means of domestic transportation between 1965 and 2015. The following abbreviations are used: (i) AASK (available airline seat-kilometers); (ii) PTK (passenger train-kilometers); (iii) TTK (tonnage train-kilometers); (iv) TK (truck-kilometers);

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and (v) PCK (passenger car-kilometers). AASK refers to mileage covered multiplied by the number of seats actually occupied by passengers. AASK counts only scheduled domestic passenger transportation by airplanes. Adding in both domestic and international air cargo transportation as well as international passenger air transportation, the actual kilometers for airplane transportation must be much larger than the AASK figures provided in Table 1.1. PKT and TTK represent the mileage covered by trains multiplied by the number of coaches in each train. TK and PCK represent the mileage covered by trucks and passenger cars, respectively. It should be noted that Table 1.1 does not represent the precise mileage measure for the five means of transportation analyzed. Still, the history of Japan’s domestic transportation post-1965 can, nevertheless, be identified therein: 1. The major structural changes in Japan’s transportation system started post-1990. AASK and PCK began dramatically increasing post-1990. In fact, the mileage covered by each of AASK, PCK and TK in 1965 is negligible in comparison with their respective corresponding mileages in 2015. 2. PTK in 2015 increased by only 99% compared with 1965 levels. In relative terms, this increase is minor compared with the increases in ASSK, TK and PCK. 3. Train as a means of transportation (TTK) has been drastically replaced by the automobile starting in the 1970s. TK and PCK in 2015 have become, respectively, two times, and three and a half times as many kilometers as TK and PCK in 1970. In fact, TTK in 2015 was just 27% of its 1965 level. 4. Aircraft transportation (AASK) in 2015 was more than ten times AASK in 1970. Large-scale aircraft transportation phenomena seem to have started in the 1990s. Table 1.1 clearly supports the idea that, without fossil fuels, the motive basis of modern civilization, large-scale production and consumption patterns can never hope to be accomplished. Fossil fuels are contributions formed by the remains of plants and aquatic planktons, organisms that perished millions of years ago over vast stretches of land and over the course of many years. Fossil fuels all but guarantee the essential merits of modern industry, i.e. land and time-saving. In this way, the modern industrial society has successfully overcome the three previously listed severe constraints typically observed in traditional agricultural society, i.e. low land productivity, waiting-time and insufficient motive power. Manufacturing processes considerably liberate themselves from natural cycles, e.g. the diurnal cycle, seasonal differences, changes in climatic conditions, the rhythm of the food chain, and interactions between water and soil. They thereby manifest themselves as artificial processes. By liberating themselves from natural cycles, manufacturing processes can produce goods at a much higher rate in comparison with traditional agriculture, both in terms of scale and variety. Indeed, manufacturing processes are typically made to be independent of soil fertility. In this way, the amount of production per unit of area can be raised dramatically, thus reducing land requirements and realizing a land-saving in the economy. Metaphorically speaking, humans are in a condition that can be described as a temporary emancipation from land (Mayumi 1991). Mechanical power supported by a large-scale consumption of fossil fuels replaces many types of manual labor, thereby creating a drastic change in

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human time allocation, in particular, mechanical power realizes a major increase in leisure time. Take mechanical agriculture in the United States, for example, an interesting case capable of illustrating just how drastic changes in human time allocation can be. In 1994, in the United States, on average and at an aggregate level, less than three minutes out of every 24 h were spent in the agricultural sector (Giampietro 2003)! The modern high material standard of living, combined with a sufficient level of social security and medical care systems and, supported by a large-scale consumption of fossil fuels replaces, guarantees shorter labor hours and a longer lifespan. Accordingly, population size should be expected to dramatically increase for a time, all the while without substantial changes in population structure being realized. After a period, once the majority of the young population is able to enter into expensive education systems, a considerable portion of the younger population either remain unmarried or marry late in life. In Japan, in comparison with other developed countries, maternity care is not well organized. Thus, the number of new-born babies has been steadily decreasing, and the inversion of Japan’s population structure is seen to accelerate. Following this logic, aging population is an inevitable consequence of the land saving and time-saving ability of the modern economy, two abilities due to the large-scale bonanza of fossil fuels. Let’s now discuss the nature of money in the double-edge of fossil fuels and money. According to both recent anthropological work and early twentieth century references on the subject of barter, money and credit (e.g. Graeber 2011; Innes 1913, 1914), money and credit have co-existed since Babylonian time. These statements are contrary to the widely accepted view that barter came first, followed by money and finally credit (e.g., Smith 1976; Samuelson and Nordhaus 2010). Of course, the credit of Babylonian times was not used to promote economic development by way of industrial investment. Rather, credit in Babylonian times was used mainly for the lending of money to people so that those people might maintain their lives. Our present discussion of the role of credit adopts the definition of wealth, capital and credit by Meulen (1917) and Schumpeter (1951). In this sense, wealth is understood as everything with the purchasing power to obtain economic items, including but not limited to land, labor and financial assets. Capital is a type of wealth used in the production of fresh wealth. Credit in itself is neither money nor money substitutes. To obtain purchasing power, a loan is usually arranged to materialize credit, so the borrower of new investment is obliged to properly use the purchasing power of capital. In this sense, credit is an arrangement that productively transforms capital into a new form of wealth. ‘Productively’ in this context means to produce goods and services, not simply to create more money and money substitutes. Therefore, a restriction of credit equals a restriction of industrial development. To repeat, credit should be used either to increase production capacity or to produce more goods and services, not simply to increase financial assets in the form of money and money substitutes. In fact, if properly used, credit is an ingenious arrangement that allows investors to link future economic state with present and past economic states, thereby facilitating further economic development.

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In connection to the idea of credit and the strong incentive to create more money, it is interesting to consider the idea of anticipatory systems. Anticipatory systems were first touched upon by Jevons (1965, the first edition was published in 1871) and later developed more systematically by the theoretical biologist (Rosen 1985). Rosen’s formulation can be related to the addictive desire of issuing more monetary assets, an action which can prove problematic for the whole world at a fundamental level. All dynamical systems depend on their present and past states. However, a truly astonishing ability of humans as anticipatory agents is that they may envision future system states. The behavior of anticipatory agents to change the present state of a system depends on the envisioned future as well, not only on past and present states. This type of system—an anticipatory system—has been excluded from system theory, a fact which is understandable since anticipatory behaviors violate the causal foundation of contemporary theoretical science. This exclusion is indeed another side-effect of the fact the final cause has been systematically excluded from contemporary science. In Aristotelian parlance, a final cause is one which involves a purpose or goal. Unfortunately, the process of how anticipatory behaviors are formed within a system, as well as the question of what are the possible future effects of that process on the whole system and each component are, cannot be represented by an arithmomorphic model such as a reactive model4 . If human beings as anticipatory agents can be sure of a continuous abundant supply of fossil fuels, a critical resource needed, to support all industrial systems including financial systems in the future, the aging population problem facing Japan and other developed societies could be mitigated by continuously replacing human activity with mechanical and electrical apparatus. Unfortunately, this is not the case and, the four predicaments—the demographic predicament, the industrial structure predicament, the budget deficit predicament, and the social security predicament— are being realized at this very moment when the outlook for fossil fuel supply looks dim suggested by peak-oil proponents (Vodra 2014). Anticipatory agents constantly try to gain advantage by creating money and money substitutes, assuming circumstances allow. So, anticipatory behavior related to fossil fuels and money tends to destroy the delicate balance between (i) production capacity and the production of goods and services; and (ii) the total stock of money and money substitutes, which is ultimately to be exchanged for goods and services or other forms of wealth. In the context of this discussion, it is most useful to now discuss in closer detail the close relationship between energy and money. Money holds a predominant position over all other things on Earth because money defies the first and the second law of thermodynamics. Defying the first law, money can be created out of nothing and defying the second law, money does not functionally decay within legal and institutional arrangement even though the structure of coin, for example, does decay. Acknowledging the entropy law, apparently anything other than money must decay. In this way, money can increase the original value in the form of interest if time passes. Money is a promise to pay and ultimately used to exchange for goods and services (Wilson 1935). Therefore, every economic unit as an anticipatory agent, either a business entity (for example, a commercial bank) or a political entity (for

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example, the Bank of Japan or the European Central Bank), has a desire to obtain the ability to issue money out of nothing. Such desire and characterization of money can explain the reason why the stock of money and money substitutes always tends to expand, assuming circumstances allow the money issuing entity to do so. Such desire and characterization is the root cause of financial instability inherent to the modern economic system. Nowadays, people benefit from issuing a variety of money substitutes, such as reward cards. People typically do not notice that items such as reward cards are essentially money substitutes. Private minting is allegedly a crime, yet many private economic agents such as banks and financial corporations create money substitutes as financial assets. Unfortunately, many private agents create money substitutes without understanding the ultimate consequence for society as a whole. In fact, paradoxically, at the level of an entire community or the whole world, money and money substitutes are debts. This is true because, ultimately, money and money substitutes are supposed to be exchanged for goods and services in the future. Producing those goods and services is obligatory if money is presented as payment. From the perspectives of natural science, all goods and services are produced at the expense of useful energy and materials: production increases total entropy by a greater amount than that which would result in case of no production5 (GeorgescuRoegen 1971). So, economic production typically entails deficit in biophysical terms since a certain amount of exhaustible resources are irrevocably consumed. Production and consumption prospects for an aging society are not bright if the foundational supply of fossil fuels is insufficient. Aging societies with shrinking workforces will experience serious troubles in increasing GDP without a sufficient supply of energy. Due to population decrease and a related inversion of population structure, GDP growth per capita proves insufficient at the population level. Thus, the governments of aging societies must expand debt in the form of national bonds in order to compensate for decreasing tax revenue. While issuing national bonds increases money stock, it results in more monetary debt. Expenses for pensions, medical care and elderly care steadily increase in aging societies. Because of too much debt creation in terms of the stock of money and money substitutes, managing social security systems becomes troublesome. This trouble is found in the acute case of the pension system of Japan and is due to a trend of decreasing returns on money by which certain parts of the pension system are financially maintained. These problems occur when the fossil fuels supply perspective is not bright, as Simmons (2005) mentions is indeed the current situation in the Middle East, still the world’s most prominent oil-producing region. Lastly, a tremendous further increase in energy demand from China and India—two countries with massive population size—may likely put additional constraints on the oil demand of aging societies. It is crucial to recollect the meaning of double-edged nature of energy, in particular fossil fuels, and money: the two related edges, i.e. fossil fuels and money, act in two distinct ways—a first, one acting in a positive fashion and a subsequent one acting in a negative fashion. Unfortunately, the double-edged nature of fossil fuels and money is now negatively influencing the aging population of Japan in terms of the four bioeconomic predicaments. Expectations of further increase in the material standard of living by continuously reducing labor and land input, which is supposed

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to mitigate the negative effect of the aging population, will not easily be realized as prospects for the supply of fossil fuels are not so bright in the future. This fact will be explained in detail in Chaps. 2 and 3. It must be realized that the proper balance between the production scale of goods and services and the stock of money and money substitutes is being lost because of a disproportionate increase in money and money substitutes, such as national bonds and financial assets, thereby exerting another negative influence in terms of ever-increasing debt and an ever-decreasing trend of interest rates. It should be clear that the double-edged nature of fossil fuels and money is finally working in a negative direction. This book is intended to consider the various problems associated with the four bioeconomic predicaments as they are faced by Japan. It enters that discussion from the viewpoint of energy and economics and does so to provide the reader with an alternative vision towards a more sustainable and equitable world order. The first half of the book, Chaps. 2, 3, 4 and 5, discusses energy and money. The second half of the book, Chaps. 6, 7, 8 and 9, examines the four bioeconomic predicaments, before Chap. 10, the conclusion of the book. Chapter 2 presents various aspects of scarcity, the nature of Promethean technology, and future perspectives for fossil fuels and uranium. Reconsideration is given to three crucial aspects of scarcity originally conceptualized within the framework of conventional economics, i.e. limitless wants compared with limited resources and goods, the substitution concept related to scarcity, and scarcity related to the issue of a fair allocation of resources. The discussion of scarcity is also related to five aspects of the finiteness of resources and environmental constraints for sustainability. A new energy transformation scheme is introduced to deal with the metabolic pattern of society. The new transformation scheme allows a consistent and precise definition of both feasible technology and Promethean technology. A reexamination of future perspectives for coal, oil, natural gas and uranium is conducted. Special attention is also paid to aviation fuel such as aviation gasoline and jet fuels, due to an anticipated future increased demand for that particular variety of fuel. The dream of a nuclear fuel cycle, i.e. transforming uranium-238 into plutonium in a fast breeder reactor, is shown to be a delusion. A brief discussion is provided concerning the prospects of shale gas and methane hydrate as alternative primary energy sources. Chapter 3 makes an assessment of photovoltaic (PV) systems and ethanol production and reexamines the credibility of scientific analysis when applied to energy policy. The Multi-Scale Integrated Analysis of Societal and Ecosystem Metabolism (MuSIASEM) scheme is introduced to assess PV systems of crystalline silicon waferbased solar cells against biophysical, environmental, economic and technological criteria. If electricity generation by first-generation PV systems is significantly scaled up, silver will prove to be a limiting factor for large-scale electricity generation by the current PV systems. There are several bothersome problems associated with large-scale ethanol production from corn (United States) and sugarcane (Brazil). In particular, it is shown that in the case of United States ethanol production, various forms of energy carrier, in addition to corn biomass, are intensively and indirectly used to produce corn-ethanol. A question then immediately emerges: Why do many countries pour an enormous amount of investment into alternative energy carrier

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production systems? Certain reasons explaining why such wasteful investments are being attempted are presented. To better understand the critical situation of our modern society—a situation associated with the nature of scientific analysis and energy assessment, Chap. 3 offers three additional ideas: the idea of ‘granfalloon’ as proposed by Vonnegut (1963), the idea of ‘belief fixation’ as proposed by Peirce (1877) and the idea of ‘post-normal science’ as proposed by Funtowicz and Ravetz (1990). The 2008 Lehman Brothers bankruptcy brought the world to recognize the inherent instability of monetary and financial systems. In this light, it is worthwhile to reconsider various problems associated with money, interest and credit and also worth considering an alternative perspective that has not attracted sufficient attention from conventional economists. Chapter 4 first critically assesses the widely accepted view that there was or naturally is a progressive development from barter to money to credit. It is pointed out that, historically, barter was much rarer than is commonly believed and that the credit system began in the ancient Babylonian times, the inevitable result of unequal exchange, something which requires records of credit and debt arrangement. Chapter 4 then discusses the origin of money interest and the distinction between structural decay and functional decay. It is shown that distinguishing functional decay from material decay offers clues into the emergence of money interest and that if the principal of loan money is allowed to decrease, the total money interest to be paid never exceeds the principal. This idea of decreasing the principal of loan may be applied to the redemption of national bonds. Chapter 4 also demonstrates: (i) any form of promise to pay in the form of general liquidity is an abstract right of demanding future payment from the debtor; (ii) general liquidity has a dual nature that is regarded as a debt communally, and as a form of wealth individually, a dual nature that causes the progressive expansion of debt; and (iii) the deposit system associated with the credit creation mechanism dates back to the idea of mutuum in Roman law, and the proper use of a credit system is exemplified by cash credit in 18th-century Scotland, a system that was based on the idea of accommodation paper. In its conclusion, Chap. 4 also discusses a number of additional important issues related to the points mentioned. Chapter 5 presents issues concerned with capital interest, the financial sector and debt expansion. The origin of capital interest is examined. There are three additional factors of interest in the case of capital interest, i.e. biophysical, monetary and anticipatory factors, factors which cannot be attributed to the case of the origin of money interest. Examination of five theories of capital interest is made before an alternative new theory of capital interest is proposed. Chapter 5 then introduces F. Knight’s analysis of uncertainty. Four forms of uncertainty, i.e. perception, modelling future, effect and implementation, are discussed in relation to the forward-looking nature of humans—a nature that proves to be a, if not the, key element of investment activity. The steady growth in the financial and insurance sector is one of the conspicuous trends in developed society, in particular observable after World War II. A close examination of the balance-sheet of three representative producers, Sony, Toyota and Honda, shows that a considerable part of operating income for those three producers derives from their respective financial business divisions. The balance sheet

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status of each representative producer is discussed in relation to the quantitative easing policy of the Bank of Japan. In addition, Chap. 5 also discusses the role of the World Bank (WB) and the International Monetary Fund (IMF)—two powerful and influential organizations capable of creating a broad world economic policy consensus by way of their system of weighted votes and majority rules. In the context of that discussion, Chap. 5 examines serious debt trap in terms of external debt to national income ratios for three groups of countries. An emerging paradoxical yet inevitable consequence is that the richer a country is, the more that country can borrow and the larger external debt that country can maintain. Ever more debt to the world community results. Identifying who has the right to issue money and money substitutes is the key to understanding this paradox. Chapter 5 discusses the meaning of the Macleod-Soddy-Allais (MSA) relation and follows that discussion with some concluding remarks. The MSA relation represents the theoretical basis for explaining financial instability and the fact that the whole economic system undergoes sporadic yet endlessly repeating financial explosions and ultimate collapses. The long average lifespan in Japan is the most devastating cause of an aging population. Yet, there are other crucial causes that work to accelerate the situation of Japan’s aging population. Chapter 6 considers the socioeconomic factors of the aging population of Japan and the rapid increase of vacant dwellings as a compatibility problem between human population and exosomatic population. Chapter 6 first discusses three crucial drivers of the rapidly aging population in Japan, i.e. late marriage, the decreasing average birth rate and the increasing cost of raising children. A detailed socioeconomic analysis of the decreasing average number of children per married couple is also provided. Because of the aging population structure and the decreasing size of the population, the stable relation between aging human population and exosomatic population is losing its balance. Increasing vacant dwellings is one problem that has been seen to emerge. So, Chap. 6 discusses various socioeconomic issues associated with vacant dwellings in Japan. Three types of vacant dwellings, i.e. vacant rental dwellings, vacant condominiums and vacant private dwellings, are examined together with their associated problems. Among the most crucial issues associated with vacant dwellings is an increasing number of households with only one single elderly and one single elderly couple. Chapter 6 concludes with a discussion of the financial problems of Japan Railway (JR) in the Shikoku and Hokkaido regions. Maintaining a minimum transportation service is necessary for each citizen, yet, due to depopulation and inherent economic disadvantage, the JRs of Shikoku and Hokkaido are in financial trouble. In fact, this problem is nothing but the problem of compatibility between human population and exosomatic population. The conclusion section of Chap. 6 also considers possible ways of mitigating the aging population structure of Japan. The industrial development process is identified with the rapid transfer of the workforce from primary industry, in particular from agriculture, forestry and fishery, to the manufacturing industry and the service sector. This development process was theorized by Clark whose work followed the ideas of Petty’s law. This workforce movement is also accompanied by a lower GDP share in agriculture, forestry and fishery. In fact, these two trends for Japan, i.e. the rapid decrease in workforce

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in agriculture, forestry and fishery, and the lower GDP share of these sectors, are well-known facts. On the other hand, agriculture, forestry and fishery are closely related to biological activities associated with net primary production (NPP). Those biological activities ultimately constrain long-term land productivity on which the survival of all biological species on Earth depends. Conventional economic analysis does not pay due attention to the crucial role of NPP. If the climate change described by the Intergovernmental Panel on Climate Change (IPCC) is real, the current economic development path should be reconsidered in view of the crucial importance of NPP—that which is inseparably related to agriculture, forestry and fishery. Chapter 7 is aimed at reconsidering the basic role of Japanese agriculture, forestry and fishery in view of responsible development on behalf of future generations. Chapter 7 first reconsiders the basic characteristics of agriculture and manufacturing. These inherent characteristics are associated with two different modes of economic production and can be reexamined and highlighted in view of a distinction between ecological succession and mechanized agriculture. Chapter 7 then discusses various problems with the current form of Japanese agriculture. The origin of these problems is shown to be traced back to the Japanese government’s policy on rice production. The Japanese government’s heavy subsidy policy is also shown to be responsible for the poor performance of Japanese agriculture and the trend of increasing net import. Chapter 7 then discusses the multiple problems of Japanese Agricultural Cooperatives (JA), the most important organization in charge of promoting agriculture. Chapter 7 introduces basic points of the Montréal Process for sustainable forest management. Chapter 7 next discusses the trend of decreasing forest workforce together with elderly people and of self-sufficiency rate of timber supply in Japan. Chapter 7 also reexamines the basic role of various activities associated with silvicultue, activities such as cleaning and weeding and suggests certain special arrangements for Japanese forestry, which is managed mainly on the small scale by family foresters. Chapter 7 introduces the world fishery situation where aquaculture is seen to be radically increasing, in contrast to, catches trends which are not at all increasing. Chapter 7 discusses the vicious cycle of the Japanese fishery where the fish stock is seen to decrease in the longrun. A set of measures to make the fishery sector sustainable is proposed based on scientific research. Lessons from the fishery sector of New Zealand and Norway are examined in promotion of a sustainable Japanese fishery. Chapter 7 concludes with a reexamination of NPP—something which should be maintained as an important target in discussion of sustainability. Chapter 8 deals closely with several serious problems concerning budget deficit and how to redeem increasing quantities of outstanding national bonds. Chapter 8 introduces the general principles of national budget, principles that must be followed by all national governments. Particular attention is paid to the situation of Japan. Chapter 8 then discusses, in the context of Japan, the two types of budget, i.e. general account budget and special account budget. A special focus is given to the history of special account budgets. Chapter 8 further discusses the serious status of the outstanding balance of Japanese bonds. According to Article 5 of the Public Finance Act of Japan, the Bank of Japan is not legally permitted to underwrite newly issued national bonds. It is shown, however, that the recent monetary policy of the Bank

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of Japan, i.e. the drastic quantitative easing policy that started in April of 2013, is in actuality an act of violation of Article 5 of the Public Finance Act. The amount of national bonds held by the Bank of Japan is shown to currently be greater than that of the commercial banks in Japan. Soddy once proposed an interesting scheme of bonds redemption, which he termed compound redemption. Chapter 8 presents Soddy’s two schemes of debt redemption, one of which is the scheme of compound redemption. Chapter 8 concludes with a summary and presents the two characteristics of the current society, a society where maximization of present monetary value is put on the center stage of individual decisions, and where the power of expansion of bureaucratic organization is built into the political system. Chapter 9 discusses Japan’s collapsing social security systems in Japan, in particular, the pension, medical health and elderly nursing care systems. Chapter 9 first deals with the Japanese pension system and includes a short history of that system. The chapter, simultaneously touches upon how to promote the employment of both female workers and of senior citizens who are willing to work after retirement. Chapter 9 discusses whether or not the Japanese pension system is sustainable in terms of replacement ratio, where replacement ratio refers to the ratio of an individual pension benefit entitlement to average pre-retirement earnings. Chapter 9 then examines three Japanese public healthcare insurance systems, i.e. the workplace insurance scheme, the national health insurance scheme and the medical care scheme for senior citizens over 75-years of age. These systems are discussed together with the history of medical care systems in Japan. It is shown that, because of an extremely low premium burden, both the national health insurance scheme and the medical care scheme for senior citizens over 75-years of age, are already in a status of bankruptcy. Chapter 9 also examines the elderly nursing care system. Under the status of heavy deficit, the orientation toward more financial burden on higher-income elderly is being attempted. Chapter 9 concludes with a discussion on the fundamental factors that accelerate the worsening trend of social security systems. In order to learn to cope with the four major bioeconomic predicaments facing Japan, we should start reconsidering how to build a more sustainable and equitable world order. Chapter 10 makes seven proposals to mitigate the four formidable predicaments facing the aging society of Japan: (i) incorporating a spread of smallscale hydroelectric generation systems; (ii) endorsing Keynes’ view on international trade and the financial systems; (iii) establishing a locally distributed transportation network to promote regional production and consumption; (iv) establishing socioeconomic and public support for childbirth and child-raising; (v) reducing the population concentration in urban areas; (vi) decreasing the number of civil servants; and (vii) implementing national bonds redemption schemes. These seven proposals are not intended to be comprehensive. Rather, these seven proposals are intended to be only suggestive.

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Energy

Double-Edged Nature

2. Scarcity, Promethean Technology, and Future Perspectives for Fossil Fuels and Uranium 3. Credibility of Scientific Analysis, and Assessment of PV Systems and Ethanol Production

Money

4. Beyond the Conventional View: Reconsidering: Money, Credit and Interest 5. Capital Interest, the Financial Sector and Debt Expansion: Toward a More Sustainable and Equitable World Order

Four Predicaments of Aging Japan 6. Aging Population, Vacant Dwellings and the Compatibility Problem between Human and Exosomatic Populations 7. Reconsidering Agriculture, Forestry and Fishery: Searching for a Responsible Development of Japan 8. Budget Deficit Problems and Reexamining Soddy’s Schemes of Compound and Simple Redemption 9. Collapsing Social Security Systems in Japan : Pensions, Medical Care and Elderly Nursing Care 10. Conclusion: An Alternative Vision for the Future of Japan and the World

Fig. 1.1 A schematic representation of the book

Figure 1.1 shows the schematic representation of this book as it has been explained thus far. The numbers in the figure indicate the chapter numbers where the particular subjects are discussed. Notes 1. According to Meulen, Coquelin (the French economist), correctly traces two great stems of industrial progress to improvements in machinery based on fossil fuels and to instruments of exchange (cited in Meulen 1917). I share this view with Coquelin: energy and money matter for industrial progress. 2. The financial system consists of institutions that partake in the transaction of money and money substitutes for investment and speculative reasons. The monetary system is the system that manages and facilitates the provision of money and circulation of money and credit. Monetary institutions include the central bank and banks in general. Money provided by the monetary system is used in the financial system to buy and sell financial securities in the capital market (e.g. stocks, government bonds and corporate bonds) and the money market (e.g. certificates of deposit and treasury bills), as well as alternative investment securities (e.g. mutual funds and real estate). Institutions that operate within the financial system are insurance companies, stockbrokers, pension funds, mutual funds, hedge funds, etc. More recently, the monetary system and the financial system have merged and are seen to move together very closely. The monetary system

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provides wealth in the form of credit for participants in the financial system to invest. The financial system is a very large component of the whole economy, and what happens in the financial system seriously affects the real economy. The 2008 collapse of Lehman Brothers is one supporting example. 3. Petty wrote in Political Arithmetick—that there ‘is much more to be gained by Manufacture than Husbandry, and by Merchandise than Manufacture’ (included in Hull (ed.) 1676[1899], p. 256). Clark admired Petty’s work without giving esteem to the work of Adam Smith and David Ricardo. To wit: ‘economics was started on the right lines by Gregory King and Sir William Petty at the time of that astonishing flowering of the English scientific spirit in the later seventeenth century. The slowly growing science was twisted out of shape by Adam Smith and Ricard, the argumentative Scot and the “stupid bothering stockbroker’ (Clark 1940). Clark had a completely different opinion from that prevalent in the contemporary interpretation of the economic theory. 4. The arithmomorphic concept has a distinct individuality. It is a concept describing a situation where overlap is now allowed: being A and not being A cannot coexist. This non-overlapping characteristic is the foundation of theoretical science (Georgescu-Roegen 1971). 5. Georgescu-Roegen’s statement of entropy deficit is interesting. An interesting question is how the additional entropy created by production process or other biological activities is disposed of. In 1945, Schrödinger added a note to Chap. 6, concluding that the fact “that we give off heat [thermal entropy] is not accidental, but essential. For this is precisely the manner in which we dispose of the surplus [thermal] entropy we continually produce in our physical life process” (Schrödinger 1967, p. 80). Schrödinger’s deep insight shows that disposal of surplus thermal entropy is necessary for living things to continue life. Water plays the vital role in discarding the entropy production occurring on Earth. This important phenomenon is all but forgotten among people. Perhaps the first person who noticed the important role of water for this purpose is Soddy. Soddy states ‘A minute fraction of the energy that falls upon the ocean escapes total degradation into useless heat and evaporates the water. By a natural process—very similar, however, to that which is made artificially to occur in the steam engine—the water vapour ascends and suffers “adiabatic cooling and expansion.” It so performs useful work upon itself in climbing against gravity. It chills as it ascends, until it is condensed again as rain, collects in rivers, which drive water-wheels and turbines on their course to the ocean’ Soddy (1926, p. 40). Soddy’s idea was further extended by Tsuchida (Tsuchida and Murota 1987). He explains convincingly how Earth disposes of thermal entropy generated within its system and the essential role played by land within the biosphere in terms of thermal entropy disposal. Air convection and the water cycle constitute an atmospheric heat engine, an engine which guarantees the existence of life on Earth by continually discarding entropy into outer space. Within this heat engine, water and air circulate between the surface area of Earth (15 °C on average) and high altitudes (−18 °C on average). The low temperature of the upper atmosphere (−18 °C on average), created by the adiabatic expansion of the air indicated by Soddy, is also

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important. It is possible to dispose of more thermal entropy of radiation with a same given quantity of heat at a low temperature than with at a given quantity of heat at a high temperature. In addition, at about −18 °C, vapor pressure is sufficiently low, and the air is so dry, that sunlight can easily pass through the atmosphere. Water cycles emerge due to the asymmetry of the atmosphere. This asymmetry is created by the fact that the molecular weight of water vapor is 18 g/mol, while the average molecular weight of air is 29 g/mol. This difference in molecular weight creates an air pump, as it were, to lift water vapor to the upper atmosphere, therein working against gravity. If Earth’s primitive atmosphere had consisted mainly of methane (CH4 , molecular weight of 16 g/mol) instead of carbon dioxide (CO2 , molecular weight of 44 g/mol), neither asymmetry nor life would have been possible. Through the operation of the water cycles created by Earth’s primitive atmosphere, living things on Earth can dispose of heat entropy. Thus, water really is important for the health of the biosphere. The present problems of climate change are due to the fact that the mechanism of entropy disposal on Earth is seriously damaged, a result of too much industrial activity relative to the carrying capacity of Earth.

References Avery JS (2015) The need for a new economic system. Irene Publishing, Sparsnäs Clark C (1940) The conditions of economic progress. Macmillan, London Cloud P (1977) Entropy, materials, and posterity. Geol Rundsch 66(3):678–696 Daly H (1980) The economic thought of Frederick Soddy. History of Political Economy 12(4):469– 488 EDMC (2018) Handbook of energy & economic statistics in Japan. The Energy Data and Modelling Center, Tokyo Funtowicz SO, Ravetz JR (1990) Post normal science: a new science for new times. Sci Eur 266:20– 22 Georgescu-Roegen N (1971) The entropy law and the economic process. Harvard University Press, Cambridge, Mass Georgescu-Roegen N (1977) Bioeconomics: a new look at the nature of economic activity. In: Junker L (ed) The political economy of food and energy. Ann Arbor: Michigan Business Papers no. 62. Pp 105–134. University of Michigan Giampietro M (2003) Multi-scale integrated analysis of agroecosystems. CRC Press, London Graeber D (2011) Debt: the first 5,000 years. Melville House Publishing, New York Higgs H (1923) Cartesian economics: the bearings of physical science upon state stewardship, by Frederick Soddy. Econ J 33:100–101 Hull CH (ed) [1676](1899) The economic writings of sir william petty, vol 1. Cambridge University Press, Cambridge Innes AM (1913) What is money? Bank Law J 30(5):377–408 Innes AM (1914) The credit theory of money. Bank Law J 31(1):151–168 Jevons WS (1965) The theory of political economy, 5th edn. Augustus M. Kelley, New York Lotka AJ (1956) Elements of mathematical biology. Dover Publications, New York Mayumi K (1991) Temporary emancipation from land: from the industrial revolution to the present time. Ecol Econ 4:35–56

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Meulen H (1917) Industrial justice through banking reform: an outline of a policy of individualism. Richard J. James, London Peirce CS (1877) The fixation of belief. Popul Sci Mon 12:1–15 Phillips RJ (1995) The chicago plan and New Deal banking reform. M.E. Sharpe, New York Roberts L (1991) Academy panel sprit on greenhouse adaptation. Science 253:1206 Rosen R (1985) Anticipatory systems. Pergamon Press, Oxford Russell B (1927) An outline of philosophy. George Allen Unwin Ltd., London Samuelson PA, Nordhaus WD (2010) Economics, 19th edn. MacGraw-Hill, New York Schrödinger E (1967) What is life & mind and matter. Cambridge University Press, London Schumpeter JA (1951) The theory of economic development. Harvard University Press, Cambridge, Mass Simmons MR (2005) Twilight in the desert. Wiley, Hoboken, New Jersey Smith A (1976) In: Cannan E (ed) An inquiry into the nature and causes of the wealth of nations. The University of Chicago Press, Chicago Soddy F (1926) Wealth, virtual wealth and debt. George Allen & Unwin Ltd., London Tsuchida A, Murota T (1987) Fundamentals in the entropy theory of ecocycle and human economy. In: Pillet G, Murota T (eds) Environmental economics: the analysis of a major interface. R. Leimgruber, Geneva, pp 11–35 Vitousek PM, Ehrlich PR, Ehrlich AH, Matson PA (1986) Human appropriation of the products of photosynthesis. Bioscience 36(6):368–373 Vodra RE (2014) Oil abundance?–Not so fast: drilling holes in the energy boom story. ASPO USA. http://peak-oil.org/wp-content/files/Oil_Abundance-Not_So_Fast_2014.10.24.pdf Vonnegut K (1963) Cat’s cradle. Dial Press Trade Paperbacks, New York Wilson RM (1935) Promise to pay: an inquiry of the principles and practice of the latter-day magic called sometimes high finance. George Routledge & Sons, Ltd., London

Chapter 2

Scarcity, Promethean Technology, and Future Perspectives for Fossil Fuels and Uranium

2.1 Introduction Scarcity is the fundamental concept of economics, used to deal with human behavior. In fact, Robbins (1932, p. 15) goes so far as to state in his An Essay on the Nature and Significance of Economic Science: ‘Economics is the science which studies human behavior as a relationship between ends and scarce means which have alternative uses’. Yet, in my view, the concept of scarcity has not been systematically anatomized in relation to exhaustible energy and stainability issues. This chapter makes a reexamination of scarcity concept in conventional economics and then relates it to the exhaustibility of natural resources, in particular fossil fuels and uranium. The meaning of energy transformation for societal metabolism is also investigated in terms of fossil fuels based technology that has the explosive nature of Promethean Fire. In view of sustainability, Sect. 2.2 critically reconsiders three crucial aspects of scarcity that were originally conceptualized within the framework of conventional economics: (i) the limitless wants compared with limited resources and goods; (ii) the substitution concept as it relates to scarcity, in particular substitution of a depleting resource for another resource; and (iii) the scarcity concept as it is relates to a fair allocation of resources with respect to both inter-generational and intra-generational viewpoints. In relation to inter-generational viewpoints, Sect. 2.2 also presents five aspects of the finiteness of resources and environmental constraints for sustainability. Pure physics rarely considers socioeconomic implications of different energy forms. However, a classification of different energy forms such as primary energy sources (PES) and energy carrier (EC) is crucial when considering socioeconomic metabolism. Section 2.3 introduces a new energy transformation scheme, one which is necessary to deal with the metabolic pattern of society. The new transformation scheme allows a consistent and precise definition of both feasible technology and Promethean technology. Section 2.3 shows that consideration of the historically successful substitution processes from wood to coal and coal to oil is useful to

© Springer Nature Switzerland AG 2020 K. T. Mayumi, Sustainable Energy and Economics in an Aging Population, Lecture Notes in Energy 76, https://doi.org/10.1007/978-3-030-43225-6_2

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inform contemporary attempts to substitute coal, oil and natural gas with alternative primary energy sources. Section 2.4 focuses on three types of primary energy sources: (i) coal (hard coal and lignite); (ii) oil (crude oil and refined products); and (iii) natural gas (methane, ethane, propane, butane and natural gasoline). A special attention is paid to aviation fuel, a fuel group which includes refined products aviation gasoline and jet fuels due to prospects of an increase in demand for aviation fuel. Three different reserve concepts of natural resources are introduced, i.e. proven reserves, hypothetical resources and resource potential. The reserve to projected world requirement ratio of coal, oil and natural gas is also calculated. That ratio, expressed in years and equivalent to the known amount of the resource divided by the amount used, is intended to provide an indication of how much longer a given natural resource will last. In a similar fashion, the potential to projected world requirement ratio of coal is calculated. Section 2.5 discusses nuclear technology for electricity generation. It is shown that while almost all extracted uranium ore–99.3%–cannot be directly used in light water reactors, there is a dream that uranium-238 can be transformed into plutonium within a fast breeder reactor (FBR), thereby, allowing almost 60% of uranium-238 to be utilized as nuclear fuels. That dream leads to the idea of a nuclear fuel cycle and is shown to be a delusion. The conclusion section briefly discusses the prospects of shale gas and methane hydrate as alternative primary energy sources.

2.2 Reconsidering the Meaning of Scarcity for Sustainability The scarcity concept is a theoretical pillar of conventional economics. It was formed gradually in the 1860s and was heavily influenced by the socioeconomic condition of Western European nations, in particular those of England. In the times following the Industrial Revolution, Western European nations had reached a relatively high level of material standard of living. In a historically unprecedented manner, individuals in those nations, especially individuals in England, were allowed to behave according to a strong contemporary temper of self-interest and with the expectation of perpetual economic growth (Marshall 1920). This expectation of perpetual economic growth by the general public in industrial nations was seen to intensify after World War II. Central to that expectation, oil became a ubiquitous and cheap energy source for the industrial processes and transportation networks required for global economic development. Thus, supported by ample fossil fuel supply and technological advances, the anticipation of perpetual economic growth and plentiful economic goods became second nature to people. In this way, human beings as a particular type of ‘anticipatory’ agent (Jevons 1965; Rosen 1985)1 are seen to have become greatly accustomed to the idea of limitless wants. In conventional economics, such limitless wants have become the basis for

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the scarcity concept. The scarcity concept then led to the definition of efficiency and substitution in conventional economics. Unfortunately, the consideration of what is a fair allocation of resources and goods among people might be has not much attracted the theoretical and practical attention of conventional economists. Nevertheless, that consideration proves indispensable in sustainability arguments. In the following three subsections, it is discussed.

2.2.1 Reconsidering Scarcity in Relation to Limitless Wants Scarcity in conventional economics refers to the situation where, in spite of the fact that economic goods are available to most people, a persistent gap exists between goods that are actually available and theoretically limitless growing wants (Samuelson 1980; Samuelson and Nordhaus 2010). In a situation of scarcity, people must decide to allocate goods efficiently. Efficiency requires cost-benefit analysis to be used to select projects that maximize the present monetary value of the total net economic benefits over a given time horizon (e.g. Hotelling 1931). The scarcity concept in conventional economics can be described as ‘moderate scarcity’ in which goods are assumed to be scarce relative to desires for goods. It is important to note the implication that goods which are moderately scarce are still more than sufficient to cover minimal needs. Therefore, it is understandable that Hume and Rawls restrict their well-known analysis only to the case of moderate scarcity (Hubin 1989). In a similar way, the essence of scarcity in conventional economics, the moderate scarcity, is revealed in the seminal article, Existence of an Equilibrium for a Competitive Economy (Arrow and Debreu 1954), where it is assumed that every person could consume out of the initial stock of commodities in some feasible way and still have a positive amount of each commodity for trading in the market. This assumption is exactly parallel to the concept of moderate scarcity in conventional economics. The scarcity concept in conventional economics is distinct, however, from the situation in which an economic good is not easy to obtain neither in relation to basic needs nor in relation to necessary provisions in support of subsistence.

2.2.2 Reconsidering Scarcity in Relation to Resource Substation Before discussing the second aspect of scarcity, i.e. a particular resource is scarce relative to another resource, it is absolutely necessary to understand the meaning of substitution in utility theory. In conventional economics, it is typically assumed that the marginal utility of money is quasi-constant. According to Georgescu-Roegen’s analysis (1968), Marshall, for example, made this assumption. The marginal utility of money is the change in satisfaction or benefit–termed utility—due to the spending

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of a given amount of additional money. Marshall focused on the economic reality of his own time. Indeed, Marshall’s assumption of the quasi-constancy of the marginal utility of money is compatible with a typical middle-class society in a developed country, a situation where a substantial part of personal income is spent on conveniences and not on subsistence. In the context of total income, most mere conveniences relate to marginal expenditures. So, a mere convenience can disappear from budgets when income decreases or appear as new expenditure when income increases. Under such conditions, it is reasonable to assume that the marginal utility of money for conveniences must be the same for people with a similar income level as those people are indifferent to the buying of one convenience over another convenience. Consequently, substitution between convenience goods is said to be ‘smooth’. Unlike substitution in consumer choice theory, substitution in the production process is much less smooth. Production processes are conditioned by the physical properties of material objects used for a particular purpose. Complete substitution in production processes typically requires a considerable amount of time. A typical example given is the substitution of wrought iron for steel in open-hearth furnaces where excess carbon and other impurities are burned out of pig iron to produce steel. Irrespective of these differences, in conventional economics, substitution is treated as if there were no essential difference between consumer choice and production. The second aspect of scarcity, i.e. a particular resource is scarce relative to another substitutable resource in production, has been extensively discussed following the two oil crises in the 1970s (e.g. Daly 1991). The second aspect of scarcity is basically related to substituting one exhaustible energy resource for another energy resource through either technological progress (Nordhaus 1973) or substituting one production factor for another production factor in an aggregate production function (Solow 1974). As Nordhaus declared, examining the substitutability of a depleting resource for another abundant resource is a useful acid test. Nordhaus proposed to look for a backstop technology that allows the substitution of a depleting energy resource by using a practically infinite resource base such as a breeder nuclear reactor or a fusion reactor. Nordhaus claimed that thanks to the anticipation of a future breeder reactor capable of using uranium-238, the total nuclear energy contained in Earth (uranium235 and uranium-238) amounts to more than 2,100 times the heat content of all fossil fuels. He calculated that such extensive energy content would last 1.35 million years, assuming the world energy consumption levels observed in 1965. Nordhaus made an unrealistic anticipation of the nuclear reactor technology advances, however. Perhaps, he did not properly recognize that only 0.7% of natural uranium (uranium235) is fissile during electricity generation. The remaining 99.3% of natural uranium (uranium-238) is not fissile. There are four phases leading up to the envisioned development of commercial fast breeder reactors: (i) development of an experimental reactor; (ii) development of a prototype reactor; (iii) development of a demonstration reactor; and (iv) development of a commercial reactor. Japan made it so far as to reach the second phase with its prototype reactor Monju before, in 2016, completely abandoning the idea and

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starting a decommissioning process. In Europe, only France continues to contemplate attempts to reach the third phase of reactor development. Still, France’s high-profile prototype reactor, Superphénix, was decommissioned in 1998—quite some time ago. Even now, nearly half a century later, the backstop technology of Nordhaus’ is remote. Instead of resorting to backstop technology to tackle exhaustible resource shortage, Solow’s proposal to solve resource scarcity without technological progress is based on two conditions on the aggregated production function, the production factors of which are an aggregated natural resource, labor, and capital (Solow 1974, p. 10). As will be seen these two conditions are unrealistic: 1. Solow’s first unrealistic condition is that the elasticity of output with respect to capital exceeds the elasticity of output with respect to exhaustible natural resource. Such a condition entails that even if the resource base decreases, capital with higher productivity can compensate to the extent that production is increased. Effectively, an increase in production results regardless of an initial decrease in production caused by a decrease in resource base. Thus, a positive constant level of production per capita without technological progress is possible. 2. Solow’s second unrealistic condition is that the aggregate production function is increasing, and concave in nature (i.e. it exhibits decreasing marginal production) and unbounded in relation to the initial stock of capital—that which is supposed to be considerably large. Combining the first condition with the second condition entails that a positive constant level of production per capita can be maintained forever by assuming it is unbounded, given the large initial stock of capital, even if the aggregate production function is concave. It must be noticed that Solow’s two conditions completely ignore biophysical reality. Indeed, the essence of the first unrealistic condition declares that a decreasing resource base is irrelevant for maintaining a given level of production since capital is able to contribute more to production than exhaustible resources. Solow furthermore ignores the simple fact that without natural resources it is impossible to create capital in the first place. In fact, Solow (1974) explicitly stated in his Ely Lecture at the American Economic Association’s annual meeting of 1973: ‘The world can, in effect, get along without natural resources, so exhaustion is just an event, not a catastrophe. Nordhaus’s notion of a “back- stop technology” is just a dramatic way of putting this case; at some finite cost, production can be freed of dependence on exhaustible resources altogether’ (p. 11). In a similar fashion, Barnett and Morse (1963) claimed that average costs would always follow a declining trend and that the continuous progress of technology renders accessible resources nearly inexhaustible. After examining the relative cost variations of aggregate labor and capital inputs during a period of exceptional energy and mineral bonanza, however, it is very difficult to accept their claims due to the fact that large- scale energy and mineral resources consumption has led to rapid capital accumulation and a dramatic reduction in labor requirement. So, their analysis is based on a transitional period and therefore not easily translated to the case of long-run.

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Conventional economists still believe that the market mechanism works well to facilitate energy substitution whenever the price of any given type of energy increases. For example, if the price of oil increases, search for new oil fields is assumed to increase at least temporarily. Since 1859, however, the discovery of oil fields has tended to be random and uncorrelated with high oil prices. In spite of the fact that oil prices have increased numerous times since the 1960s, and in spite the fact that prospecting technology has greatly improved, there has been no major change in the predictable decline of long-term discovery rates (Downey 2009).

2.2.3 Reconsidering Scarcity in Relation to Inter-generational and Intra-generational Equity Conventional economics often ignores inter-generational and intra-generational equity since equity issues requires a normative judgement. Making a normative judgement is one of the most important aspects of establishing a more sustainable and equitable world and managing scarcity in everyday life. When considering the inter-generational distribution of resources, it is necessary to contemplate at least five types of finiteness, namely, finiteness of: (i) (ii) (iii) (iv)

stocks of energy resources, such as fossil fuels and fissile uranium; stocks of mineral resources; the flow rate of solar radiation and the solar lifespan; land (and water areas) as a receiver of solar radiation for terrestrial biological activities; and (v) the carrying capacity of the biosphere, i.e. the maximum population size of a species that the biosphere can sustain indefinitely, given that species’ specific requirements of food, habitat and water as well as other resources.

In the following, these five aspects of finiteness will be briefly discussed in turn. Fossil fuels and uranium, the first finiteness, are the two most important types of stocks of energy resources directly used by humans. The stock of energy resources, which includes resources such as fossil fuels and fissile uranium is systematically discussed in Sects. 2.4 and 2.5. There are two contrasting theories of the origin of fossil fuels. The biogenic theory argues that fossil fuels such as oil, natural gas and coal are hydrocarbon fuels that derive from biological debris via the sedimentation of organic materials. Concerning the formation of oil and natural gas, the abiogenic theory instead argues for an origin independent of biological activity and is inspired by the fact that is based on the fact that the most basic hydrocarbon, methane, is known to exist on planets where no life is known. In present times, the abiogenic theory is not supported by convincing hard data (Downey 2009). Stocks of mineral resources, the second finiteness, serve as the material basis for humans as well as for other biological species. They are crucial for the building of tools and machines. Except for cadmium (Cd), lead (Pb), mercury (Hg) and arsenic (As), nearly all other minerals are essential for the survival of biological

2.2 Reconsidering the Meaning of Scarcity for Sustainability

27

species. Regarding human life, Skinner (1976) points out the crucial role played by metals in particular. Georgescu-Roegen additionally emphasized the impossibility of the complete recycling of mineral resources in what he termed the ‘fourth law of thermodynamics’ (Georgescuf-Roegen 1977b). In fact, Samuelson also endorsed Georgescu-Roegen’s view on matter, stating of the fourth law: ‘It is GeorgescuRoegen’s Law of Inevitable Dissipation of Useful Concentrated Matter. This is a good-sense certainty’ (Samuelson 1999, p. xvii). In addition to the crucial role played by metals, Skinner (1976) and Cloud (1977) also emphasize the meaning of ‘ore deposits’ which are commercially exploitable. Ore deposits are the places from which we can extract minerals of high local concentrations of geologically scarce elements. Lead, for example, has an average abundance in the continental crust of 0.001%, but lead ore deposits usually contain at least 2% lead (Skinner 1976). Of course there exist a contrasting division of opinions on the existence of finiteness of energy and mineral resources. Barnett and Morse (1963) argue that while an absolute limit of natural resources exists, the definition of such absolute limit cannot be quantitatively specified. On the other hand, Daly believes that ‘absolute scarcity’ does exist because scarcity of fossil fuels and mineral resources ultimately constrains our biophysical means for survival (Daly 1991). Many people are of the opinion that solar radiation is practically infinite in relation to human use. The flow rate of solar radiation and the solar lifespan, the third finiteness, are, however, strictly constrained. In the following, a calculation of the time span of solar energy for humans is conducted where it is assumed that the current rate of energy consumption is maintained (Glucina and Mayumi 2010). While the quantity of incoming solar energy is very large, it is not large enough to fend off the power of the exponential growth of the human economy for long. Assuming a yearly growth rate in world energy consumption of 2% (the average rate during the period 1980–2006), our total energy consumption rate would reach the total solar energy influx in about 360 years. Though the sun has been around for 4,500 million years (Gribbin 1980), but the sun’s life is said to be in the latter half of its lifespan. Of course our future is always full of uncertainty and the scale of time horizon is astronomical yet the fact that a declining flow of solar energy reaching on Earth should be considered. Net primary production (NPP), the ultimate limit of biological activities, is related to land as a receiver of solar radiation for terrestrial biological activities and the carrying capacity of the biosphere, the fourth and fifth categories of finiteness. Here it must be emphasized that land in the fourth finiteness is not Ricardian land, which is considered indestructible pure space. More specifically Ricardo himself mentions that ‘Rent is that portion of the produce of Earth, which is paid to the landlord for the use of the original and indestructible powers of the soil’ (Ricardo 1951, p. 67). The essence of Ricardian land has nothing to do with land that produces organic matters for all biological species. In a classic article by Vitousek et al. (1986), NPP is defined as the amount of energy left after subtracting the respiration of primary producers, mostly plants, from the total amount of energy, mostly solar, that is fixed by biological processes. As of the 1980s, according to Voutesek et al., nearly 40% of potential terrestrial net productivity is already appropriated by the human species.

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In the context of this characterization, how to share NPP between humans and other biological species proves crucial for discussion of sustainability. According to conventional economics, the efficient allocation of an exhaustible natural resource, such as oil over n years, is considered using the following assumptions and assigning the following variables: (i) (ii) (iii) (iv) (v)

the demand function is— pt = a − bqt (a > 0, b > 0 and t = 1, 2, …, n), where pt is the price of the resource and qt is the quantity demanded in year t; the marginal extraction cost is c; the total quantity of the resource is known  to be Q; the size of Q is constrained such that Q < n1 qt ; and the discount rate is r.

The maximum present monetary value of the distribution of Q over n years is realized when all present values of marginal net benefit at time t (MNBt ) are equalized. This relation is expressed in Eq. 2.1. M N Bt =

pt − c (1 + r )t−1

(2.1)

Because 1 + r > 1, for any t, we then have: pt−1 − c pt − c pt − c = < t−2 t−1 (1 + r ) (1 + r ) (1 + r )t−2

(2.2).)

Therefore, we can obtain the inequality pt−1 < pt . This condition is known as Hotelling’s rule. However, Hotelling’s rule entails qt−1 > qt since pt = a − bqt . Conventional economists do not usually mention said inequality, qt−1 > qt , although it proves very important. Specifically, this inequality implies that the physical quantity of the exhaustible resource to be allocated over successive periods must decrease over time: q1 > q2 > · · · > qn . Therefore, the criterion of efficiency, i.e. maximizing the present monetary value using a discount rate, puts later generations in a worse biophysical condition than earlier generations. In conventional economics there is no distinction between an individual decision and a collective decision as conventional economics uses mathematical models in which a representative individual optimizes an objective function given certain constraints. The crucial question emerges as to whether the efficiency rule is really appropriate for the collective decision of the inter-generational distribution of crucial exhaustible resources. As used in cost-benefit analysis, maximizing the present monetary value represents an individual perspective. As Bromley (1990) argues, an individual value judgement such as the efficiency criterion should not be used for collective decision making. The efficiency rule implies a worsening of the biophysical situation of later generations. Georgescu-Roegen, in opposition to conventional economics, once stated that securing an equal amount of exhaustible resources for each generation is an obligation since people tomorrow feel just as hungry and just thirsty as people today (Georgescu-Roegen 1977a). In fact, one of the founders of

Fig. 2.1 The situation of ‘severe scarcity’ for two individuals (A and B) of the same generation over some given period t

price of resource

2.2 Reconsidering the Meaning of Scarcity for Sustainability

29

MC2

C

DAt+Bt DAt

0

qAt

DBt

qBt

marginal cost MC1

quantity of resource

neoclassical economics, Jevons (1965) lamented the unfortunate myopic attitude of individual human beings who do not pay due attention to the welfare of future generations. Strotz’s (1955) article furthermore reveals that the optimal plan of the initial moment is not always to be followed and that the an individual’s future behavior will be inconsistent with their initial optimal solution. Unfortunately, the temper of the contemporary is opposite to Jevons’ sincere concern for future generations. In fact, Barnett and Morse (1963) go so far as to explicitly advise to ignore obligation to future generations and to pay attention only to technological progress. Finally, indicated in Fig. 2.1, there is one more serious equity problem associated with intra-generational distribution. Generally, the severity of resource scarcity is more noticeable when considering the intra-generation distribution of resources. Figure 2.1 shows an example of the intra-generational equity problem. In it: (i) there are two individuals, A and B. DAt represents A’s demand of an exhaustible resource over the period t. In the same way, DBt is B’s demand; and (ii) the kinked dotted line, DAt+Bt , is an aggregate demand for A and B. For the marginal cost line MC 1 , the resource allocated to individual A is qA and the resource allocated to individual B is qB , which is larger than qA . If the marginal cost line increases to MC 2 , then A can no longer afford to obtain the resource at all. A’s demand is reduced due to insufficient income. Under this condition, the market mechanism cannot give the individual A the minimally acceptable share of the resource. Such a condition can be referred to as ‘severe scarcity’ because resources are scarce not only relative to demand but relative to need (Hubin 1989). Therefore, in severe scarcity, it should be advisable to devise a socially agreeable arrangement to overcome social and economic inequalities. For example, the number of people receiving the minimally acceptable level of the resource could be minimized (Hubin 1989). The contingent valuation method (CVM) is often used to make an environmental assessment by asking individuals how much money they are willing to pay for the protection of some given set of environmental services. In situations of severe scarcity, it is more important to ask individuals how much of each subsistence resource is necessary in order to lead a decent life. Poor people cannot afford to pay enough

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money, so, monetary value expressed by them is necessarily too small to be properly evaluated. A competitive economic system treated using the Arrow and Debreu model ignores factors of distributional fairness (Arrow and Debreu 1954). People in developing countries may be so poor that, for example, they are forced to use dung as fuel rather than as fertilizer because the present monetary value of the dung as fuel is higher than that of the dung as fertilizer. A significantly worse ecosystem condition typically results, alongside the depletion of fuelwood supply and, ultimately, deforestation (Barbier and Markandya 1990). In contrast, the situation in industrial nations is entirely different when evaluating the monetary value of ecosystem services in CVM because of higher average income in these nations. Thus, Costanza et al. (1997) assumed for their now famous CVM calculation that rich nations value their coasts 100 times as much as poorer nations, making the contribution of coastlines in poor nations relatively tiny in monetary terms (Pimm 1997). Clearly, CVM should be completely avoided when distributional issues are crucial for the welfare of the poor.

2.3 Energy Transformation, Promethean Technology and Reexamining the Transition of Energy and Materials During the Industrial Revolution Primary energy sources (PES) are energy forms in nature that have not been subject to any transformation process by humans. PES energy forms include raw fossil fuels, solar radiation, water, wind, geothermal energy and biomass. Energy carriers (EC), on the other hand, are usually produced from primary energy sources. For example, geothermal energy, a PES can be transformed into heat, an EC. On the hand, one type of EC can also be transformed into another type of EC. For example, liquid natural gas as an EC can be transformed into electricity as another EC. Generally, EC energy forms are classified into three categories: liquid fuels, process heat and electricity. Each of the three categories of energy forms is crucial for the various end-uses of socioeconomic metabolism. Before discussing energy transformation, it is best to introduce the distinction between flows and funds in a production process (Georgescu-Roegen 1969). Flows are qualitatively transformed in a production process. They are elements that enter but do not come out of the process or elements that come out of the process without having entered. Funds are agents transforming a given set of inflows into a given set of outflows. They are the elements that enter and leave the process unchanged, and include labour, real capital and Ricardian land. Figure 2.2 diagrams a simple energy transformation system in a way useful for the analysis of socioeconomic metabolism. The representation is given as if there were only one transformation system—the hierarchical nature of actual energy transformation systems is temporarily set aside. Furthermore, in the representation of the figure, all other flows except energy, as well as fund elements such as capital, labor

2.3 Energy Transformation, Promethean Technology …

31

Energy Carrier Input (ECI)

Fig. 2.2 A simplified energy transformation system and associated internal energy loss

Primary Energy Source (PES)

Energy Carrier Output (ECO)

Energy Transformation System Internal Energy Loss (IEL)

and land are not explicitly included. Nevertheless, their importance in the energy transformation process should be emphasized. In Fig. 2.2, ECI represents an energy carrier input to the system and ECO represents an energy carrier output from the system. In many cases ECI consists of various forms of energy carrier that are used jointly along with PES to generate EIO. For example, in the case of corn-ethanol production, ECI contains corn as a biomass energy carrier, not as a primary energy source. Internal energy loss (IEL) refers to internal energy use for the transformation itself. Naturally, both ECO and IEL are ultimately discarded as waste heat. In thermodynamics, energy entering into a system is counted as positive and energy exiting from the system as negative. The first law of thermodynamics dictates P E S + EC I − EC O − I E L = 0.

(2.3)

While the purpose of the transformation system is to obtain as much ECO as possible, generating ECO requires IEL inside of the transformation system. Thus, Eq. 2.3 can be formally transformed into an energy balance format for the purpose of representing process in the analysis of socioeconomic metabolism: P E S + EC I − EC O = I E L .

(2.4)

The energy balance represented in Eq. 2.4 can be interpreted as if the left-hand side, PES + ECI − ECO were an input to the system and the right-hand side, IEL, were an output from the system. By doing so, net energy output, ECO, is obtained out of the gross input PES + ECI. Treating PES as different from ECI is crucial when solar radiation is used as PES. Such is the case, for example, in photovoltaic (PV) systems.2 The following tautological relation is then obtained: P E S + EC I P E S + EC I = EC O P E S + EC I − I E L  P E S + EC I  =

I − EC O  PPSEE S++EC  EC I − P E S + EC I − EC O

 P E S + EC I 

1

EL  =  P E S +IEC I I EL

−1

(2.5)

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2 Scarcity, Promethean Technology, and Future Perspectives …

Fig. 2.3 A tautological relation between (PES + ECI)/ECO and (PES + ECI)/(PES + ECI − ECO)

(PES+ECI) / (PES+ECI-ECO)

(PES + ECI)/ECO is the ratio of gross energy input to net energy output, i.e. how much energy input is spent to generate a unit of net energy. Because the internal energy use is always greater than zero, i.e. IEL > 0, then (PES + ECI)/ECO > 1. The term (PES + ECI)/(PES + ECI − ECO) represents the ratio of gross energy input to energy loss, i.e. how much gross energy input is required in comparison to a unit of internal energy use by the transformation system itself3 . Figure 2.3 shows the tautological relation between (PES + ECI)/ECO and (PES + ECI)/(PES + ECI − ECO). It is crucial to remember that when a particular PES with a certain quality is given, a point on the curve in Fig. 2.3 is automatically located. That specific point only characterizes the quality of that PES. If the available quantity of that PES is insufficient, that PES cannot support the socioeconomic metabolism that usually requires large quantity of that PES. Generally speaking, if the quality of a PES is high, the point on the curve has a larger value of (PES + ECI)/(PES + ECI − ECO), on the horizontal axis, and a smaller value of (PES + ECI)/ECO, on the vertical axis. The point usually moves to the left on the curve as PES depletes over time. Using the transformation scheme outlined in Fig. 2.2, it is possible to redefine in an analytical and consistent manner the ideas of feasible technology and Promethean technology, terms originally proposed by Georgescu-Roegen (1984): 1. In the case of feasible technology: (i) all specific flow and fund elements associated with the energy transformation process are known; and (ii) energy carrier output (ECO) is greater than zero. Even if a huge quantity of a depleting stock of energy carrier input is spent to generate a positive energy carrier output, the technology is classified as a feasible technology. In such a case, however, it is perhaps more appropriate to refer to that feasible technology as parasite technology (see Chap. 3 for the case of corn-ethanol production in the United States). 2. In the case of Promethean technology: (i) energy carrier output (ECO) generated from available primary energy sources (PES) is more than sufficient to provide for all other sectors of the socioeconomic system; (ii) energy carrier input (ECI) is either zero, or positive; however, if positive, ECI is also generated

2.3 Energy Transformation, Promethean Technology …

33

from PES as described in (i); and (iii) the corresponding material funds elements including infrastructure and the human population can be maintained until the given primary energy source (PES) is completely depleted. So, a system using Promethean technology tends to expand explosively–but temporarily—until the PES is exhausted. The explosive Promethean technology is seen to accelerate PES depletion. Land is agriculture’s PES. Fossil fuels are modern industry’s PES. It is vitally important both for agriculture and for modern industry to secure those forms of PES. However, PES cannot be created out of nothing. Promethean technology is often found in energy and material transformation in ecosystems. In fact, the first condition of Promethean technology, i.e. that ECO is more than sufficient to provide for all other is sectors of the socioeconomic system, exactly corresponds to the ideas of ecosystem organizations advanced by Ulanowicz (1986). Ulanowicz (1986) who adopted the original ideas of Eigen’s (1971) nonequilibrium of self-organizing thermodynamic systems, finds that the network of matter and energy flows making up an ecosystem can be divided into two parts: one part, the hypercycle part, generates all energy requirements for the other part of the ecosystems, i.e. the dissipative part. The hypercycle part therefore satisfies the first condition of Promethean technology. Ulanowicz (1986) applied his theory of ecosystem organization to a tidal marsh creek ecosystem adjacent to Crystal River, Florida. The final subject in this section uses the concepts introduced thus far to reexamine how an energy and materials transition during the Industrial Revolution was achieved. While Georgescu-Roegen’s description of the Promethean technology embodies by steam engines focused mainly on the large-scale consumption of coal as a PES, this Promethean technology could not be realized without both metallurgical development4 and other scientific advancements. In particular, it could not have been realized without the development of a process by which coal is transformed into coke (Skinner 1976). The foundation of the Industrial Revolution in England was supported by two dramatic changes. A first dramatic change was the transition from scarce organic materials, especially from low entropy wood, to abundant, high entropy coal. A second dramatic change was the transition, from good quality wool, dependent on land in England, to abundant, though poor quality, cotton in India and America (Kawamiya 1983). It is absolutely necessary to understand the nature of the primary energy substitutions that occurred during the Industrial Revolution. For this purpose, the concept of entropy is introduced. Entropy is a relative index of the amount of unavailable energy in a given system. The transition from coal to oil, from high entropy energy to low entropy energy, is atypical. On the other hand, the development process of the coke blast furnace can be regarded as a typical example of primary energy substitution. A scarcity of low entropy wood caused high entropy coal to be used as a substitute. Burning coal with iron ore caused impure chemicals such as sulfur and ash to diffuse into the iron ore, producing lower quality iron. Transforming coal into coke was essential for removing impure chemicals. Furthermore, due to coke’s high

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heat generation power, the inside temperature of the coke blast furnace was enabled to reach the very high temperatures required for the production of high-quality iron. There is some similarity between the scarcity of wood before the Industrial Revolution and the scarcity that faces modern people in the foreseeable future. The resource transition from wood to coal in the iron industry is a transition from low entropy energy resource to a high entropy energy resource. Unless a particular primary energy source is of low entropy with abundant supply, such as is the case with oil, or unless there is a possibility of transforming a high entropy resource, such as coal, into a relatively low entropy resource, such as coke, the substitution transition is difficult to achieve. We cannot expect technology to produce something out of nothing. We must recognize that technology is only a catalyst in inducing the latent ability of energy resources to emerge.

2.4 Coal, Oil, Natural Gas and Aviation Fuel: The Present Situation and Future Perspectives Before discussing the various aspects of coal, oil and natural gas, the three types of ‘reserve’ concepts, i.e. proven reserve, hypothetical resources and mineral resource potential, are introduced (U.S. Geological Survey 2018).5 Proven reserve is the portion of an identified resource from which a usable mineral or energy commodity can be economically and legally extracted at the time of determination. Hypothetical resources are undiscovered materials that may reasonably be expected to exist in known mining districts under known geologic conditions. Mineral resource potential is the likelihood of the occurrence of undiscovered mineral resources in a defined area. In this fashion, the quantities of each of the three types of ‘reserve’ are presented in ascending order ordered by the reliability had in their availability for commercial extraction. These three definitions are also based on the assumption that all three reserve forms are supposed to be legally extracted under the state control. Illegal mining unfortunately causes various forms of the conflicts in developing countries with rich mines (see for the case of Afghanistan, Lakhani and Corboz 2017).

2.4.1 Coal In the old days, the most important fuel for the metallurgist was charcoal. In late 16th century England, the days of Queen Elizabeth I, serious timber shortage had already begun to occur. The construction of smelting plants was forced to move into the mountains to secure valuable timber and water resources (Forbes 1958). However, the transition from charcoal to coal was not effectively realized before both the problem of long-distance transportation and the problem of water disposal in coal mining sites were solved. It was the development of high-efficiency steam

2.4 Coal, Oil, Natural Gas and Aviation Fuel …

35

engines which solved these two problems, and with that development, coal became the primary energy source of a new Promethean technology. Coal is generally divided into hard coal and lignite. Hard coal is defined as having an energy content greater than 16,500 kJ/kg and is comprised of sub-bituminous coal, bituminous coal and anthracite. Lignite, on the other hand, possesses a lower energy content of less than 16,500 kJ/kg, and a higher water content. Therefore, as a fuel, hard coal is much better than lignite. Out of the total proven reserve of coal as of 2014 (984,624 million tonnes), about 70% is hard coal and out of the total resource potential as of 2014 (23,116,658 million tonnes), about 80% is hard coal (World Energy Council 2016). Owing to a relatively high water content (40–60%) and, in comparison to hard coal, a corresponding lower calorific value, lignite is often used close to the site where it was mined. Indeed, the typical purpose of lignite, accounting for nearly 90% of its worldwide usage, is power generation near the site it was mined. Germany, where lignite is transported by conveyor belts or trains to power plants near mining deposits, is a typical example of a developed country with significant lignite usage. Regarding the quantities of hard coal mined, a worldwide average of 83% is used in the country of origin. Unlike lignite, international trade is important for hard coal. Hard coal in a raw state often fails to meet international customer requirements, hence it must typically be processed after extraction in order to improve its quality (World Energy Council 2016). The total world production of hard and lignite coals declined in 2014 by about 53 million tonnes. That decline represents the first annual decline since 1999. After more than a decade of strong growth in global coal production and consumption, the coal sector entered a phase of oversupply and was forced to confront stagnating global demand. Despite the declining trend of the total world coal production, coal still plays a significant role in global steel production. According to recent statistics issued by the World Steel Association, there was an increase in global steel production in 2014 up to 1,665 million tonnes, a value which represents 16.2% increase from 2010 values (World Energy Council 2016). Figures 2.4 and 2.5, both of which depict the current and future prospects for coal consumption, use data from the World Energy Council (2016). Figure 2.4 shows the reserve to projected requirement ratio of coal if projected coal consumption compared with the 2015 level world coal consumption increases at the rate of 0, 0.1, 0.5, 1, 2 and 3%. Figure 2.5 achieves a similar logic, instead looking at resource potential rather than reserve. Resource potential, what is referred to in Fig. 2.5, can be interpreted as the measure of ultimate resource base. Even with 1% growth rate, however, coal resources would last only 412 years. At a 2% growth rate that prospect drops to 241 years and at a 3% growth rate that prospect drops to just 174 years. While the resource potential of coal is huge, the most severe constraints come from a different direction. If the resource potential of 23,116,658 million tonnes of coal is burned, the CO2 concentration in the atmosphere could likely reach an order of magnitude of several percent, thereby creating an environment inhospitable to human life. Furthermore, SO2 emissions would be expected to dramatically increase to a

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depletion time (year)

250 200 150 100 50 0

0%

0.1%

0.5%

1%

2%

3%

rate of coal consumption increase (%) Fig. 2.4 The reserve to projected requirement ratio of coal

depletion time (year)

7000 6000 5000 4000 3000 2000 1000 0 0%

0.1%

0.5%

1%

2%

3%

rate of coal consumption increase (%) Fig. 2.5 The potential to projected requirement ratio of coal

level where not only humans but also other living species would not be able to survive. In order to preserve favorable environmental conditions, humans would be forced to stop using coal far before such hard limits.

2.4.2 Oil People have used oil obtained from the ground since at least 4,000 BC. In the Middle East, crude oil that seeped to the surface was used to waterproof boats. Oil was also used as an adhesive in building construction (Downey 2009). Although, it is not well recognized, the modern oil industry was triggered as a result of a scarcity of whale oil

2.4 Coal, Oil, Natural Gas and Aviation Fuel …

37

following the 1860s, not by the development of the internal combustion engine. The large-scale international transportation network based on oil came to fruition after World War II. While this section is dedicated to oil, and the next to natural gas, it is worth noting that crude oil and natural gas exploration and production are related. Though relative mixes vary drastically, hydrocarbon reservoirs typically contain both oil and natural gas and the release and capture of natural gas often occur during the oil drilling process. Oil has three distinctive characteristics. First, oil is made of hydrocarbons of high purity, and so its entropy per unit mass is very low. In this respect, oil is superior to coal. Second, oil is liquid and so exhibits a low entropy per unit volume. In this respect, oil is better than natural gas. Indeed larger-scale equipment is required for the transportation and storage of natural gas. Third, the environmental pollution produced by oil when burned is relatively small. In this respect, oil is much superior to both coal and to nuclear energy (Kawamiya 1983). Oil is also an excellent raw material used in the manufacturing industry. Synthetic petrochemical products such as polyethylene and polypropylene provide an important group of new materials that substitute natural products such as wood, plant fibers and animal fibers. Polyethylene, for example, is replacing cellophane and paper bag materials, and is also applied to a host of other uses such as the production of wrapping materials in the packaging industry. These are only a few examples of substitution of natural resources with synthetic resources. The most important distinction between transition in modern technology and transitions in technology during the Industrial Revolution is that the substitution of synthetic resources for natural resources is now happening at an accelerated rate both in scale and in variety. The reserve of oil for industrial purposes is composed of crude oil since longterm reserves of finished petrochemical products are very often difficult to maintain in terms of original quality. Such is the case for gasoline, for example. Refined finished products such as gasoline degrade relatively quickly, typically within a year after production. In the jargon of the petrochemical industry, feedstocks are inputs to refinery processes. End results such as gasoline and kerosene are finished products. The mix of crude oil used as a feedstock is referred to as a refinery’s crude oil. In a refinery, a barrel of crude oil can produce additional amounts of finished products due to refinery gain, also known as processing gain, and depending on refinery equipment as well as the process configuration and the type of crude oil being refined. The fundamental process of distillation involves separating, or ‘fractioning’, different products by heating in a tiered distillation column. Different desirable products have different boiling points, and so they evaporate and condense predictably and separately (Downey 2009). In Fig. 2.6, percentages of various refinery products are depicted (Downey 2009) as averages and following the production profile of the United States. An approximate total of 44.77 gallons is yielded from 42 gallons of crude oil. Liquefied refinery gas refers to methane, ethane, propane and butane. It should be noticed that the percentage share of jet fuel is less than 10%, an important aspect which is discussed further in Sect. 2.4.4.

2 Scarcity, Promethean Technology, and Future Perspectives …

refined oil products

38

others aviation gasoline kerosene naphtha bitumen/road oil liquefied refinery gas residual fuel oil still gas coke jet fuel diesel gasoline 0

10

20

30

40

50

percentage by volume Fig. 2.6 Percentage of each refined oil products in the United States

It is reported that the proven reserves of oil have grown over the last 20 years from 1126.2 to 1697.6 billion barrels in 2015, with regional distribution being largely maintained over time. Yet, there is the important exception. South and Central America has captured a greater share of the proven reserves over time. So, the Middle East has gradually reduced its world market share of oil sale from 55 to 47% in the late 1990s (World Energy Council 2016). So, the super-abundance of Saudi Arabia’s oil resource, for example, will likely not be sustained in the near future (Simmons 2005). Furthermore, annual global crude oil discovery rates peaked in the 1960s and have been steadily declining since then in spite of huge advances in exploration technology. The amounts of both hypothetical resources and resource potential for oil are not yet scientifically confirmed. However, even in the most optimistic scenario, sufficient oil supply will effectively cease to exist at around the end of this century (Downey 2009). The major challenges associated with finding a replacement for oil include not only the sourcing of energy to store but also energy storage. As oil is primarily a transportation fuel that is currently relatively little used to generate electricity at the moment, the goal of any replacement must be to produce and safely store energy in a lightweight form such that it can be reasonably fit on a vehicle. Figure 2.7 shows the ratio of the reserve to projected requirement of oil if projected oil consumption compared with the 2015 world oil consumption increases at the rate of 0, 0.1, 0.5, 1, 2 and 3%.

2.4.3 Natural Gas Natural gas is used as an energy source for cooking and space heating and for manufacturing chemicals such as methanol, ammonia and acetylene. The technology needed in order to use natural gas for certain types of transportation is well

2.4 Coal, Oil, Natural Gas and Aviation Fuel …

39

depletion time (years)

60 50 40 30 20 10 0 0%

0.1%

0.5%

1%

2%

3%

rate of coal consumption increase (%) Fig. 2.7 The reserve to projected requirement ratio of oil (data from World Energy Council 2016)

established, whereas the shipping and storing of natural gas is currently much more expansive than oil. Natural gas mainly consists of hydrocarbons. The main chemical compound of natural gas is methane and natural gas does not contain undesirable impurities such as carbon monoxide. So, when natural gas is burned, much less nitrogen oxide and carbon dioxide are emitted in comparison to coal and oil. Furthermore, sulfur oxide is not emitted at all. Raw gas usually contains methane, natural gas liquids (NGLs for short, consisting of ethane, propane, butanes and natural gasoline), carbon dioxide, nitrogen, hydrate sulfide and oxygen. The proven reserve of natural gas is identified to be roughly 6,600 trillion cubic feet as of 2015 (World Energy Council 2016). As in the case of oil, the amounts of both hypothetical resources and resource potential for natural gas are, as far as I know, not available. Methane serves as the main component of natural gas, representing between 70 and 90% of raw gas. Four NGLs form up another 20% of raw gas (Downey 2009). Gas pipeline operators usually require carbon dioxide, oxygen, nitrogen and hydro sulfide to be removed before transportation to reduce risks associated with pipe corrosion, accidental ignition and clogging. NGLs are gases at normal room temperature, but due to their higher boiling points, they are far more easily cooled to liquids than methane. Liquefied natural gas (LNG) is usually traded in metric tonnes and not by volume measurement. The reserve to projected requirement ratio of natural gas is calculated in Fig. 2.8. The data in the figure is taken from World Energy Council (2016). Figure 2.8 shows the reserve to projected requirement ratio of natural gas if projected natural gas consumption compared with the 2015 world natural gas consumption increases at a rate of 0, 0.1, 0.5, 1, 2 or 3%. As global natural gas production rates are expected to begin to decline within twenty years or so, natural gas can only serve as a temporary solution to offsetting decreasing conventional oil production. The technology to use natural gas as a transportation fuel is well known and natural gas is used to power vehicles in many areas

40

2 Scarcity, Promethean Technology, and Future Perspectives …

depletion time (years)

60 50 40 30 20 10 0 0%

0.1%

0.5%

1%

2%

3%

rate of coal consumption increase (%) Fig. 2.8 The reserve to projected requirement ratio of natural gas

around the world. Shipping and storing natural gas is currently more expensive than shipping and storing conventional oil, but at least natural gas is an available proven technology. There are three unconventional sources of methane, sources distinct from methane sourced from natural gas. The three unconventional sources of methane are tar sands, coalbed methane and shale gas. Unconventional gas requires either reservoir stimulation or other high cost recovery techniques in order to extract the gas. Until the late 1990s, unconventional gas accounted for only a small amount of production in the USA. With the higher recovery costs of unconventional production being offset by the rise in natural gas prices since 2000, unconventional production has quickly risen to almost 50% of dry gas production in the USA. However, unconventional gas production is still quite rare outside of the USA (Downey 2009).

2.4.4 Aviation Fuel Prior to the development of the jet engine in the late 1930s, almost all aircraft were powered by high-compression spark-ignition engines similar to those used in motor cars. Aviation gasoline is a minor fuel used only in high compression sparkignition piston engines of small private 4-seater propeller airlines and helicopters in lightweight aviation situations. Globally, on average, aviation gasoline is produced on a very small scale. It represents a 0.008% share of crude oil finished products, compared with a 26% share for motor gasoline and a 6% share for jet fuel (Downey 2009). Demand for air travel is expected to double in the next two decades. A rapid growth in the use of jet fuels would have major implications for global oil markets (Piotrowski 2018).

2.4 Coal, Oil, Natural Gas and Aviation Fuel …

41

Jet fuel is a clear or slightly yellow low-sulfur middle distillate (150–280 °C) that is used to power aircraft jet engines. There are two types of jet fuel: kerosene-type and naphtha-type. Kerosene-type jet fuels are used for commercial and military turbojet and turboprop aircraft engines. Naphtha-type jet fuels are used for commercial and military turbojet and turboprop aircraft engines where a lower freezing point than kerosene-type is required for high altitude operations and for use in cold climates. There are several important indicators to determine the quality of jet fuel. Here, two of those indicators are briefly discussed, i.e. flash point and viscosity. Flash point is an important safety characteristic of jet fuel. The flash point of a fuel is the lowest temperature at which that fuel will form sufficient vapor to be ignited. The flash point is especially important, for example, on aircraft carriers that store large quantities of fuel and have restricted evacuation options. Naphtha-type jet fuel is more volatile and has a lower flash point than kerosene-type jet-fuel, so it is more dangerous to handle on the ground. Thus, naphtha-type jet fuel is not popular in comparison with kerosene-type jet fuel (Downey 2009). The purity of the aviation fuel in particular is of vital importance for the aviation industry. The purity of the aviation fuel can be measured by viscosity. If jet fuel is contaminated with water, ice may form in the fuel tanks and fuel lines at high flying altitudes. Those ice crystals might disturb or interrupt the flow of fuel to the turbines, and that situation could raise concerns regarding flight safety and could lead to a serious failure (Chevron Products Company 2007). The calculation used in Fig. 2.9 is based on the two data sources: The Statistical Portal (2018) and the World Energy Council (2016). According to the data provided in Downey (2009), the average rate for recovering jet fuel from crude oil is only 6%. In the case of Japan, 11.7% of jet fuel is produced on average (Okachi & Co., Ltd. 2018). Therefore, judging by an expected, tremendous increase in demand for airline aviation, jet fuel consumption will be severely constrained in the future (Mazraati 2010). Indeed, jet fuel demand is expected to rise, in comparison to 2016 levels, by

jet fuel to oil ratio (%)

8 7 6 5 4 3 2 1 0

year Fig. 2.9 Percentage of jet fuel to oil ratio 1990–2012

42

2 Scarcity, Promethean Technology, and Future Perspectives …

more than 50%, to a grand total of more than 9 M barrels per day (Mbd). However, without anticipated improvements in efficiency, demand could reach a full 15 Mbd. That level of jet fuel demand would put jet fuel demand at approximately 13% of global oil demand, up from about 6% in current times (Piotrowski 2018). In relation to these concerns, it should be noted, however, that this type of argument misses an important point: jet fuel is one of the component of crude oil. This class of argument misses an important additional point: jet fuel is less than 10% of the total volume of finished petrochemical products! Judging from the Fig. 2.9, jet fuel consumption and demand is already saturated compared with the share rate of jet fuels from crude oil. The potential substitution of jet fuel for another fuel is yet to be seen.

2.4.5 The Future Perspectives for Shale Gas and Methane Hydrates Shale gas is methane gas found between fine-grained shale deposits with low permeability, an aspect of the resource which makes the gas quite difficult to remove. Artificial fracturing of the gas reservoir is necessary to remove the gas. Despite the recent hype in the USA, hype labeled as the ‘fracking revolution’, there still remains a sharp controversy over the recoverable level of shale gas as well as the environmental impact of hydraulic fracturing (Stevens 2012). Methane hydrates are a fourth source of unconventional gas, currently untapped, but with potential in the future. Methane hydrates are molecules of methane surrounded by, but not bound to, molecules of water. Methane hydrates are crystalline in appearance and have traditionally been perceived as a nuisance as small amounts occasionally clog natural gas pipelines. The estimated naturally occurring quantities of methane available from methane hydrates are enormous, at least 15 times as much as the proven reserve of methane in 2015 (National Energy Technology Laboratory 2011). Naturally occurring methane hydrates are most often found under ocean floors. Producing large quantities of methane from methane hydrates in a commercially viable manner is not currently technically possible. One danger with methane hydrates is that an accidental release of large quantities of methane into the atmosphere could rapidly exacerbate global warming as methane is up to ten times more effective than carbon dioxide at trapping the sun’s heat.

2.5 Uranium and Nuclear Technology Uranium is a naturally-occurring element in Earth whose traces can be found in many locations. Most nuclear reactors are fueled by uranium, which is mined in significant quantities in only twelve countries, regardless of the fact that the distribution of

2.5 Uranium and Nuclear Technology

43

uranium is quite widespread with a concentration within Earth’s crust similar to that of tin. Over 80% of the global production of uranium is mined in just five countries (Kazakhstan, Canada, Australia, Namibia and Niger). In conventional mining, uranium ore is mined either via underground access workings or via open pits. The ore goes through a, where it is crushed and then ground in with water to produce a slurry of fine ore particles suspended in the water. That slurry is leached with sulfuric acid to dissolve the uranium oxides, leaving the remaining rock undissolved. Since 1991, total annual uranium production from mines is less than the fresh fuel requirements of all operating nuclear reactors in the world (Nuclear Energy Agency 2016). The cumulative production of uranium minus the cumulative consumption of uranium up until 2015 is 568,421 tU (Nuclear Energy Agency 2016), enough for less than 12 years of operation assuming the approximate 50,000 tU requirement per year. As of 1 January 2015, world uranium production (55,975 tU) provided about 99% of world reactor requirements (56,585 tU). The remainder of the uranium required by reactors was supplied by previously mined uranium, so-called secondary sources (Nuclear Energy Agency 2016). The secondary supply of uranium includes excess government and commercial inventories, reprocessed spent fuel, underfeeding and uranium produced by the re-enrichment of depleted uranium tails as well as low enriched uranium produced by down-blending highly enriched uranium. So, it is important to verify whether or not the uranium reserve is sufficient for the long-term supply as fuels for nuclear reactors. The stock of uranium-235, a fissile type of exhaustible primary energy source, is then examined. It turns out that the proven reserve of uranium-235 is surprisingly limited. What, you might ask, has been the reaction of the nuclear power generation supporters to this resource limitation? Their reaction was to try to establish a nuclear fuel cycle. In other words, their reaction was to attempt to invent and construct a fast breeder reactor (FBR), which uses mixed oxide (MOX) fuel consisting of both plutonium oxide (Pu O2 ) and uranium oxide (UO2 ). The uranium oxide product of a uranium mill (U3 O8 ) is not directly usable as a fuel for a nuclear reactor and additional processing is required. Only 0.7% of uranium ore is fissile, in other words capable of undergoing fission in the process by which heat energy is produced in a nuclear reactor. Proven reserves of uranium consist of reasonably assured resources (RAR) and recoverable inferred resources (IR). Both variants could, in 2015, be extracted at a cost of less than USD 260 kgU−1 . Now the total energy of the proven reserves is to be calculated. The total proven reserve of U3 O8 in 2015 was about 7.642 million tonnes. This reserve consisted of both RAR and IR. RAR was about 4.386 million tonnes and IR was about 3.255 million tonnes, so the average weight of U3 O8 was 841 million tonnes. Only 0.59% of all U3 O8 is the useful variant–uranium-235—however. The heat equivalent of 1 g of uranium-235 is 82 × 106 kJ. So, the total energy from the proven reserves of uranium is equal to: 82 × 106 × 3 10 × 7.642 × 106 × 106 × 0.59 × 10−2 = 36.97 × 1020 J. Comparing 2015 estimates against 2010 estimates, the energy amount in proven reserves of uranium increased by more than 20%. Still, assuming a 2008 consumption baseline, this amount is

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2 Scarcity, Promethean Technology, and Future Perspectives …

sufficient for less than 8 years of total world primary energy. The world reserve of uranium-235 is indeed a very scarce resource. In Fig. 2.10, the envisioned nuclear fuel cycle is described in context. The left part of Fig. 2.10 represents a schematic of the process of mining, milling, enriching and fabrication for thermal neutron reactors. It is noted that spent fuel usually contains 1% plutonium. The current stock of separated plutonium stored for Japan amounts to more than 45 tonnes, an amount which is equivalent to the potential production of about 4,000 atomic bombs of the type dropped on Nagasaki in World War II. Plutonium is, in fact, easily transformed into nuclear weapons. For this reason, possessing pure plutonium is prohibited for Japan under the nuclear non-proliferation treaty. The only law-abiding way for Japan to possess plutonium is to create a mixed oxide form consisting of both Pu O2 and UO2 . As already mentioned, fissile uranium-235 consists of 0.7% of the world’s total uranium ore. On the other hand, 99.3% of the world’s total uranium ore is uranium238, which is not fissile and cannot be used directly in a light water reactor as nuclear reactor fuel. Plutonium-239 and uranium-238 are typically disposed of as radioactive nuclear waste. However, if uranium-238 is successfully transformed into plutonium within a fast breeder reactor (FBR), almost 60% of uranium—a mix of both uranium235 and uranium-238 could theoretically be utilized as nuclear fuel. In this way the actual stock of proven uranium reserves would be more than 60 times as much as Natural Uranium Uranium Mining and Milling Natural Uranium

Enrichment and Fabrication

Fast-Breeder Reactor

Enriched Uranium Plutonium Fuel Fabrication

Thermal-Neutron Reactor

Spent Fuel containing 1% Plutonium

Envisioned Nuclear Fuel Cycle Spent Fuel

Plutonium Fuel Reprocessing

High-level radioactive waste

Plutonium

Fuel Reprocessing

High-level radioactive waste

Final Disposal of Vitrified Waste at a depth of more than 300m in one million years Fig. 2.10 Envisioned nuclear fuel cycle (compiled from a slide by Prof. Koide)

2.5 Uranium and Nuclear Technology

45

the current stock of uranium-235! This imaginative idea is the basis of establishing a nuclear fuel cycle, depicted schematically on the right part of Fig. 2.10. After people started realizing, however, that it may be impossible to establish a commercially viable nuclear fuel cycle based on a FBR, MOX began to be used in thermal-neutron reactors (not in FBR!). Such was the case in the Fukushima Unit 3, the fuel of which has reportedly been melted down. Making mistakes is the only way for humans to acquire proper understanding of the nature and rationale behind any technology. In the case of nuclear power generation, the learning process mechanism seems to be very difficult to establish, perhaps beyond the reach of humans. The following statement by Georgescu-Roegen, made in 1975 deserves special attention with respect to the threat of heat pollution created by nuclear power generation at a fundamental level: “The additional heat into which all energy of terrestrial origin is ultimately transformed when used by man is apt to upset the delicate thermodynamic balance of the globe in two ways. First, the islands of heat created by power plants not only disturb the local fauna and flora of rivers, lakes, and even coastal seas, but they may also alter climatic patters. One nuclear plant alone may heat up the water in the Hudson River by as much as 7 °F. Then again the sorry plight of where to build the next plant, and the next, is a formidable problem. Second, the additional global heat at the site of the plant and at the place where power is used may increase the temperature of Earth to the point at which the icecaps would melt—an event of cataclysmic consequences. Since the Entropy Law allows no way to cool a continuously heated planet, thermal pollution could prove to be a more crucial obstacle to growth than the finiteness of accessible resources” (the second italics part is added, Georgescu-Roegen 1975, p. 358). This excerpt is very valuable for our sustainability debate. Georgescu-Roegen argues that nuclear power plants could be a real threat to global warming. We must recall that some countries such as China and Russia are planning to launch the construction of even more nuclear power plants due to the high price of oil and— ironically—to fight global warming. In conclusion, we must emphasize three points associated with nuclear waste. First of all, there is no safe level of exposure to radiation: even very low doses can cause cancer (National Research Council 2006). Secondly, it is almost impossible to safely operate large commercial plutonium plants for reprocessing spent fuels. For example, there is only one place in Japan, Rokkasho-Mura (Rokkasho village) of Aomori Prefecture, which aims to do just that. Rokkasho-Mura has yet to commence operation. Every year about 1,000 tonnes of spent fuels is produced in Japan and the stock of spent fuels that are to be processed is accumulating without proper processing. Finally, concerning high-level radioactive waste, final underground disposal sites, where the vitrified wastes are supposed to be buried for 100,000 years, have not yet been determined. Given this information any serious discussion of sustainability in Japan must be void of any argument for building additional nuclear power plants.

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2.6 Conclusion According to the projection of total primary energy consumption in 2050, a projection which assumes Asia, including China and India, does not experience any technological improvement in terms of technology for using primary energy sources, predicts that energy demand from Asia in 2050 will represent nearly 70% of world total primary energy consumption. Within 35 years or so, the world demand is predicted to increase by more than 54% in comparison with the 2015 consumption level (EDMC 2018). Besides the increasing trend of world primary energy consumption, there is another major problem to be faced: how to supply an ever-increasing demand for electricity. Although electricity is considered to be the cleanest form of energy, as shown in Table 2.1, a full two-thirds of global electricity, consumed in 2015, was generated using fossil fuels. Generating sufficient electricity without the use of fossil fuels is crucial for mitigating climate change. Unfortunately, coal, which is the most intensive source of greenhouse gas (GHG) emissions, still sources almost 40% of global electricity generated. Thanks to shale oil gas production, the United States reduced coal-fired electricity generation, down from 52% in 2008 to 34% in 2015. However, that reduction is likely temporary. Along with the United States and despite government claims, China and India remain heavily dependent on coal-fired electricity generation. In relation to nuclear energy, Table 2.1 shows that electricity generation in France comes mainly from nuclear power generation. As discussed in the previous section, Table 2.1 Percentage share of primary energy sources for electricity generation in 2008 and 2015 (compiled from data in EDMC (2011, 2018)) Coal

Oil

Natural gas

Nuclear

Hydro

Bio and waste

Others

52

1.4

18

23

2.3

1.3

2

USA

2008 2015

34

1

32

19

6

2

5

France

2008

4.4

1.6

4.1

84

4

0.4

1.6

2015

2

0

4

78

10

1

5

2008

89

0.8

0.9

2.3

6.5

0.1

0.1

2015

70

0

2

3

19

1

4

India

2008

82

4

6.7

1.7

4.2

0.5

0.5

2015

83

2

5

3

1

2

4

Japan

2008

28

12

24

30

3

1

2

2015

34

10

40

0

8

4

4

World

2008

47

6

21

16

6

2

3

2015

39

4

23

11

16

2

5

China

2.6 Conclusion

47

however, it should be remembered that total uranium-235 supply does not satisfy current world demand. We have not thus far established another Promethean technology capable of utilizing solar radiation or hydrogen as primary energy sources. Notes 1. Jevons was perhaps the first economist who emphasized the importance of the anticipation of a future event. He gave a systematic discussion of the subject in his book, The Theory of Political Economy (1965, but originally published in 1871). Quite some time later, Rosen presented a precise definition on anticipatory systems in his book, Anticipatory Systems (1985). In essence, anticipatory systems try to change their present actions based not only om past states of the systems, but also and more importantly on envisioned future states of the systems. 2. It is not well recognized even among energy analysts that both net energy and gross energy cannot be properly defined in analytical terms. In the text, however, the conventional method is adopted for the present purpose of the book. However, gross energy cannot discriminate between technologies based solely on solar energy. Net energy analysis, on the other hand, completely ignores the efficiency of the technologies by which resources in situ are transformed into controlled energy. As far as net energy analysis is concerned, it does not matter whether two tonnes or one million of tonnes of oil in situ are depleted for obtaining one tonne of oil net. A detailed discussion of the insurmountable difficulty in defining net energy can be seen in Georgescu-Roegen (1979). 3. Many energy analysts use the concept of Energy Return on Investment (EROI) to describe the energy quality of a particular type of energy source. EROI is based on the idea of the cost-benefit method: the total energy generated by a project is divided by the total energy invested in the project. EROI was systematically proposed by Hall et al. (1979). EROI does not, however, define what the term ‘invested’ really means and does not distinguish between different energy forms. In particular, it does not distinguish energy carrier based on their primary energy source. Furthermore, Hall et al. (1979) mistakenly tries to convert certain information on economic data such as labor, into energy units. The general framework in this chapter is a much more precise formulation of energy transformation that is independent of economic data. 4. It is important to note coal and metals were inseparable driving wheels for the industrial revolution. See Man the Maker (Forbes 1958) for the detailed description of the interplay between coal mining and metallurgical development. 5. Downey (2009) devotes one whole chapter to discussing various aspects of reserves.

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References Arrow KJ, Debreu G (1954) Existence of an equilibrium for a competitive economy. Econometrica 22:265–290 Barbier E, Markandya A (1990) The conditions for achieving environmentally sustainable development. Eur Econ Rev 34:659–669 Barnett HJ, Morse C (1963) Scarcity and growth: the economics of natural resource availability. The Johns Hopkins University Press, Baltimore Bromley DW (1990) The ideology of efficiency: searching for a theory of policy analysis. J Environ Econ Manag 19:86–107 Chevron Products Company (2007). Aviation fuels: technical review. https://www.chevron.com/-/ media/chevron/operations/documents/aviation-tech-review.pdf Cloud P (1977) Entropy, materials, and posterity. Geol Rundsch 66(3):678–696 Costanza R, d’Arge R, de Groot R, Farber S, Grasso M, Hannon B, Limburge K, Naeem S, O’Neill RV, Paruelo J, Raskin RG, Sutton P, van den Belt M (1997) The value of the world’s ecosystem services and natural capital. Nature 387:253–260 Daly H (1991) Steady-state economics, 2nd edn. Island Press, Washington, DC Downey M (2009) Oil 101. Wooden Table Press, New York EDMC (2011) Handbook of energy & economic statistics in Japan. The Energy Data and Modelling Center, Tokyo EDMC (2018) Handbook of energy & economic statistics in Japan. The Energy Data and Modelling Center, Tokyo Eigen M (1971) Selforganization of matter and the evolution of biological macromolecules. Die Naturwissenschaften 58:465–523 Forbes RJ (1958) Man the maker: the history of technology and engineering. Abelard-Schuman, New York Georgescu-Roegen N (1968) Revisiting Marshall’s constancy of marginal utility of money. South Econ J 35:176–181 Georgescu-Roegen N (1969) Process in farming versus process in manufacturing: a problem of balanced development. In: Papi U, Nunn C (eds) Economic problems of agriculture in industrial societies. Macmillan, London, pp 497–528 Georgescu-Roegen N (1975) Energy and economic myths. South Econ J 41(3):347–381 Georgescu-Roegen N (1977a) Bioeconomics: a new look at the nature of economic activity. In Junker L (ed) The political economy of food and energy. Ann Arbor: Michigan Business Papers no 62, pp 105–134. University of Michigan Georgescu-Roegen N (1977b) The steady state and ecological salvation: a thermodynamic analysis. BioScience 27(4):266–270 Georgescu-Roegen N (1979) Myths about energy and matter. Growth and Change 10:16–23 Georgescu-Roegen N (1984) Feasible recipes versus viable technologies. Atl Econ J 12(1):21–31 Glucina MD, Mayumi K (2010) Connecting thermodynamics and economics: well-lit roads and burned bridges. Ann N Y Acad Sci 1185:11–29 Gribbin JA (1980) The death of the sun. Delacorte Press, New York Hall CAS, Lavine M, Sloane J (1979) Efficiency of energy delivery systems: I. An economic and energy analysis. Environ Manag 3(6):493–504 Hotelling H (1931) The economics of exhaustible resources. J Polit Econ 39(2):137–175 Hubin DC (1989) Scarcity and the demands of justice. Cap Univ Law Rev 18(2):185–199 Jevons WS (1965) The theory of political economy, 5th edn. Augustus M. Kelley, New York Kawamiya N (1983) Entropy and future choices for the industrial society (in Japanese). Kaimei, Tokyo Lakhani S, Corboz J (2017) Illegal mining in Afghanistan: a driver of conflict. Peacebrief 226:1–4 Marshall A (1920) Principles of economics, 8th edn. Machmillan and Co., Limited, London Mazraati M (2010) World aviation fuel demand outlook. OPEC Energy Rev 34(1):42–72

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National Energy Technology Laboratory (2011) Energy resource potential of methane hydrate. https://www.netl.doe.gov/File%20Library/Research/Oil-Gas/methane%20hydrates/ MH-Primer2011.pdf National Research Council (2006) Health risks from exposure to low levels of ionizing radiation. BEIR VII Phase 2. The National Academies Press, Washington, DC Nordhaus WD (1973) The allocation of energy resources. Brook Pap Econ Act 1973(3):529–576 Nuclear Energy Agency (2016) Uranium 2016: resources, products and demand, OECD. NEA. No 7301. https://www.oecd-nea.org/ndd/pubs/2016/7301-uranium-2016.pdf Okachi & Co., Ltd. (2018) Oil refinery products and their shares. http://www.okachi.co.jp/market/ commodity/domestic/tokyo_oil/picture.html Pimm SL (1997) The value of everything. Nature 387:231–232 Piotrowski M (13 Feb 2018) Strong jet fuel demand to have long-term impacts on global oil market. The Fuse. http://energyfuse.org/strong-jet-fuel-demand-long-term-impacts-global-oil-market/ Ricardo D (1951) On the principles of political economy and taxation. In: Sraffa P (ed) The works and correspondence of David Ricardo, vol 1. Cambridge University Press, Cambridge Robbins L (1932) An essay on the nature and significance of economic science. Macmillan, London Rosen R (1985) Anticipatory systems. Pergamon Press, Oxford Samuelson PA (1980) Economics, 11th edn. MacGraw-Hill, New York Samuelson PA (1999) Foreword. In Mayumi K, Gowdy J (eds) Bioeconomics and sustainability: essays in honor of Nicholas Georgescu-Roegen, pp xiii–xvii. Edward Elgar, London Samuelson PA, Nordhaus WD (2010) Economics, 19th edn. MacGraw-Hill, New York Simmons MR (2005) Twilight in the desert. Wiley, Hoboken, New Jersey Skinner BJ (1976) A second iron age ahead? Am Sci 64:258–269 Solow RM (1974) The economics of resources or the resources of economics. Am Econ Rev 64(2):1–14 Stevens P (2012) Shale and a renewed dash for gas in the UK?. https://www.chathamhouse.org/ media/comment/view/187991. Accessed 3 Oct 2019 Strotz RH (1955) Myopia and inconsistency in dynamic utility maximization. Rev Econ Stud 23(3):165–180 The Statistical Portal (2018) Fuel consumption of airline worldwide. https://www.statista.com/ statistics/655057/fuel-consumption-of-airlines-worldwide/. Accessed 25 Sep 2018 Ulanowicz RE (1986) Growth and development: ecosystem phenomenology. Springer, New York U.S. Geological Survey (2018) Mineral reserves, resources, resource potential, and certainty. https:// www.nwrc.usgs.gov/techrpt/sta13.pdf Vitousek PM, Ehrlich PR, Ehrlich AH, Matson PA (1986) Human appropriation of the products of photosynthesis. BioScience 36(6):368–373 World Energy Council (2016) World energy resources 2016. https://www.worldenergy.org/wpcontent/uploads/2016/10/World-Energy-Resources-Full-report-2016.10.03.pdf

Chapter 3

Credibility of Scientific Analysis, and Assessment of PV Systems and Ethanol Production

3.1 Introduction Ascertaining whether or not a particular primary energy source is a reliable alternative to fossil fuels is crucial for national energy policies. In order to realize an informed energy policy and to avoid wasteful investment on primary energy sources that do not make a significant contribution to the societal metabolism, a scientifically credible assessment is a prerequisite for all countries. To understand the meaning of proper scientific energy assessment, two types of energy carrier production method, i.e. photovoltaic (PV) and ethanol based on corn and sugarcane, are assessed to identify: (i) to what extent such methods are able to replace fossil fuels; and (ii) what types of constraints show up if the scale of energy carrier production is significantly enlarged. Afterward, several important factors that often prevent not only policy makers but also scientists from making a reliable assessment of alternative primary energy sources for societal metabolism are identified. Section 3.2 introduces the Multi-Scale Integrated Analysis of Societal and Ecosystem Metabolism (MuSIASEM) scheme. MuSIASEM is an accounting scheme that extends Georgescu-Roegen’s flow-fund scheme by applying it to hierarchically organized systems with multi-scale and multi-level components, socioeconomic systems, for example. In comparison with nuclear and coal-based electricity generation, an assessment of PV systems based on crystalline silicon wafer-based solar cells is conducted in connection with four dimensions of sustainability. Namely, those dimensions are biophysical, environmental, economic and technological. Section 3.2 also attempts to calculate what the silver requirement for PV systems would be in the case that electricity generated by first-generation PV systems is significantly scaled up. Silver is found to be a factor that serious limits the large-scale generation of electricity with PV systems. Section 3.3 discusses several problems associated with the large-scael production of ethanol from corn (United States) and sugarcane (Brazil). In the case of ethnol production in the United States, various forms of energy carrier in addition to corn biomass are intensively and indirectly used in the production of corn-ethanol, e.g., © Springer Nature Switzerland AG 2020 K. T. Mayumi, Sustainable Energy and Economics in an Aging Population, Lecture Notes in Energy 76, https://doi.org/10.1007/978-3-030-43225-6_3

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oil, fertilizers, pesticides, steel, cement and electricity, via cultivation, irrigation, tractor use, drying and, transportation. When all is said and done, it is perhaps more appropriate to call the current processes of ethanol production in the United States as ‘parasite technology’ as they use substantial amounts of precious resources and energy carriers both directly or indirectly. The assessments of PV systems and ethanol production in Sects. 3.2 and 3.3 beg a question: Why do many countries make enormous investments into alternative energy carrier production systems that are feasible yet not Promethean? Section 3.4 explores certain reasons why such wasteful, non-Promethean investments are being attempted. Reducing such investments, made by reasonably concerned governments, is a prerequisite for enhancing the quality and transparency of scientific analysis of energy policy. To better understand the critical situation of our modern society associated with the nature of scientific analysis and energy assessment, Sect. 3.4 discusses three ideas: (i) ‘granfalloon’ proposed by Vonnegut (1963); (ii) ‘belief fixation’ proposed by Peirce (1877); and (iii) ‘post-normal science’ proposed by Funtowicz and Ravetz (1990). The Agency for National Resources of Energy in Japan proposed hydrogen fuel cell technology, which is expected to provide an important principal energy source for the future of Japan (2018). Section 3.5, the conclusion, makes a critical assessment of that proposal and shows that, though hydrogen generation is a feasible technology, it is, in reality, a parasite energy technology that heavily uses exhausting energy carriers in the form of fossil fuels. A more reliable and integrated scientific analysis of hydrogen energy must be conducted so as to prevent the deception of Japanese citizens.

3.2 MuSIASEM Applied to the Evaluation of PV Systems PV systems convert solar energy directly into electricity. PV systems have several advantages, including the fact that they essentially emit no greenhouse gas emissions once installed, excepting maintenance operations, and that they have no moving parts, meaning they do not cause noise pollution during operation (Jungbluth et al. 2012). In addition to these points, silicon, used to produce PV systems, is nontoxic and the second most abundant element in the Earth’s crust. On the other hand, PV systems do have several significant technical drawbacks, mainly in relation to the questionable ability of current electrical grids to adjust to the societal patterns of electricity consumption when those grids source their electricity from PV system sources. Indeed, the production of electricity by PV systems is concentrated within daytime hours and limited by variable levels of insolation. Such constraints mean that peak electricity generation is often unable to match the demand of urban systems and, by extension, PV systems are not particularly effective at serving peak demand. In countries where high-penetrations in the electric grids have already taken place, several cases of over-loading and over-voltaging have already been documented (Stetz et al. 2014). A substantial over-loading incident occurred in Kyushu area of

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Japan in late October of 2018, for example. In addition to these technical drawbacks, the long-term utilization of PV systems tends to be considerably lower than that of fossil fuel-based ones (Palmer 2014). In order to generate the same amount of electricity, this low capacity utilization factor, i.e. low capital utilization in economic terms, implies the need to construct PV systems with much higher power capacities than would otherwise be needed. The concept of energy payback time (EPBT) is often used in the assessment of PV systems. In the case of a PV module, EPBT is the ratio of the required energy carriers during the module life cycle of a PV panel—including the energy requirements of manufacturing, installation, operation, and decommissioning—to the energy savings due to electricity generated by the PV module. That said, EPBT refers only to aspects of the quality and quantity of the specific energy carrier being assessed. Therefore, EPBT is not a satisfactory approach for an evaluation of an overall energy and material balance associated with important aspects of the quality and quantity of alternative primary energy sources as well as their corresponding socioeconomic factors in terms of human time, land and capital utilization patterns. To this end, the analysis is left in want of a general accounting scheme suitable for the assessment of PV systems. The methodology proposed in response to this requirement is the MultiScale Integrated Analysis of Societal and Ecosystem Metabolism (MuSIASEM) scheme (see, e.g. Giampietro et al. 2009). MuSIASEM is an accounting method that is a combination of the three pioneering works from various scientific disciplines: (i) Georgescu-Roegen’s flow-fund representation of the production process (Georgescu-Roegen 1971); (ii) hypercycle and dissipative parts theory in nature (Eigen 1971; Ulanowicz 1986); and (iii) hierarchy theory and scale issues in ecology (Allen and Starr 1982; O’Neill et al. 1986; Salthe 1985). The idea of Ulanowicz, i.e. the importance of hypercycle and dissipative parts, associated with Promethean technology, was discussed in Chap. 2. GeorgescuRoegen’s flow-fund representation of the production process was also touched upon in Chap. 2. In relation to the societal metabolism, when omitting the fund elements, such as labor, capital and Ricardian land, from the analysis of energy transformation technologies embedded in socioeconomic systems, one certainly misses many crucial aspects. Part of the value-added of the MuSIASEM accounting scheme is the attempt to explicitly include these crucial fund elements in an analytical representation of energy transformation systems. Hierarchy theory in ecology is crucial when investigating the societal metabolic pattern in which the whole socioeconomic system is not only internally related to the sectoral components but also externally related to the environment. In particular, Salthe’s basic idea of three levels representation, i.e. upper, focal and lower (1985), is suggestive for the workable representation of the MuISASEM scheme. In the following, a representation of four levels is introduced to examine the performance of a PV system being considered. The multi-scale perspective of societal metabolism involves four different hierarchical levels: 1. The level ‘+1’—outside of the societal system, the upper level; 2. The level ‘0’–the system corresponding to the society, the focal level;

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3. The level ‘−1’ level—corresponding to the sub-sectors: energy and mining (EM), agricultural (AG), building and manufacturing (BM), service and government (SG) and household (HH), these are lower levels; and 4. The level ‘−2’—the lowest level representing the ‘photovoltaics’ subcompartment sector, converter of solar radiation into the electricity within the EM sector. Bringing these three pioneering concepts together, the production factors required by the energy conversion process in PV systems can be said to include three fund elements and five flow elements: (i) labor (HA), measured in hours; (ii) Ricardian land (L), measured in m2 ; (iii) power capacity (PC), that is, the maximum electricity generation capacity, measured in megawatts (MW); (iv) water, measured in cubic meters (m3 ); (v) three forms of energy carriers, electricity, measured in megawatthours (MWh), heat, measured in gigajoules (GJ) and fuels, measured in gigajoules (GJ); and (vi) silver, measured in kilograms (kg). These flow and fund elements are evaluated in terms of GWh per MWp , where the GWh value is electricity generated during the lifetime of the analyzed PV system and the MWp value is the power capacity of the analyzed PV system. The environment—the level ‘+1’—provides the requisite biophysical resources, e.g. solar energy, water and silver, as well as waste emission sink capacity. The constraints on the conversion process of PES into EC are determined at various scales: (i) the microscale; (ii) the mesoscale; and (iii) macroscale. At the microscale, the relation between level ‘−1’ and level ‘−2’ is described, e.g. the availability of production factors such as PC and EC, converters and appropriate structures, is described. At the mesoscale, the relation between level ‘0’ and level ‘−1’ is described, e.g. the demographic profile of the society is described and used to answer questions such as whether enough hours of human activity, to be invested in the energy conversion process, are available. Lastly, at the macroscale, the relation between the level ‘+1’ and level ‘0’ is described, e.g. the availability of biophysical gradient emissions sink capacity is described. Complicating this hierarchy of issues, it is also possible to deal with import and export of both primary energy sources (PES) and energy carriers (EC). Four dimensions of sustainable conditions within the MuSIASEM framework can be considered when identifying the limits of PV systems within a given geographical region, typically a nation, a territory or an urban settlement (Lo Piano and Mayumi 2017). It should be noted that these four dimensions, listed in the following, are not mutually exclusive: 1. Energy and material accessibility—referring to the availability of resources. A set of variables employed for fueling the economy as well as for maintaining the social fabric must be selected: (i) primary energy sources; (ii) energy carriers; (iii) material flows; and (iv) land-based resources such as water. 2. Environmental health desirability—referring to satisfying the minimum standard of human and ecosystem health. Consideration of the following processes of energy and material flow transformation is proposed: (i) acquisition; (ii) production; (iii) distribution; (iv) consumption; and (v) assimilation.

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3. Socioeconomic acceptability—referring to the socially desirable material standard of living, industrial structures, and institutional arrangements associated with the population under assessment. 4. Technological achievability—referring to the present technological level and the plausible future technological prospects. In the assessment of PV systems, the four dimensions of a sustainable condition are, in our accounting methodology, considered across two phases. The first phase, that of all stages of PV production and dismantling processes, thereby excepting the process of electricity generation during operation, consists of the following processes: (i) silica mining and refining; (ii) reduction and purification; (iii) wafer sawing; (iv) PV cell production; (v) PV panel production; (vi) transportation and installation; and (vii) final dismantling. The second phase is that of electricity generation. Now, it is possible to assess a PV system based on the utility-scale and groundmounted, fixed-tilt solar power plants constituent of crystalline silicon wafer-based solar cells. This first-generation type of solar cells represents the most widely adopted technology globally. In fact, it enjoys a market share of around 90–95% according to a recent contribution by the Fraunhofer Institute for Solar Energy Systems (2018). Furthermore, Japanese companies—those that shipped roughly 20% of the total installed capacity in 2013—stopped the production of second-generation PV due to a lack of cost competitiveness of that technology. To that end, a recent survey found that: ‘Meanwhile, in Japan, two thin-film PV manufacturers announced withdrawal from the[sic] PV production between 2013 and early 2014. Honda Soltec stopped production of CIGS PV modules in March 2014. Fuji Electric announced that they would transfer their a-Si solar cell business to FWAVE, a wholly-owned Japanese subsidiary of ZinniaTek (New Zealand), effective at the end of March 2014. Both companies faced difficulties in continuing their PV business due to the price gaps between c-Si PV products and thin-film PV products as well as their lack of competitiveness in product performance’ (Yamada 2013, p. 21). Despite of the research that led to the development of second-generation (thinfilm) and third-generation solar cells, the share of crystalline silicon wafer-based solar cells firmly predominates. There does not exist any apparent sign of decline. For electricity production, an average yearly solar radiation of 1,700 kWh m−2 −1 y is assumed. A sensitivity analysis of that parameter was also performed, however, and a wide range of solar irradiations (850–2,500 kWh m−2 y−1 ) representative of everything from high-latitude, low-insolation regions to the highest values typical of equatorial deserts were considered. A production factor of 0.7 was adopted to account for conversion losses, including mismatch of modules, reduction of efficiency due to dust, transmission and grid losses, and so forth. An average efficiency of 16% is also assumed, with a PV panel lifetime of 30 years. The assumed solar panel power density is 160 Wm−2 . Regarding plant size, most of the installations assessed for this chapter’s analysis were small-scale rooftop in nature. In terms of power capacity, however, the utility-scale plants assessed constitute a very relevant fraction. Still, all these figures are typical for modern commercial technologies. From these data an average PV panel operation of 1,200 h y−1 is estimated over its lifetime

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Table 3.1 Comparison of the performance of solar PV electricity generation relative to nuclear and coal-based electricity generation

Construction/Installation/Dismantling of Electricity Generation Systems PV

Nuclear

IGCC (coal)

HA(h/GWh)

1,100

160

15

Electricity (MWh/GWh)

38

N.A.

0.32

Heat and Fuels (GJ/GWh)

94

110

2.3

Electricity Generation Process PV

Nuclear

IGCC (coal)

HA(h/GWh)

83

480

160

Electricity (MWh/GWh)

0.15

33

32

Heat and Fuels (GJ/GWh)

3

250

160

IGCC (Integrated Gasification Combined Cycle)

(with a range of 600–1,767 h considered, dependent on solar insolation levels). The utilization factor assumed is 0.17, with a range of 0.10–0.26 considered. It should be noted that utilization factors can reach as low as 0.05 in particular cloudy regions. The data used in this chapter’s accounting is derived directly from measured experimental values. Analytical models and extrapolations have been excluded from the accounting, privileging bottom-up data from technical documents over top-down statistics wherever possible. However, data is affected by a rather high amount of uncertainty due to the absence of systematic and accurate investigations in the literature. The quantities of human labor and water are particularly affected by uncertainty. Nevertheless, Table 3.1 shows a comparison of PV systems, a result of the mentioned numerical assumptions and a comparison to nuclear and coal-based electricity generation.1 In Table 3.1, heat and fuels are aggregated for the sake of convenience. A first observation in relation to Table 3.1 is that a majority of resources are allocated in the construction phase of PV systems, as should be intuitive. In contrast to PV systems, the specific input of production factors is seen to be definitively higher in the electricity generation phase of power-plants based on both nuclear energy and coal (Diaz-Maurin and Giampietro 2013). Regarding to energy and material accessibility, the power of solar insolation does not represent a limit per se, with an average value of 174,000 TW reaching Earth of which 21,840 TW reaches ice-free land surface, does not represent a limit per se. Should this second-mentioned quantity be entirely converted into electrical energy, roughly one hour of supply would be enough to meet the current annual world electricity demand. So, in an absolute sense, solar energy does significantly not limit PV systems. There do, however, exist other limits to energy and material accessibility. Two important limiting factors of that type, not mentioned in Table 3.1 are, in the case of PV systems, silver, and, in the case of all three electricity generation methods mentioned, water.

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In PV systems, silver is used in a specialized paste for the contact metallization of silicon wafer-based cells. Its requirement is given extended discussion later in this chapter. Water does not represent a limitation of environmental health desirability in the deployment of PV. In fact, most of the use of water in PV systems takes place during the production phase. Generally, for the production phase, high-value demineralized, if not deionized, water is required. A small amount of water is also required for panel cleaning, with the number of washing cycles estimated to be between two and four per year (Jungbluth et al. 2012; Tanesab et al. 2015). In the electricity generation phase, PV is not at all water-intensive, its use ranging between two to three orders of magnitude less than most other electricity generation technologies (Paiano 2015). However, water proves indispensable for nuclear power plants and thermal power stations including coal-fired power plants. Huge amount of cooling water is used during the operation of both nuclear power plants and coal-fired power plants. For example, in the case of a power plant with a 1 GW power capacity, roughly, 30– 40 m3 s−1 s of water is required in the case of a coal-fired plant and roughly 70 m3 s−1 is required in the case of a nuclear plant. Touched on previously in Chap. 2, heat pollution is a particularly serious concern for nuclear power plants (Marine Ecology Research Institute 2013). Regarding land use, 520–1500 m2 are required to produce 1 GWh from PV solar power plants. This figure corresponds to an average power density of 37 W m2 . In comparison, the supplied power density of fossil fuel power plants is at least one order of magnitude higher. Typical power densities for electricity consumption are between 20 and 100 W m−2 for houses, with lower benchmarks in rural areas. On the contrary, in urban contexts, that same quantity can be found to be orders of magnitude higher, ranging from 200 W m−2 to 400 W m−2 in the case of office edifices, and up to 3 kW m−2 for high-rise buildings (De Castro et al. 2013). In spite of the fact that solar PV is the densest form of renewable energy, the mismatch between the highpower density of demand of urban systems and the low-power density of production is blatant. This ‘power dilution’ could potentially drive a significant land rush in the case of a large-scale solar PV deployment (Scheidel and Sorman 2012). In Japan, the electricity feed-in tariff system was enacted in 2012. Under that system, electric power companies are supposed to buy all electricity generated by renewable energy sources, such as PV systems (JP¥40 per 1 kWh). The fixed feedin price was reduced to JP¥18 in 2018, a fixed contract price level that electricity generation companies are legally made to maintain for the next 20 years. In light of these price levels, a substantial amount of new PV systems are being installed to take advantage of the generous electricity feed-in tariff system. Forest land is frequently being reclaimed in order to serve as a construction site for PV systems. As a result of this land repurposing, serious environmental concerns emerge with respect to soil conservation and water retention capacity. In the literature, however, it has also been argued that coal-based power plants are significantly land-intensive, once one thoroughly computes land transformation e.g. that which occurs during the mining stage (Ong et al. 2013). Indeed, the selection of the boundary of a system to be analyzed has a substantial impact on the results of an analysis.

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In relation to the dimensions of technological achievability and socioeconomic acceptability, the highest share of energy carriers is used in the construction of the electricity generation systems. This fact is readily observable in Table 3.1, and is especially true for the electricity energy carrier, whose consumption is two orders of magnitude higher in the construction stage compared to the electricity generation stage. Most electricity generated by PV systems is consumed in the manufacturing process, especially during the purification of metallurgical-grade silicon and wafer sawing. Indeed, the purification of metallurgical-grade silicon consists of a carbothermic reduction, a process which takes place at very high temperatures. On socioeconomic acceptability, modern societies are characterized by the allocation of a very limited fraction of human time in the agricultural, energy and mining sectors. The dramatic reduction of human labor in these sectors allows for the investment of large fractions of the workforce in the service and government sectors. It also allows, a significant quantity of time to be spent performing leisure activities, where the resources—either locally produced or imported—are consumed. That is to say, in order to allocate more time in consumptive activities, a certain minimal fraction of human labor must be invested in the production of resources. In terms of the consumption of energy carrier, the PV lifecycle turns out to be relatively minor when compared with the consumption of EC used in other activities in EM. This is not at all surprising since the latter comprises several very energydemanding processes such as the mining of ores and other resources, as well as the refining of oil, a process particularly intensive in terms of heat use. As a result, EC use does not seem to represent a constraint on a massive deployment of PV. However, the allocation of human activity to the PV lifecycle appears to be more critical. In fact, the PV comes out to be roughly twice as labor-intensive as the average of the EM sector. This aspect could have significant implications on the socioeconomic acceptability of PV systems. The total levels of power capacity level required by PV systems represent another important issue in the context of large-scale PV deployment. In our assessment of PV systems, the utilization factor was assumed to be 0.17. Over the timescale of a year, that factor translates to roughly 1,490 h of operation at nameplate capacity. Another way to interpret these figures is to first note that 1,000 MWh of electricity is generated by a 1 MW plant operating at nameplate capacity for 1,000 h. Then, given the characteristic utilization factor of 0.17, one could estimate that a plant with a power capacity of 0.67 MW (1,000/1,490) would be required to produce 1,000 MWh in one year’s time. On the other hand, in the case of a typical coalbased power generation plant, the expected utilization factor would be roughly 0.8, translating to roughly 7,000 h of generation at nameplate capacity out of 8,760 h in a year. Thus, the required power capacity would be just only 0.14 MW (1,000/7,000). In summary, the power capacity level of PV systems tends to be much larger than that of fossil fuel-based power generation plants due to two factors: (i) a low capital utilization factor of the inherent low energy density level, in the case of solar energy utilization; and (ii) the daily timescale during limit of solar insolation, dependent on the location of the PV system in question.

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This potential criticality of the level of power capacity of PV systems is often related to metal requirements for constructing and maintaining these systems. The metal requirement problems have already been addressed in the literature in recent years (Feltrin and Freundlich 2008; Kleijn et al. 2011; Zuser and Rechberger 2011; Elshkaki and Graedel 2013; Grandell and Thorenz 2014). However, in view of the recent evolution of the solar PV industry, a new assessment is required in order to better characterize possible mineralogical constraint. Developing alternative renewable energy sources, particularly those based on solar energy, has become an important policy for Japan and many other industrial countries. This statement proves particularly true, following the Fukushima disaster. In fact, the global cumulative power capacity of PV systems reached a level of 177 GW in 2014, a figure which represents a 27% increase in comparison with the previous year (IEA 2015). However, despite this impressive expansion, it is estimated that this capacity would only be sufficient to meet roughly 1% of the modern world’s electricity demand. Before entering into the calculation of silver demand, it is instructive to briefly consider the current situation of global silver supply and consumption as well as the demand for silver in the PV sector. The current requirement of silver per silicon cell is estimated to be 130 mg per cell (36 mg W−1 ), although it’s worth noting a striking tendency of lowering silver requirements, recorded in recent years and, especially up until 2013 (Semi PV Group Europe 2015). It is also reported that the total annual quantity of silver (about 1,900 t) used in the industry for the contact metallization of crystalline silicon wafer-based cells corresponds to approximately 6% of the annual world silver demand (GFMS 2015). The estimated world reserves of the metal amounted to 530,000 t in 2014 (U.S. Geological Survey 2015). Figure 3.1 shows the global annual silver supply and demand between 2003 and 2014. A certain amount of silver is occasionally provided in terms of net hedging supply. Selling silver in the futures market acts as a hedge and is actually part of 40000

amount of silver (t)

35000 30000 25000 total supply

20000

mine production

15000

scrap

10000

physical demand

5000 0

year Fig. 3.1 Global annual silver supply and demand 2003–2018

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3 Credibility of Scientific Analysis, and Assessment of PV Systems …

the silver supply. Selling less future production is actually de-hedging and is part of silver demand: in 2010, for example, the net hedging supply was estimated to be 1,567 t. Additionally, recycled old scrap has contributed to at least 20% of the supply between 2003 and 2014, though a substantial decrease in 2014 should be remarked, possibly due to the low commodity price at that time. As yet, there is no clear data regarding the actual recoverable ratio of silver from disposed solar panels due to the embryonic state of the PV recycling sector. A recovery rate of 30–50% has been hypothesized in a recent contribution in the literature, although available information is highly speculative (Paiano 2015). However, in upcoming years and considering the exponential growth that has characterized PV installation in recent years, the quantity of silver reclaimed from recycling process will represent only a negligible fraction in comparison to the likely future demand. The following simple calculation is conducted: m Ag =

(α − α0 )E Icons × Pdensit y × m Ag_U P χ El_net × S I × μ

(3.1)

where 1. mAg is the quantity of silver required in metric tons (t). 2. α is the fraction of the annual global electricity consumption and α 0 is the fraction of electricity already met by crystalline silicon-based PV power installations—α varies in the range 5–30%, whereas α 0 is 1%. 3. El cons is the global annual electricity consumption in terawatt-hours (TWh), 18,910 TWh, an estimate made by the IEA and referring to the year 2012 (IEA 2014). 4. χ El_net is the fraction of electricity available for consumption after general losses, 0.7 (annual average general losses of electricity are 30% of production) (Feltrin and Freundlich 2008). 5. Pdensity is the average density of power of solar PV panels, expressed in watts per square meter (Wm−2 ), 150 W m−2 ; 6. SI is the average annual global solar irradiance, expressed in kilowatt-hour per square meter per year—set to 1,460 kW m−2 y−1 . 7. μ is the efficiency factor of the solar panel, 17% (Semi PV Group Europe 2015). 8. mAg_UP is the quantity of silver required per unit of installed power, expressed in milligrams per Watts (mg W−1 ). Six technological levels are considered: (i) current commercial technology (38 mg W−1 ); (ii) current best commercial technology (34 mg W−1 ); (iii) current best research technology (24 mg W−1 ): (iv) worst forecast technology (14 mg W−1 ): (v) best forecast technology (8.1 mg W−1 ); and (vi) best forecast technology with copper (5.4 mg W−1 ) (Semi PV Group Europe 2015). Figure 3.2 shows silver requirements based on six technological scenarios for five levels of multicrystalline silicon wafer-based PV penetration, levels between 5 and 30% of world electricity production. Comparison with world silver production in 2013 is made. According to Fig. 3.2, assuming the average current

silver requirement in comparison to world silver production in 2013

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61

7 6 5

A B

4

C

3

D

2

E F

1 0 5

10

15

20

30

electricity generated by PV systems in comparison to world electricity demand in 2010 (%) A: Best Forecast technology with copper (5.4 mg/W of Ag) B: Best forecast technology (8.1 mg/W of Ag) C: Worst forecast technology (14 mg/W of Ag) D: Current best research technology (24 mg/W of Ag) E: Current best commercial technology (34 mg/W of Ag) F: Current commercial technology (38 mg/W of Ag)

Fig. 3.2 Silver requirement in comparison to silver production in 2013 for five electricity demand scenarios and six technological scenarios

commercial technology, the consumption of silver is included in the range 24–170 kt for the production of an amount of electricity corresponding to between 5 and 30% of the current global electricity demand. This quantity represents some 71–520% of the 2014 world supply of the metal, or 4.4–32% of the estimated global reserves of silver in 2014. Silver is mostly extracted as by-product of host metals. Precisely, silver was extracted in 2014 as a valuable by-product in the lead and zinc mining industry (35% of total production), the copper mining industry (20%) and the gold mining industry (13%), with the remainder (31%) deriving from mining of silver alone (GFMS 2015). Therefore, an increase in silver production can only take place in the event that a more efficient recovery from host metals is realized or by simultaneously incrementing the production of host metals. This planning aspect could potentially affect current efforts to recycle these commodities. If technological improvements are introduced at the current pace, our simulation points out a significant decrease in demand. However, even in the best-case hypothesis—i.e. substitution of silver with copper for the bus-bar of the cells—a significant amount of the annual world consumption of the metal would still be required for large-scale PV deployment. Unless dramatic technological improvements in replacing silver for other metals are achieved, silver could represent a serious constraint on the large-scale electricity generation from crystalline silicon wafer-based solar PV systems. In this context, it is instructive to recall the following statement of the eminent geologist Preston Cloud:

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‘It is the uncommon features of a rock that make it mineable. It is the local concentration of elements beyond, and usually far beyond, their normal abundance in Earth’s crust to commercially exploitable levels that we designate a mineral deposit’ (Cloud 1977, p. 689, emphasis original). In relation to those statements, Cloud once strongly opposed Brooks and Andrews’s flights of fancy (Brooks and Andrews 1974) with respect to mineralogical reality. Silver belongs to the category of geochemically scarce metals, that is to say those metals with crustal abundances below 0.1% (Skinner 1976, 1986). Furthermore, ‘only a minor percentage of silver-producing deposits are rich enough to be worked for silver alone’ (Skinner 1986, p. 119). As a result, as already mentioned, most silver is produced as a byproduct of copper, lead and zinc mining. Cloud’s warning on scarce metals, as well as Skinner’s, is shared in sentiment by Georgescu-Roegen. Georgescu-Roegen’s unique epistemological attitude warned us not only about energy scarcity but, more importantly, about issues around mineral resources for sustainability. He states: ‘Every chemical element has at least one property that characterizes it completely and hence renders it indispensable for some technical recipes’ (Georgescu-Roegen 1979, p. 1035). Should the use of silver in the PV sector remain well below the physical limit of the available current estimated reserve, the present consumption pattern of silver will prove viable. However, should large-scale electricity be produced from modern PV systems, which depend on silver use, its consumption will go well beyond the annual global silver production. In order to avoid this risk, the decrease of silver usage in the crystalline silicon waferbased PV cells must continue to be realized at a meaningful pace. Ironically, due to the world wide stagnation of the economy over recent years, the currently acknowledged low prices of the commodity could hamper the efforts in this direction. We have shown that silver, as a commodity, could represent a material constraint to the large diffusion of crystalline silicon wafer-based PV power plants. Therefore, besides traditional indicators such as EPBT and EROI, the physical quantity of silver should also be addressed in studies of the viability of PV systems for electricity generation. In relation to these points, a brief discussion on three aspects of silver issue is attempted: (i) silver demand in the electronics industry; (ii) a silver demand perspective for the PV sector and silver recycling from PV panels; and (iii) the possibility of a use-reduction and substitution of silver. Silver demand in electronics represented 40% of the total industrial silver demand in 2013. In electronics, silver has two important characteristics: (i) the highest electrical conductivity of all metals; and (ii) a superior optical reflectivity. A wide range of applications in the electronics industry is indeed thanks to the high electrical conductivity of silver. Because of its high electrical conductivity, silver is used in several PV technologies as well. Silver is used in PV technology, mainly in crystalline silicon wafer-based solar cells, to form electrical contacts between the cells. Silver-oxide batteries and silver-zinc batteries are two additional common usages of silver, and can be also found, for example, in cameras, toys, hearing aids, watches and calculators. Printed circuit boards used in many consumer items, such as mobile phones and computers, are produced with silver-based inks or films. Radio frequency identification (RFID) tags are produced with silver-based inks and are found today

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in a broad variety of products. Silver membrane switches (touch switches) are found today in many consumer products and even conventional switches, e.g. in-room lighting switches, contain small amounts of silver (Grandell and Thorenz 2014). Electric cars demand more silver than conventional cars with combustion engines due to the increased amount of electronics required. Furthermore, due to its superior high optical reflectivity, silver is the first choice of materials for high-quality mirrors in concentrated solar power (CSP) plants. A similar application is silver coated windows, where silver serves to reflect excessive solar radiation outward and thus reduce the need for air conditioning (Grandell and Thorenz 2014). To overcome silver supply constraints, the recycling of PV panels is absolutely necessary. Lifespan expectations for PV panels vary from 20 to 40 years (Grandell and Thorenz 2014). It is sometimes difficult to visualize a PV panel being disposed of and being recycled. However, we must anticipate a large quantity of end-of-life PV panels very soon, since the first significant volumes of PV installations began in the early 1990s. Thus far, only two PV panel recycling processes are in operation. One process designed and operated by First Solar, the thin-film manufacturer based in the United States—whose recycling processes apply to CdTe panels, and another process designated and operated by Deutsche Solar AG—whose recycling processes apply to crystalline wafer-based silicon panels (Appleyard 2009). According to Dias, et al. (2016), the recycling procedure needed to concentrate silver from a PV module consists of: (i) manual removal of the aluminum frame; (ii) milling of the modules; (iii) sieving and selecting the fraction with particle sizes smaller than 0.5 mm; and (iv) leaching the obtained powder in nitric acid and precipitating the leached solution using 99% sodium chloride. This recycling process enables the recovery of 94% of the silver present in a PV panel. However, the necessary costs and time required to complete the described process are not considered. These two issues become important if a significant up-scaling of recycling is to be attempted. There is also one silver plating method, which can considerably reduce the amount of silver required by PV panels (Green 2011). This method is to deposit a thin seed layer of silver by way of either screen-printing or aerosol jet printing. Using this seed layer, it is possible to plate a solar cell with silver to a suitable thickness. This new method can reduce the silver resistivity to a value, approximately halving the silver amount needed for a given fractional resistive loss. Additionally, from the thinner lines of deposited silver conductor, it is possible to obtain performance gain at lower temperature. Furthermore, one manufacturer is developing a new tool that uses nickel in busbar metallization for electric grids contacting of solar cells. The new system, Helia, coats solar cells with nickel in a shortened system configuration to form the front and rear busbars via a sputtering process. Helia cannot eliminate the need for silver completely, however it could achieve silver savings of more than 50%. Therefore, the Helia system is expected to reduce the overall production costs of solar cells considerably (Mining Review Africa 2015). A major avenue of PV research is dedicated to discovering and developing alternatives that offer similar conductivity and mechanical qualities at considerably lower

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costs (Appleyard 2012). The use of copper instead of silver to create the electrical contact lines in PV panels is one of the more recent developments in the PV sector. The copper idea has been around for decades but the high price of silver 2007–2011 triggered a rapid step-up of research and development into the practical use of copper (Mining Review Africa 2015). Using copper as an electrode material for PV cells holds great potential in terms of the reduction of silver use and cost-effectiveness. In fact, a conversion efficiency of 20% is already attainable with copper contacts, a value approaching the value achieved by silver contacts. Such a result was obtained on large-area cells of 148 mm2 with a 160 µm thickness and it proves the industrial feasibility of the process using copper (Appleyard 2012). There are several additional promising possibilities of substituting copper for silver in PV systems. These possibilities include: (i) copper plating; (ii) coper pastes; (iii) laser doped selective emitter (LDSE); (iv) rear contact cells; and (v) copper indium gallium diselenide (CIGS) (Mining Review Africa 2015; Green 2011). Among those possibilities listed, and due to shortage of the precious metal, indium, CIGS technology may likely prove difficult on the long-term horizon.

3.3 Large-Scale Ethanol Production from Corn and Sugarcane Reconsidered: The Case of the United States and Brazil Using the general framework provided by MuSIASEM a critical evaluation of largescale agro-biofuel production using three key characteristic indicators is examined. Any feasibility assessment of alternative primary energy sources should address, at a minimum, the following three criteria of metabolic performance: 1. The metabolic labor productivity, achieved by the energy sector and measured in terms of amount of energy carriers (i.e. fuels, process heat and electricity) supplied to society per hour of labor in the energy sector. 2. The metabolic land productivity, achieved by the energy sector and measured in terms of the amount of net supply of energy carriers per area of managed land (e.g. per hectare). 3. The multiplier of energy carrier transformation, associated with the exploitation of a primary energy source to generate a net supply of energy carriers, is the ratio between the amount of energy carriers generated by the exploitation process, and the amount of energy carriers internally used in the exploitation and generation process of energy carriers. It should be noted that the multiplier of energy carrier transformation is a concept similar to EROI (Energy Return on the Investment), but it should not be confused with EROI (see Giampietro and Mayumi 2009). In fact, the concept of EROI does not address the issue of how to identify the three different types of energy carriers used in society. In general terms, we can say that the bigger the transformation multiplier

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ceteris paribus, the better the quality of the PES in relation to the task of generating a net output of energy carrier at a low biophysical and economic cost. To explain this point, it is important to recall that if, in the process of exploitation producing 100 units of an energy carriers (gross output), there is a significant internal consumption of energy carriers—e.g. 75 units (an input)—then this internal consumption of energy carrier has a multiplier of 100/75 and, implies that, in order to supply a net output of 100 units of the hypothesized energy carrier, the process of exploitation must produce roundabout 400 units of gross output. Needless to say, the need of sustaining a gross production four times as large as the net production will generate a dramatic increase in the requirement of production factors—e.g. hour of labor, power capacity provided by technical capital and land in production—per net unit of energy carrier supplied to society. This will translate into an increase of both the biophysical and economic cost (reducing the viability in relation to internal constraints) and a reduction in the metabolic density of the net supply of energy carriers. The consequent increase in the demand for land area will reduce the process’s feasibility in relation to external constraints. Whenever the ratio describing the multiplier is small enough to generate a nonlinear amplification of the requirement of production factors, e.g. less than 2/1, it makes more sense to directly burn the biomass, e.g. for heating or electricity production—rather than convert that precious biomass into a liquid fuel, a different type of energy carrier. The benchmark values describing the performance of energy carrier generation using fossil energy in developed society are shown in the left part of Table 3.2: (i) the metabolic labor productivity is in the range 20,000–47,000 MJ h−1 ; (ii) the metabolic land productivity is in the range 10–100 W m2 and (iii) the multiplier of energy carrier transformation is in the range 13–20 (Smil 2003; Giampietro and Mayumi 2009; Mayumi and Giampietro 2014). Using this set of indicators and the benchmarks described in Table 3.2, it becomes possible to check whether current agro-bioethanol from corn and sugarcane is able to cover a significant fraction of the liquid fuels consumed in modern society. As reported by the World Bank (cited in Gimapietro and Mayumi 2009), in 2008, ethanol production in the United States and Brazil covered nearly 90% of world biofuels Table 3.2 Metabolic labor productivity, metabolic land productivity and the multiplier of energy carrier transformation for a fossil fuel-based society, and for ethanol production in the United States and Brazil Industrial Society

Current Ethanol Production USA

Brazil

1 Metabolic Labor Productivity (MJ/h)

20,000–47,000

224

(H) 150 (L) 395

2 Metabolic Land Productivity (W/m2 )

10–100

0.02

(H) 0.1 (L) 0.4

3 Multiplier of Energy Carrier Transformation

13–20

1.1

(H) 1.5 (L) 7.0

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production. In 2006, the United States produced 18.4 billion liter (46% of the world’s total) and Brazil produced 16 billion liter of ethanol (42% of the world’s total). While, in 2005, the combined quantity of ethanol produced in the United States and Brazil represented just 1.2% of the world’s liquid fuel supply, the scale of production was still large enough to allow an assessment of relevant technological coefficients starting from the analysis of aggregated values and referring to the whole sector. The assessment of the United States ethanol provided in Table 3.2 is based on data provided by the ethanol industry and concerns the entire sector. In that assessment, we use the output/input ratio in our terminology the multiplier of energy carrier transformation calculated by Farrell et al. (2006) for ethanol from corn in the United States with a further correction made by eliminating energy credits for byproducts. The three calculated indicators are shown in the centermost column of Table 3.2. The metabolic labor productivity is 224 MJ h−1, the metabolic land productivity is 0.02 W m−2 , and the multiplier of energy carrier transformation is 1.1. The numbers mean that 1,100 units of energy carriers must be generated in the process in order to deliver a net supply of 100 units to society. For the Brazilian assessment, official data and technical coefficients provided by a very detailed and informative study published by the Sugar Cane Agroindustry Union (UNICA) in Brazil are used (De Carvalho Macedo 2005). These data are checked against the assessment of ethanol production from sugarcane in Brazil as provided by Patzek and Pimentel (2005) and Pimentel et al. (2007), both sources of which report a significantly worse performance. From this data set, we obtain two sets of benchmarks: 1. High input (H) estimates—from Pimentel et al (2007), the calculated values for the three indicators are shown in the rightmost column of Table 3.2: (i) the metabolic labor productivity was 150 MJ h−1 ; (ii) the metabolic land productivity was 0.1 W m2 ; and (iii) the multiplier of energy carrier transformation was 1.5 (Giampietro and Mayumi 2009). 2. Low input (L) estimates—from De Carvalho Macedo (2005), the calculated values for the three indicators are also shown in the rightmost column of Table 3.2: (i) the metabolic labor productivity was 395 MJ h−1 ; (ii) the metabolic land productivity was 0.4 W m2 ; and (iii) the multiplier of energy carrier transformation is 7 (Giampietro and Mayumi 2009; Mayumi and Giampietro 2014). Table 3.2 clearly indicates that both in the United States and Brazil cases, the production of ethanol is far from reaching the energetic performance of PES expected at the moment by developed societies. To see the poor performance of the case of the United States in terms of labor hours and land requirement, we conduct a Gedanken experiment: When using these benchmark values, how much labor time and cultivated land would be required in order to cover just 10% of the liquid fuels used in transportation in the United States if this quantity should be produced in terms of corn-ethanol produced in the United States? 10% of fuels corresponds roughly to 3 EJ (3 × 1018 J), equivalent to 140 GL (140 × 109 L) of ethanol. Because of the very low multiplier of energy carrier transformation in the case of the United States, a value of roughly 1.1, the total gross production of corn-based ethanol must be 33 EJ

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(1,540 GL). To produce a gross supply of 33 EJ, it is necessary to use 148 Gh of labor in biofuels production. This labor time would represent almost 48% of the labor hours that could be provided by the United States workforce, even after absorbing all the unemployed. In comparison to this figure, the total quantity of labor hours in Japan in 1999 was 117 Gh. Obviously, this production option is not feasible. It is impossible to transfer 148 Gh, currently used in other sectors of the United States economy, to agro-biofuel production. And what about the land requirement? The production of 1,540 GL of ethanol would require 5,500 million ha of arable land. This land area corresponds to an area 31 times larger than the total arable land of the United States in 2005 (175 million ha). This shows that the massive investment in corn-ethanol in the United States is not at all meaningful. It is useful to again reflect on Fig. 2.3—the same figure detailing the energy transformation relation between (PES + ECI)/ECO and (PES +ECI)/(PES + ECI − ECO)—as presented in Chap. 2. In relation to that diagram, Fig. 3.3 identifies three points on a curve describing the relation between ECI/ECO (the ratio between energy carrier input and energy carrier output) and ECI/(ECI−ECO) (the ratio between energy carrier input and internal energy use): (i) corn-ethanol production in the United States; (ii) sugarcane-ethanol production in Brazil; and (iii) fossil fuels. Due to the superb quality of fossil fuels in terms of labor and land saving ability, it is not necessary to distinguish fossil fuels as a primary energy source (PES) from fossil fuels as an energy carrier (EC). So, in this comparison of three technologies, fossil fuels are treated directly as an EC. Incoming solar radiation (insolation), used as a PES used for corn and sugarcane production, is excluded in Fig. 3.3 since biomass corn and biomass sugarcane can be regarded as embodied forms of energy carrier derived from solar energy, thus the quantity of solar radiation as PES is assumed to be zero for the energy transformation process in question: corn and sugarcane are included as energy carrier input. The summary relation, depicted in Fig. 3.3 is represented algebraically in Eq. 3.1

Corn-Ethanol (11/10, 11)

ECI/ECO

Fig. 3.3 ECI/(ECI−ECO) and ECI/ECO for corn-ethanol, sugarcane-ethanol and fossil fuels

Sugarcane-Ethanol (7, 7/6))

Fossil Fuels (13, 20/19)

ECI/(ECI-ECO)

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EC I 1 = EC O 1 − EC1 I

EC I −EC O

=

EC I EC I −EC O EC I − EC I −EC O

1

(3.1)

Figure 3.3 indicates that corn-ethanol production in the United States is a parasite technology which, use substantial quantities of energy carriers beside biomass corn. Specifically, Fig. 3.3 indicates this through its description of: a very high ECI/ECO, i.e. 11 and an ECI/(ECI−ECO) close to 1, i.e. 1.1. Figure 3.3 also shows the vast superiority of fossil fuels compared with sugarcane-ethanol production in Brazil. Lastly, it must be noted that the labor hours required in the Brazil case are much larger than both the case of corn-ethanol in the United States and fossil fuels.

3.4 Scientific Analysis and Assessment in the Era of Post-normal Science The Japanese government has been endorsing biofuel production as an alternative to fossil fuels energy for at least the past 10 years. In relation to the biofuel investment issue, a former member of the House of Representatives, T. Shibano, the president of Nippon Chuyu Corp. (a Tokyo-based dummy biofuel developer), at the time committed suicide on 5 September 2011. He was suspected of falsely increasing Nippon Chuyu Corp.’s capital value from JP¥20 M to JP¥1.25 B in less than six months during 2009. According to the Tokyo District Public Prosecutor’s Office, there had been no real biofuel production. In actuality, Nippon Chuyu Corp. was simply running off with governmental subsidies (The Japan Times, Thursday, 23 September 2010). This story of subsidy misuse in relation to biofuel production is illuminating when reconsidering the role of scientific investigation with respect to sustainable energy policy. Scientific investigation, in this role, can be seen to trap a society in an unfortunate crisis. The definition of ‘paradigm’ by Allen introduced in Chap. 1 implies that researchers working in well-defined scientific fields are ‘supposed’ to ignore disturbing opinions or alternative points of view, whenever those points of view are not compatible with the justification narrative shared by the establishment in their scientific fields. Therefore, a given paradigm protects the ‘paradigmatic work’ of scientists as an intellectual wall that effectively filters out both information for the establishment and equally legitimate yet contrasting perspectives. In the previous section, a biophysical analysis of the performance of agro-biofuel production was conducted to show that, especially for the United States, the implementation of a large-scale corn-ethanol production is not at all a good idea. The obvious question is then: How is it possible that the massive amount of scientific analysis dedicated to large-scale biofuel production could not detect the systemic problems—quite a large elephant in the room—of this type of energy policy? To better understand the critical situation of our modern society, associated with the nature of scientific analysis and energy assessment, three conceptual ideas are introduced: (i) the concept of ‘granfalloon’ proposed by Vonnegut (1963); (ii) the concept of

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‘belief fixation’ proposed by Peirce (1877) and (iii) the concept of ‘post-normal’ science proposed by Funtowicz and Ravetz (1990). Firstly, the concept of ‘granfalloon’. The term ‘granfalloon’ was first introduced in the book Cat’s Cradle by Vonnegut (1963). The concept of granfalloon is useful in explaining the current status of agro-biofuel policy in the United States and Brazil. In relation to that policy, it is instructive to introduce Pratkanis’ (1995) explanation of granfalloon, given in his paper ‘How to Sell a Pseudoscience’: ‘Granfalloons are powerful propaganda devices because they are easy to create and, once established, the granfalloon defines social reality and maintains social identities. Information is dependent on the granfalloon’ (Pratkanis 1995, p. 22, emphasis added). In our context, Shibano, mentioned previously in relation to Nippon Chuyu Corp., was simply riding the agro-biofuel granfalloon in Japan. In fact, in a densely populated country such as Japan, a country that not only uses massive quantity of oil to reduce the demand of land placed by food production but one that is also heavily dependent on imports in terms of its food security, how can one endorse the idea of using massive quantities of land to reduce the consumption of oil? Why are people easily convinced? Why do people believe in granfalloons based on sloppy scientific information? To partially answer this question, it is helpful to recall the work of C. S. Peirce, well known also as the father of pragmatism and a great contributor to the field of semiotics. Peirce prescribes four methods to fix our own beliefs (1877): 1. The method of tenacity—an individual can stick to her or his own opinions, like an ostrich that buries its head in the sand without consulting the views of other people. 2. The method of authority—a given authority or institution forces the upholding of ‘correct’ theological and political doctrines. This method, therefore, requires a priesthood or a centralized regime. 3. The method of a priori—whenever fundamental propositions seem to be ‘agreeable to reason’, we find ourselves inclined to believe without checking any observed facts. This method is exemplified in the history of metaphysical philosophy. 4. The method of science—according to Peirce, whenever our beliefs are determined by experience about some external permanency, something, which Peirce calls ‘reality’, we can talk of a scientific method. However, when making this statement, Peirce does not address the issue of whether it is possible for humans to correctly to perceive ‘reality’ in the first place. In the past, many philosophers and philosophical traditions have, in fact, warned that we cannot know the ‘reality’ but only our perception of the ‘reality’. Similarly, when dealing with scientific analysis, the bias introduced by human perception can never be eliminated (e.g., Chu 2012; Foucault 1989; Lyotard 1984). Peirce seems to support the method of science as the best possible way of fixing our beliefs. However, an enormous amount of evidence is accumulating that shows that, when dealing with complex problems and technology, scientific investigation per se can never eliminate genuine uncertainty from its analytical outputs. In relation to this point, the Fukushima nuclear accident in 2011 revealed many fragile aspects

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of nuclear power generation systems, and, in some respects, unwavering confidence in the natural scientific method has been shaken as a result of that disaster. The following story, provided by Ino (2011), is illustrative in the sense that the general public was instructed of the safety of nuclear power generation systems for a very long time despite the fact that the information coming from the scientists involved in nuclear research as unreliable and, in many cases, false. The main concept used in Ino’s research is concerned with ductile brittle transition temperatures (DBTT). DBTT is the minimum temperature beyond which a given metal starts fracturing. The story is this. Japan started nuclear power generation in 1970. The original reactors were designed to last roughly 30 years for pressurized water reactor (PWR) technology and 40 years for boiling water reactor (BWR) technology. Therefore, the reactors now in operation have exceeded their life expectancies. Light water is used as a moderator for these reactors in order to reduce the speed of neutrons. If the quantity of neutron radiation within the pressure vessel exceeds a certain threshold level, the pressure vessel becomes extremely fragile. According to Ino’s study (2011), Japan has seven nuclear power units that have a considerably high DBTT. The initial DBTT of high-strength steel is roughly 20 °C below zero. The Genkai Unit 1 in Saga Prefecture of Kyushu in April 2009 was reported to have reached a DBTT of 98 °C, a 42 °C increase from 1993. If the temperature of the pressure vessel were cooled below the DBTT, then, with a high probability, the reactor would shatter like glass—without bending or deforming the pressure vessel—especially true in the case of a ‘cold shutdown operation’ at 95 °C. In addition to these major problems, the aging of nuclear power plants is a serious threat for the Japanese people. Ino’s study revealed that the so-called scientific evidence that had been presented to the general public before the Fukushima accident was not necessarily scientifically robust. There are at least four lessons to be learned from Ino’s study: What is the objectivity, if any, of scientific investigation on these difficult problems? 1. For example, what is the life span of a nuclear power plant? Is the brittle fracture of a pressure vessel predictable? Is there a reliable relationship between DBTT of a sample and the DBTT of a pressure vessel? 2. How is it possible to guarantee the ‘transparency’ of scientific argument associated with the basic assumptions and procedures adopted by scientists? According to Ino (2011), it took many years to reach an agreement among scientists on the fact that DBTT is heavily dependent on the speed of neutrons. Before that agreement reached, researchers based in the United States tended to deny the dependency of the speed of neutrons. 3. How should information from scientific analysis and assessment, inform journalists or media and the general public? What information should be shared? For example, it is absolutely necessary to know the effect of the pressurized thermal shock (PTS) phenomenon. The PTS phenomenon occurs if the pressurized nuclear vessel is suddenly cooled down following an emergency stop due

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to an accident. Following that stop, strong tensile stress appears within the pressure vessel of a PWR due to the substantial temperature difference experienced. Unfortunately, no assessment method of the tensile stress is publicly disclosed in Japan. 4. How can the honesty and social responsibility of scientists involved in procuring information in relation to scientific analysis and assessment be guaranteed? For example, Kansai Electric Power is still reluctant to disclose the PTS assessment procedure, yet it denies the fragility of the pressure vessels of the Mihama Unit 1 and Unit 2, located in Fukui Prefecture (Ino 2011). In the examples given thus far in this chapter, ethanol production, the Fukushima nuclear accident and DDBT, the role of scientists, envisioned by Peirce, has been unfortunately and drastically transformed. There are situations in which the role of scientists has been transformed into the ancient role of priests endorsing the method of authority, without providing any sound scientific evidence. In this situation scientists are used to back-up the generation of dangerous granfalloons. Obviously, this type of danger is not confined to these examples. There are many other important decisions besides looking for an alternative energy source that are made in relation to sustainability challenges. For example, how to deal with climate change, how to deal with the progressive collapse of social fabric all over the world, how to deal with a shortage of water and how to control technological innovation. Finally, in this context, we introduce the last concept, that of ‘post-normal science’. This final concept is required as sustainability issues imply a new role for scientists in relation to human progress. In this situation issue-driven research takes precedence over curiosity-driven research and this situation requires the adoption of a substantially more integrated approach to describing the interplay between socioeconomic systems and their environment. The objective of scientific endeavor in this new context is more so to reinforce the process of social problem sharing, including participation and mutual learning among the stakeholders, rather than to identify a definite, once-for-all ‘solution’ or technological fix. This is an important change in the relationship between problem identification and the prospects of science-based solutions. The new epistemological framework, developed by Funtowicz and Ravetz (1990) and called ‘post-normal science’ acknowledges that uncertainty, stakeholders and their value conflicts play a crucial role in processes of policy decision-making. ‘Post-normal’ departs from curiosity-driven or puzzle-solving exercises of normal science, defined in the Kuhnian sense (Kuhn 1962). The name, post-normal, indicates the need for an important paradigm shift in the conceptualization of scientific activity. Normal science, so successfully extended from the laboratory of core science to the conquest of nature through applied science, is no longer suitable for the discussion of sustainability problems. The social, technical and ecological dimensions of sustainability problems are so deeply tangled that it is simply impossible to consider these dimensions as separated into conventional disciplinary fields. In relation to this point, we can recall the wisdom of S. Tomonaga, winner of the Nobel Prize in Physics as shared with R. Feynman and J. Schwinger. Tomonaga warns us

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against the unfounded optimism associated with scientific and technological solutions to societal problems in his book Promethean Fire (2012). Tomonaga’s book was originally intended as a critical viewpoint concerning nuclear technology. However, his investigation on the role of scientists is also very relevant to the ‘post-normal science’ viewpoint.

3.5 Conclusion The National Energy Plan of Japan was issued in 2018. The plan proposed to make extensive use of hydrogen as the principal energy source of a new ‘hydrogen society’ (Agency for Natural Resources of Energy 2018). Yet, the National Energy Plan of Japan honestly acknowledged four formidable barriers to establishing a hydrogen society, namely: technological, economical, institutional and infrastructural. Most of the global hydrogen demand, 94%, is due to ammonia synthesis (mainly for food production in terms of synthetic nitrogen fertilizer and amounting to 50%), petroleum refining (35%) and methanol synthesis (9%) (Japan Science Technology Agency 2016). Hydrogen does not, however, exist in the convenient H2 form on the Earth’s surface. For use of industrial processes, hydrogen must first be generated from certain energy sources such as hydrocarbon compounds sourced as fossil fuels. So, hydrogen cannot be a PES. Rather, it is a sort of secondary energy source, generated from other energy sources similar to electricity. Hydrogen cannot be used as the PES for a new Promethean technology. It is easy even for laypersons to understand that, in view of energy saving and a reduction in CO2 emissions, it is much better to use hydrocarbon (e.g. fossil fuels) directly rather than to generate hydrogen fuel from hydrocarbon compounds by a roundabout process. Currently, hydrogen generated by methane (CH4 ) steam reformation, a method to generate hydrogen from natural gas using 1,000 °C steam, is often utilized for ammonia (NH3 ) production purposed for the synthesis of nitrogenous fertilizers. Methane steam reforming accounts for 48% of the total world hydrogen production, naphtha steam reforming for 30%, coal gasification for 18% and electrolysis for 4% (Japan Science Technology Agency 2016). So, 96% of hydrogen production is dependent on fossil fuels. The remaining 4% is dependent on electricity, the production of which is again heavily dependent on fossil fuels as was shown in Chap. 2. Hydrogen generation is not, in fact, a feasible technology. In reality, it is a parasite energy technology that heavily uses a rapidly exhausting energy carrier in the form of fossil fuels. Recently, hydrogen fuel cell-technology based on the steam reforming method has been proposed as a future vehicle energy source. According to such proposals, current oil-based automobiles could gradually be substituted by futuristic cars based on hydrogen fuel-cells. The National Energy Plan of Japan, for example, also supports such ideas. So, it is useful to make a brief energy efficiency assessment of hydrogen fuel cell-technology based on the steam reformation method. There are four stages for generating electricity, which is the final form of energy for hydrogen fuel cell vehicles based on steam reforming method (Straham 2007). The first stage is the

3.5 Conclusion

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process of steam reforming mainly from natural gas. 10–30% of the energy content of methane is lost for this process, dependent on the process plant efficiency. The second stage is the process of liquefying hydrogen gas in order to avoid expensive pipeline construction. The second process consumes about 30% of the energy remaining. The third stage is the process of compressing hydrogen into a fuel tank. The third process consumes 10% of the energy remaining. The fourth stage is in the fuel cell vehicle itself where electricity is generated. During the fourth process, losses of roughly 50% of the energy remaining are realized. So, the overall energy efficiency is 22.5– 28.35%, less than the energy efficiency of a Toyota Prius (32%) (Straham 2007). It must also be noticed that substantial quantities of CO2 are emitted through steam reforming and transportation processes. So, the idea of fuel cell vehicles is not so terribly attractive in terms of energy efficiency and in relation to a reduction in CO2 emission. Hydrogen generation by electrolysis is another candidate since only a small amount of CO2 is emitted by this process. Unfortunately, electrolysis takes ten times as much as energy to break the water bond compared with the steam reforming of methane gas. Indeed, it is for this reason that only 4% of hydrogen is generated by electrolysis. Even if there are local filling stations of hydrogen available, during the process of electrolysis 35% of energy is lost. Adding to this loss, there are the third and fourth types of losses mentioned, i.e. 10% from compression loss and 50% from fuel cell vehicle loss. So, the overall efficiency realized is less than 30% (Straham 2007). In theory, the process of electrolysis can be conducted by electricity generated by renewable energy sources such as wind and, solar, as well as others. However, as Georgescu-Roegen noted, i.e. Georgescu-Roegen’s Fundamental Proposition, renewable energy sources are diffuse to the point that the construction of an energy transportation network requires substantial mineral resources as well as energy investment. Furthermore, the energy content of hydrogen per unit volume is one three-thousandths of that of gasoline. Compressing hydrogen into a volume the size of the normal gasoline tank requires very high pressure and extremely low temperature. In effect, it is a process that implies an immsense requirement of energy carrier. At the beginning of the famous 1999 film The Matrix, the protagonist is asked whether or not he is willing to take the ‘red pill’, capable of showing him the painful yet true path that leads to reality, or the ‘blue pill’, allowing him to remain within the blissful simulation of reality that the establishment of the conventional approach wishes him to pursue. Since then, the ‘red pill’ concept has come to symbolize the possibility of receiving a fresh view of something that was previously perceived as a solid basis for understanding reality within a well-consolidated framework employing conventional approach. In colloquial terms, taking the red pill means accepting the need for thinking outside the box and to challenge the existing perception of the external world. Perhaps modern society needs to take a red pill in relation to PV systems and ethanol production. A. Kurosawa, a Japanese movie director, who once presented a disastrous nuclear reactor explosion on Mount Fuji in his famous film, Dreams (1990), states that, ‘in a mad world, only the mad are sane’. Kurosawa’s insight forces us to look at ourselves

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as embedded in society and to reconsider our own socioeconomic framework in order to ascertain whether or not we are really sane. What is offered to the reader in this chapter is how to get out of the mad world, leading us to recognize an alternative way of energy policy that can be useful for sustainability. Because the biophysical, socioeconomic, technological and ecological factors associated with sustainable energy policy are so deeply connected with each other, it is simply impossible to put these factors into conventional disciplinary fields. A new approach is absolutely necessary in order to tackle sustainable energy policy, as post-normal science suggests. Note 1. The values for human activity are taken from Martín-Chivelet (2016), multiply1 ing the coefficient of jobs per MWp (respectively, 21.44 capita y−1 MW− p and 1.65 1 capita·y−1 MW− p for the fund-making and the flow-generation stage) by the number of hours worked per year (1,800 h) as well as the employed human factor in the mining and refining sector. The data represents the most accurate accounting available in the literature and refers to the Spanish sector in the year 2012. Regarding to land use accounting, data refers to the total occupied area and was taken from two publications related to PV solar power stations in the United States (Llera et al. 2013; Ong et al. 2013). Additionally, the average power density of 62 plants has been calculated to be 37 W m−2 . The coefficients for water use and for energy carriers derive from several technical reports and life-cycle assessments (e.g., Jungbluth et al. 2012; Fthenakis and Kim 2009). The final indirect input figure has been obtained by summing each of the sub-process components (i.e. silica mining, silica reduction, metal grade silicon to solar grade silicon conversion, casting, wafer sawing, solar cells, panels production and final decommissioning. In contrast, the direct requirement is related to employment in the operation and maintenance stages. The data assumed 1 for silver consumption per unit of installed power, 36 g W− p , refers to the average of commercial technologies in 2014 (Hou et al. 2016). Finally, all the quantities for the national case Study of Spain in the year 2013 (ECs of production and consumption, hours of labor, and so on), were retrieved from Eurostat (2016).

References Allen TFH, Starr TB (1982) Hierarchy. The University of Chicago Press, Chicago Appleyard D (2009) “Light cycle: recycling PV materials”, Renewable Energy World Magazine April 22, 2009. http://www.renewableenergyworld.com/rea/news/article/2009/04/lightcycle-recycling-pv-materials Appleyard D (2012) PV Technology: Swapping Silver for Copper. Renewable Energy World, July 2, 2012. http://www.renewableenergyworld.com/articles/print/volume-15/issue-3/solar-tech/pvtechnology-swapping-silver-for-copper.html Brooks DP, Andrews PW (1974) Mineral resources, economic growth and world population. Science 185(4145):13–19 Chu D (2012) The science myth. Iff Books, Washington Cloud P (1977) Entropy, materials, and posterity. Geol Rundsch 66(3):678–696

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Jungbluth N, Stucki M, Flury K, Frischknecht R, Büsser S (2012) Life cycle inventories of photovoltaics. Int Energy Agency Photovoltaics Power Syst Program http://www.esu-services.ch/ fileadmin/download/publicLCI/jungbluth-2012-LCI-Photovoltaics.pdf Kleijn R, van der Voet E, Kramer GJ, van Oers L, van der Giesen C (2011) Metal requirements of low-carbon power generation. Energy 36:5640–5648 Kuhn TS (1962) The structure of scientific revolutions. The University of Chicago Press, Chicago Llera E, Scarpellini S, Aranda A, Zabalza I (2013) Forecasting job creation from renewable energy deployment through a value-chain approach. Renew Sustain Energy Rev 21:262–271 Lo Piano S, Mayumi K (2017) Toward an integrated assessment of the performance of photovoltaic power stations for electricity generation. Appl Energy 186:167–174 Lyotard J-F (1984) The postmodern condition: a report on knowledge. Manchester University Press, Manchester Marine Ecology Research Institute (2013) ‘Influence of Water Intake and Discharge at Electricity Generation Plants’, Tokyo, Japan. http://www.kaiseiken.or.jp/study/study02.html Martín-Chivelet N (2016) Photovoltaic potential and land-use estimation methodology. Energy 94:233–242 Mayumi K, Giampietro M (2014) ‘Toward partial redirection of energy policy for responsible development’, Unitat d’Història Econòmica, UHE Working Paper 2014_01: 1–15 Mining Review Africa (2015) Long term demand for silver in solar panel manufacture remains resilient. http://www.miningreview.com/news/long-term-demand-for-silver-insolar-panel-manufacture-remains-resilient/ O’Neill RV, DeAngelis DL, Waide JB, Allen TFH (1986) A hierarchical concept of ecosystems. Princeton University Press, Princeton, NJ Ong S, Campbell C, Denholm P, Margolis R, Heath G (2013) ‘Land-use requirements for solar power plants in the United States’ National Renewable Energy Laboratory, p 1–47. http://www. nrel.gov/docs/fy13osti/56290.pdf Paiano A (2015) Photovoltaic waste assessment in Italy7. Renew Sustain Energy Rev 41:99–112 Palmer G (2014) Energy in Australia: peak oil, solar power, and Asia’s economic growth. Springer, New York Patzek TW, Pimentel D (2005) Thermodynamics of energy production from biomass. Crit Rev Plant Sci 24:327–364 Peirce CS (1877) The fixation of belief. Popular Science Monthly 12:1–15 Pimentel D, Patzek T, Cecil G (2007) Ethanol production: Energy, economic, and environmental losses. Rev Environ Contam Toxicol 189:25–41 Pratkanis AR (1995) How to sell a pseudoscience. Skeptical Inquirer 19(4):19–25 Salthe SN (1985) Evolving hierarchical systems. Columbia University Press, New York Scheidel A, Sorman AH (2012) Energy transitions and the global land rush: ultimate drivers and persistent consequences. Global Environ Chang 22:588–595 Semi PV Group Europe (2015) ‘International Technology Roadmap for Photovoltaics (ITRPV.net) results 2014’. The International Technology Roadmap for Photovoltaic GFMS (2015). ‘World silver survey 2015’, retrieved from https://forms.thomsonreuters.com/gfms/. Accessed 15 May 2015 Skinner BJ (1976) A second iron age ahead? Am Sci 64:258–269 Skinner BJ (1986) Earth resources, 3rd edn. Prentice Hall, New Jersey Smil V (2003) Energy at the crossroads: global perspectives and uncertainties. MIT Press, Cambridge, MA Stetz T, Rekinger M, Theologitis I (2014) Transition from uni-directional to bi-directional distribution grids. Int Energy Agency Photovoltaics Power Syst Program. http://ieapvps.org/index.php? id=294. Accessed 15 March 2017 Straham D (2007) The last oil shock. John Murray, London Tanesab J, Parlevliet D, Whale J, Urmee T, Pryor T (2015) The contribution of dust to performance degradation of PV modules in a temperate climate zone. Sol Energy 120:147–157

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Chapter 4

Beyond the Conventional View: Reconsidering Money, Credit and Interest

4.1 Introduction In 2003, R. Lucas Jr. bravely declared in his presidential address to the American Economic Association that the ‘central problem of depression-prevention has been solved, for all practical purposes, and has in fact been solved for many decades’ (Lucas 2003, p. 1). Given that the Lehman Shock happened in 2009, just a few years after Lucas Jr.’s statement, it seems worthwhile to reconsider various problems associated with money, interest and credit. Indeed, it is worth considering an alternative perspective that has not yet attracted sufficient attention from conventional economists. Three points are mainly focused on: (i) the acceptability of widely accepted point of view that there was a progressive development from barter to money to credit; (ii) the fact that money defies the first law and the second law of thermodynamics, i.e. money can created out of nothing and money can grow at a positive rate of interest; and (iii) the dual nature of money, i.e. while money is regarded as a form of individual wealth, that same money must also be regarded as a debt communally from a biophysical viewpoint. Indeed, the dual nature of money is responsible for the expansion power of money stock and long-term debt trap. Section 4.2 of this chapter assesses the widely accepted view of the progressive development from barter to money to credit. Section 4.2 points out: (i) barter in its purest form does not require written record because barter entails final settlement involving equal exchange of wants only in terms of goods and services; (ii) anthropological studies suggest that barter is much rarer than commonly believed, involving only strangers or even enemies; (iii) the two cases of nails in Scotland and dried cod in Newfoundland, cases that Adam Smith saw as an example of a transition from commodity currency to metallic money, actually show a credit system; (iv) the credit system started in ancient Babylonian times, the inevitable result of unequal exchange which requires records of credit and debt arrangement; and (v) banking activity occurred as early as around 350 BC in the Roman Republic. Section 4.3 discusses the origin of money interest and the distinction between structural decay and functional decay. Section 4.3 shows: (i) the entropy law can be © Springer Nature Switzerland AG 2020 K. T. Mayumi, Sustainable Energy and Economics in an Aging Population, Lecture Notes in Energy 76, https://doi.org/10.1007/978-3-030-43225-6_4

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applied to material decay by using Clausius’ idea of disgregation; (ii) distinguishing functional decay from material decay offers clues informing the emergence of money interest; (iii) despite the inevitability of material decay, the functional aspect of money is legally and institutionally guaranteed; (iv) scholarly views of money interest held by S. Gesell and I. Fisher deserve critical examination; (v) if, as Soddy suggests, the principal of loan money is allowed to decrease, the total money interest to be paid never exceeds the principal. Soddy’s idea may also apply to the redemption of national bonds; and (vi) the phenomenon of the intentional functional decay is linked to the tendency toward increased unsustainable consumption in modern socioeconomic systems. Section 4.4 places focus on problems associated with debt created either directly or indirectly by the banking system. Section 4.4 demonstrates that: (i) any form of promise to pay is an abstract right or property of demanding future payment from the debtor. This abstract right, termed general liquidity, includes items such as coins, bank notes, credit cards, derivatives and national bonds. General liquidity represents all forms of money and money substitutes, including financial assets. While general liquidity has a hierarchical structure related to the degree of difficulty in exchanging for goods and services, there is no essential difference between items of general liquidity because all such items can be ultimately exchanged for goods and services in the market; (ii) general liquidity has a dual nature that is regarded as a debt communally, and regarded as a form of wealth individually. General liquidity causes progressive expansion of debt, mainly through the financial system; (iii) credit expansion through the financial system is currently not controlled by elected representatives; (iv) taxation can eliminate excessive debt, so general liquidity must be combined properly with tax imposition under the control of the elected representatives; (v) the deposit associated with the credit creation mechanism dates back to the idea of ‘mutuum’ in the Roman law; and (vi) proper use of a credit system is exemplified by ‘cash credit’ in 18th century Scotland, an idea that was based on the idea of accommodation paper in the language of the present financial system. In addition to uniting the ideas discussed throughout the chapter, the conclusion section also touches upon several other important issues not discussed in earlier sections.

4.2 The Myth of Barter, Money and Credit It is generally accepted by economists that barter came first, followed by money and then by credit, through the development of the banking system. Adam Smith may be primarily responsible for such an idea due to statements of his such as: ‘[W]hen barter ceases, and money has become the common instrument of commerce’ (Smith 1976, p. 36). In a similar way, Samuelson and Nordhaus state in a well-known textbook: as ‘economies develop, people no longer barter one good for another. Instead, they sell goods for money and then use money to buy other goods’ (2010, p. 458); and the

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‘financial system is one of the most important and innovative sectors of a modern economy’ (2010, p. 453). Herein, Samuelson and Nordhaus’s definition of money refers to the means of payment in the form of currency and checks. First, let us discuss the true nature of barter. Barter is a method of exchange where a final settlement must be reached at the moment of exchange. Barter intends to achieve, in terms of goods and services, an equal exchange among those people involved in the exchange. Successful barter always requires a perfect matching in which each party in a transaction must offer something, in the amount required, to the other person. Therefore, barter requires, always, a double coincidence of wants (Graeber 2011). This double coincidence of wants is something that, in practice, is often very difficult to achieve. The anthropological discourse indicates that barter was conducted mainly between strangers who may otherwise have been enemies. For example, Graeber (2011), in his presentation of crucial case studies, in particular, those of the Nambikwara of Brazil and the Gunwinggu in Australia, states: [What] ‘all such cases of trade through barter have in common is that they are meetings with strangers who will, likely as not, never meet again, and with whom one certainly will not enter into any ongoing relations. This is why a direct one-on-one exchange is appropriate: each side makes their trade and walks away’ (Graeber 2011, p. 32). Beyond barter and before describing the historical development of the credit theory of money, it is useful to investigate whether there actually was a transitional period from commodity currency to metallic money. According to A. Smith, there was a transitional period from commodity currency such as nails in Scotland or dried cod in Newfoundland, to the metallic money (Smith 1995, p. 37). However, A. Smith’s reasoning was placed in doubt as early as in W. Playfair’s 1805 edition of the Wealth of Nations and in greater detail in Thomas Smith’s 1832 publication An Essay on Currency and Banking. It is worthwhile to directly investigate in detail these two important works here. To start, Thomas Smith states that: [T]he only value attached to these articles [dried cod at Newfoundland and nails in Scotland] is the cost of the labour hours in catching or making them, and whenever that cannot be got they will neither be caught nor made. The real fact however, is that neither of these articles ever was used or could be used as money. (Smith 1832, p. 15)

Concerning dried cod in Newfoundland, both fishermen and traders from the ports of France braved harsh environmental conditions. Fishermen who had codfish fit for trade could obtain in return articles that the fisherman might have need for in a credit system based on mutual trust. The final settlement of negotiation between fishermen and traders was achieved either by livre or the pound, depending on where negotiation occurred and according to the agreed-upon exchange rate. For example, fishermen negotiating in an area under English jurisdiction ‘sold their catch to the traders at the market price in pounds, shillings and pence, and obtained in return a credit on their books, with which they paid for their supplies. Balances due by the traders were paid for by drafts on England or France’ (Innes 1913, p. 378, emphasis added).

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Concerning nails in Scotland, because of the difficulty in making nails by steam machinery, nails were made by hand. T. Smith recounts that several villages around Falkirk near the great iron works at Carron, were inhabited by a hardy group of people whose sole occupation, men, women and children, was the making of nails (Smith 1832). These people worked hard but gained little, so they lacked good access to the circulating medium of the country and their only way to obtain necessities was to sell nails to Falkirk storekeepers. Playfair shows people used nails as part of a credit system, not as a commodity currency: [Brokers] furnish the poor nailers with iron nail rods, or small slit bars, to work up into nails; and during the time they are working, give them a credit for bread, cheese, and chandlery goods, which they pay for in nails when the iron is worked up. Nails have indeed two properties that are essential to money. Their value is known from their size and number, or weight; and they are divisible into all possible quantities: and though they may therefore be paid away by the indigent maker with more ease than other produce of his hands, yet one transfer or two of property does not intitle to be called money. (Smith 1995, p. 37, footnote by Playfair)

In actually, the credit system was well-established long before A. Smith tried unsuccessfully to use cod from Newfoundland and nails from Scotland as examples of a transition from barter to money. In fact, the credit system is as old as money itself. However, difficulty in making standardized coinage due to poor technology made it impossible to achieve large-scale coin-making and thus impossible to achieve widespread circulation. To overcome the need for the double coincidence of wants required for barter and the shortage of coins, a credit and debt record system emerged in ancient Babylonia using shubai (contract) tablets. The oldest of these tablets used c.2000 BC to c.3000 BC were made of dried clay and had the shape and size of a cake of hand soap. Most shubai record simple transactions as ‘she’, which is thought to be an assumed point of comparison related to a unit of measure for grain of some sort (Innes 1913). Shubai were also kept in sealed containers that provided protection against fraudulent tampering. Such protection strongly suggests that shubai were not intended merely as records to remain in the possession of the debtor. Instead, shubai were signed and sealed documents issued to the creditor, and could be passed from creditor to creditor until the debt was paid and the tablet was broken (Innes 1913). Another early example of a credit system was the tally stick used in medieval times to account for credit or debt. Like the shubai system, the tally system resulted from unequal exchange that demanded a record of unsettled credit or debt. The tally stick was intended to be a tamper-proof device that used a series of notches at a time when there was a constant shortage of coins and a majority of illiterate people. The split tally was a commonly used to record bilateral exchange of credits and debts with each party receiving half of the tally stick as proof of the transaction. When both parts of the split tally were rejoined, there was a completely identifiable unit (Kick Them All Out Projects 2017). Much of commerce in Medieval Europe was recorded entirely with tally sticks, used there to control purchases of goods, loans of money and settlement of debts.

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Great periodical fairs served as clearinghouses where merchants gathered with their tally sticks to settle their credits and debts (Innes 1913). It has long been recognized that the need for credit or money stems directly from unequal transactions: ‘credit is anything which is of no direct use in itself: but which is taken in exchange for something else, solely in the Belief or Confidence that we have the Right to exchange it away again for something else we do require’ (Macleod 1883, p. 36). It’s worth emphasizing the point: the instrument of credit or money is something of no direct use in itself. Rather, credit or money is the abstract right or property of demanding something to be paid or done by someone in the future. Regarding the origin of banking Samuelson and Nordhaus (2010, p. 463) state that ‘commercial banking began in England with the goldsmiths, who developed the practice of storing people’s gold and valuables for safekeeping’. T. Livius already referred to the existence of banking businesses around 350 BC in his Ab Urbe Condita Libri, now available in English as History of Rome. Therefore, the explanation of Samuelson and Nordhaus’ explanation is not at all exact. In fact, Macleod (1883, pp. 161–162) shows that banking was first practiced by the Romans in Europe when Rome began to take control of neighboring towns. Foreigners brought local coins with them and the Roman government created private agencies called ‘argentarii’ to exchange foreign money for Roman money. Over time the argentarii expanded their business to the point, that private persons could deposit money with them for the purpose of security. In such a case, the argentarii acquired no property. Instead, they simply took care of money. Gradually, the argentarii developed a new business which, in modern language, would be termed ‘banking’. The argentarii received money in the form of personal loan to themselves and paid interest for that money. In such a way money became the property of argentarii and they could trade with it as they pleased, much as modern bankers do.

4.3 The Origin of Money Interest from the Perspective of Structural and Functional Decay The second law of thermodynamics, the entropy law, is a scientific interpretation of the universal tendency of heat to disperse from a highly localized concentration and spread out, unless otherwise constrained. In fact, people have also observed in daily life that like heat, all material objects tend to disperse or decay. Those phenomena of both heat dispersion and material decay belong to our common knowledge. In 1862, proceeding his final formulation of the entropy law, Clausius attempted to quantify material dispersion within a thermodynamic system. Clausius (1862) defined a new variable that quantifies the degree of molecular dispersion in a thermodynamic system. He termed that variable the disgregation. In so doing, Clausius seems to have recognized both that change in disgregation corresponds to change in the position of molecules in the system and that disregation is more fundamental than entropy because disgregation can be used to interpret the true nature of entropy

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(Klein 1961). Before introducing the disgregation concept, his analysis was confined only to cyclic processes, which are supposed to return to their initial thermodynamic state after transformation, thereby, implying that there must be no change within the system between the initial state and the final state. It seems that Clausius became more concerned with general transformation, not restricted to cyclic processes, so that changes within the system after any type of transformation, not restricted to cyclic processes, could be investigated. Furthermore, as Gibbs correctly indicated in his 1889 obituary 1889 (dedicated to Clausius), the disgregation in a thermodynamic system does not depend on the velocities of particles within the system (Gibbs 1994). Therefore, the disgregation concept differs from the entropy concept, which is generally believed to refer only to the dissipation of energy based on the distribution of the particle velocities. Entropy S can be related to both thermal content of a system and the disgregation concept by equating entropy with heat dispersion (d H/T ) plus material dispersion (d Z) (Clausius 1862, 1865)1 : dS = d H/T + d  Z

(4.1)

where T is the absolute temperature, H is the thermal content of the system and Z is disgregation. It must be emphasized that entropy S is a thermodynamic state function, thus dS is a total differential. Neither d H/T nor d Z, on the other hand, are total differentials. Both d H/T and d Z are nearly impossible to quantify separately, due to the fact that both of these terms cannot be represented by a thermodynamic state function such as entropy (Mayumi and Giampietro 2018; Mayumi 2019). So, it is unfortunate that disgregation as the measure of material dispersion is dependent on the path through which two thermodynamic states are connected. Therefore, disgregation cannot be used as a thermodynamic state function such as entropy. However, Eq. 4.1 clearly confirms that, at a fundamental level, the concept of entropy is related not only to energy dissipation, but also to matter dispersion! On the other hand, physicists typically do not make a clear distinction between energy and matter because of Einstein’s mass-energy equivalence. For example, Fermi (1936, p. ix) stated in his well-known text, Thermodynamics, that ‘thermodynamics is mainly concerned with the transformation of heat [energy] into mechanical work and the opposite transformation of mechanical work into heat [energy]’. So, matter is not regarded as the subject matter of thermodynamics. However, in the case of the diffusion of two perfect gases, the diffusion phenomenon must be interpreted as dissipation of matter. Planck supports this interpretation (1945, p. 104 footnote, emphasis added): in the case of diffusion of two perfect gases ‘it would be more to the point to speak of a dissipation of matter than of a dissipation of energy.’ Thus, the dissipation of matter, namely, disgregation, is of vital importance for interpreting the meaning of entropy. Georgescu-Roegen similarly tried to formulate material dissipation or matter in bulk dissipation. In particular, Georgescu-Roegen tried to formulate the dissipation of mineral resources in the economics process, his so-called, ‘fourth law of thermodynamics’ (Georgescu-Roegen 1977). The fourth law implies that flows of dissipated

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matter in bulk increase with the scale of economic production and consumption activities and that there is great difficulty in maintaining large-scale material structures in modern industrial society. While Georgescu-Roegen’s fourth law has a crucial implication for the importance of mineral resources, unfortunately, like disgregation, Georgescu-Roegen’s idea cannot be represented in terms of a thermodynamic state function. However, and, perhaps the readers will be astonished, the diffusion of material structure based on disgregation can be used to explain the origin of money interest. Every material object has both a material structure. i.e. a structural component, and a particular purpose for use, i.e. a functional component. As a structural component decays, following the entropy law, its functional component jointly decays, and the material object may no longer be used to serve the particular purpose for which it was originally intended. Hard currencies such as coins and bank-notes, for example, cannot avoid the entropy law. They suffer material decay as time goes on, thereby, ‘losing’ their material structure. However, the functional component does not decay, even if money as a material object suffers material decay. This functional aspect of money, despite the inevitability of material decay, is legally and institutionally guaranteed. Therefore, legal and institutional arrangement gives money and, in fact, any form of money and money substitutes collectively, termed ‘general liquidity’ and including coins and bank-notes, a far superior position when compared with goods or wares when making economic exchanges. To use examples from Japan and the United States, the functional component of Bank of Japan notes is legally guaranteed since ‘the Bank of Japan shall exchange, without fees, Bank of Japan notes rendered unfit for further circulation due to defacement, mutilation, or other causes, pursuant to an Ordinance of the Ministry of Finance’ (Japanese Law Translation 2017b, Article 48 of the Bank of Japan Act). Similarly, in Section 100.5 of the Code of Federal Regulations, United States law stipulates that ‘Lawfully held mutilated paper currency of the United States may be submitted for examination in accord with the provisions in this subpart. Such currency may be redeemed at face amount if sufficient remnants of any relevant security feature and clearly more than one-half of the original note remains’ (Legal Information Institute 2017). Thus, the function of money does not change over time. A qualitative gap expands as money maintains its original purpose while material objects lose original purpose. Only money grows quantitatively over time as interest emerges. In this way, discounting monetary value is justified in conventional economics. The superiority of money is supported institutionally and legally, allowing the owner of money to dictate in principle the timing of transactions with people who have to sell goods in order to limit the structural decay of those goods. To repeat, money interest derives from the special characteristic of money, that is the possibility to postpone the timing of transaction without incurring functional damage. The ability to control the timing of transactions with money is legally and institutionally arranged in socioeconomic systems. So, being a money owner is, in

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general, far superior position in comparison to those who do not wield purchasing power. Here it is also useful to introduce S. Gesell’s free-money theory (Gesell 2013). Gesell’s free-money theory regards money as a medium of exchange that should depreciate over time at a certain rate. By this theory, monetary devaluation corresponds to commodity depreciation through stamping currency to indicate devaluation. In this way, money is supposed to serve only as a means of exchange for commodities and is prevented from being unnecessarily withheld from the market. As already emphasized, the emergence of money interest has nothing to do with the material of money. It is the functional aspect of money that legal and institutional arrangement guarantees. Gesell missed the crucial distinction between the material decay and functional decay aspect of money—a distinction which is legally and institutionally authorized as money, and one that does not come from the nature of the material structure of money. To wit, Gesell (2013, p. 171, emphasis added) states The physical properties of the traditional form of money (metal money and paper-money) allow it to be withdrawn indefinitely from the market without material cost of storage. […] The merchant can therefore force the possessors of wares to make him a special payment in return for the fact that he refrains from arbitrarily postponing, delaying, or, if necessary, preventing the exchange of wares by holding back his money. […] This special payment, sharply to be distinguished from commercial profit, cannot of course be exacted by the ordinary purchaser. […] Only the merchant approaching the market as owner of money can exact this tribute.

Gesell calls this special payment within the economic system basic interest. Perhaps Gesell could not grasp the crucial distinction between the origin of money interest and the money interest level itself. Fisher (2012) showed that the rate of interest in terms of a given good cannot become negative if that good can be stocked without significant expense, a condition that is met by money. Furthermore, Fisher states that ‘as long as our monetary standard is gold or other imperishable commodity, so that there is always the opportunity to hoard some of it, no rate of interest expressed therein is likely to fall to zero, much less to fall below zero’ (Fisher 2012, p. 41). In that quotation, Fisher also does not understand the true nature of money, not the coins made of gold or silver. As previously mentioned, the material of money does not matter. Fisher did not notice the distinction between material decay and functional decay which explains the true origin of the emergence of money interest. Keynes (1964) discussed money and its interest, in relation to other commodityown interests, in Chap. 17 (The Essential Properties of Interest and Money) of his The General Theory of Employment, Interest, and Money. Keynes considered the relation between the spot and future contracts of a commodity, for example, wheat and he stated that ‘Let us suppose that the spot price of wheat is ₤100 per 100 quarters, the price of the “future” contract for wheat for delivery a year hence is ₤107 per 100 quarters, and that the money-rate of interest is 5%; what is the wheat-rate of interest?’ (Keynes 1964, p. 223). Keynes then concluded that the wheat-own rate of interest is 5% − 7%, i.e. −2%. It seems that Keynes a priori assumed the existence of a positive money interest that must be relatively higher than the wheat-own interest. However,

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Keynes could not identify the true reason why money interest rate was the greatest in relation to other commodity-own interests. I strongly believe that, the true reason derives from the fact that only money can functionally defy the entropy law. Soddy raised an interesting question concerning how to pay a monetary loan interest, following implicitly Gesell’s free money idea (Soddy 2003). The basic idea behind Soddy’s new proposal is that the monetary value of that loan should also decrease over time: the value of the US$100 in the first year must be discounted to its present value, US$ 95, so that the second year’s interest ought to be 5% of US$95 and so on. Under these circumstances the total interest accruing becomes nearer and nearer to the principal and can never exceed the principal, regardless of loan duration. To illustrate, for variables: A f t i

the principal, the fraction of the principal accruing as interest, the time in years and the rate of interest per cent per annum, we can say that between the period (t, t + dt), the interest accruing is

A( f + d f ) − A f = (A − A f ) × i × dt.

(4.2)

Therefore, we obtain df = idt. (1 − f )

(4.3)

Integrating the above expression, we arrive to −ln(1 − f ) = it.

(4.4)

And rearranging Eq. 4.4 to its canonical form, we obtain f = 1 − e−it .

(4.5)

Since f is the fraction of A already paid as interest, as time approaches infinity, f approaches 1. Therefore the accumulated interest in this scheme cannot exceed the principal A as long as the interest rate i is positive. So inequality f < 1 always holds true for any t. I believe that this way of paying interest on the principle A should be established as a financial rule to minimize the superior position of money lenders. From a slightly different viewpoint, i.e. an ethical viewpoint, Keynes endorsed two of The Economic Journal’s symposiums, both of which discusses the justification of taking interest from money borrowers. For this discussion, refer to ‘Saving and Usury: A Symposium’ (1932, Vol. 42, pp. 123–137, by Adarkar, Cannan, Keynes, and Sandwell) and ‘Usury and the Canonists: Continued’ (1932, Vol. 42, pp. 312–323, by Dennis, and Somerville) in The Economic Journal.

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A similar scheme can also be applied to the national bond redemption by taxation, something which will be used more systematically in Chap. 8. Considering Eq. 4.5 and supposing a taxation rate p, the following relation can be easily obtained: f = 1 − e−i pt .

(4.6)

Equation 4.6 clearly shows that capital gain tax effectively reduces the interest rate from i to ip, since p < 1. If i = 0.05 and p = 0.2, for example, then for f to reach 0.5 (50% redemption), it will take nearly 70 years. Of course, in order not to increase the general liquidity, the interest paid in terms of tax must be set aside without defraying public expenditure. It must also be extinguished. Following our discussion thus far, in relation to distinction between material element and functional element associated with money, it is now instructive to discuss the recent phenomenon of intentional and progressive decay of the functional element by a successive versioning-up of the information technology (IT) sector, in addition to many other industries. For example, the first version of Word for Windows was released in 1989. However, this version was not very popular since Windows users represented a minority of the word processor market at that time. Between then and now, Microsoft has released many new versions of their program. One of the more recent and popular version in current times is Word 2016. In the modern world, where new products are produced according to strategies adopted by many producers and based on ingenious innovative marketing activities, intentional functional decay and intentional obsolescence strategies are often adopted, to try to effectively replace the old functional aspects of commodities by the new ones. In particular game software and computer software are typical examples of products where this ingenious but often environmentally destructive strategy that promotes uncritical expansion of consumption is employed. Relatively recent experiences such as Windows XP and Android 4.3 are, for example, typical examples of intentional obsolescence. More than 900 million of Android users were troubled when the service support of Android 4.3 was terminated in 2015. Consumers of IT products must pay unnecessary attention to the period and the content of free service support as well as the timing of new upgraded version issues. Consumers often have no choice other than to use products without free service support or to upgrade—typically purchase—a more recent version.

4.4 Debt Creation and Control: Miscellaneous Problems General liquidity including money is, in essence, the right to demand equivalent services in the future for services already provided. That is to say, money represents debts which are due to people who have made services to other people but have not yet received equivalent services in return. Money’s special function is to measure, record and preserve these unsettled rights for future use (Macleod 1883). Therefore, the

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owner of money is individually the creditor and the issuer of money as a community is the debtor. Money is usually regarded as wealth for an individual. However, money is a debt for the whole community since money entails a promise to pay in term of either existing goods or the production of future goods. Consequently, money puts a community as a whole into long-term biophysical debt. Production entails deficit in terms of entropy (Georgescu-Roegen 1971) since useful energy and materials are consumed irrevocably, thereby resulting in fewer exhaustible resources. I propose to term the essence of money as the dual nature of money: money can be seen as both a form of wealth from an individual perspective and as a debt from a communal perspective. Perhaps Soddy is the only scholar who has properly grasped this nature of money, stating in clear terms, for example: “National securities and money are both wealth from the standpoint of the individual owner and both debt from the standpoint of the community” (Soddy 1926). An issuer of money is usually a nationstate within a particular territorial boundary (Holton 2011). However, under the current socioeconomic systems, besides nation-states, there are other entities that can issue money such as the European Union. However, it is in fact very dangerous if the money issuing body is beyond the level of a nation-state. The national selfsufficiency of finance is also to be emphasized in Chap. 8. A nation-state as the issuer of money is a debtor, while money is regarded as a form of wealth by the individual owner of money. Many people seem to overlook the dual nature of money, while its understanding is crucial. An illustrative example is the case of the Bank of Japan. A vast majority of Japanese people do not realize that the Bank of Japan is a sort of private company authorized by the Bank of Japan Act and that its stocks are in fact traded within JASDAQ in Tokyo. Therefore, in Bank of Japan Accounts, government securities, such as Japanese national bonds, are counted as assets and not as liabilities. As of 20 June 2019, Japanese government securities are more than JP¥473 trillion, i.e. 84% of the total assets of the Bank of Japan and 46% of outstanding Japanese national bonds! Japanese national bonds are a debt to Japan, but wealth for individuals such as the Bank of Japan. So, Japanese national bonds for the Bank of Japan can be regarded as wealth under the current accounting method. However, to repeat, regarding the Bank of Japan as an individual private agent cannot be justified. Unfortunately, the Bank of Japan is treated in essence as a private company, similar to other national banks in modern society. It must be emphasized that money is a debt to a nation-state and can accumulate progressively with a positive interest rate under the present legal and institutional setting. So, it is important for the democratically elected representatives of a nationstate to be in full control of the total quantity of general liquidity to be issued and in full control of how this liquidity is distributed. As K. Popper aptly remarks, ‘the future depends on ourselves, and we do not depend on any historical necessity’ (Popper 1995, p. xix). Thus, there must be a rule of law that enables people to be able to replace the representatives of a nation-state if circumstances dictate. Therefore, I strongly oppose people who endorse the private issue of money. A representative endorsing the private issue of money was, on the other hand, Hayek (1990). Unfortunately, not

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only nation-states, but more importantly, a variety of private agencies such as banks and financial institutions are issuing more and more general liquidity. However, there is another crucial role of a nation-state: the imposition of taxes. Tax imposition must be linked to money creation. Ironically, we are strongly accustomed to regard the issue of money as a blessing and taxation as a heavy burden (Innes 1914). This view is based on the individual perspective of money as a wealth. Indeed, tax releases the burden of monetary debt to a community. At the present time, for nearly all countries, all tax is automatically spent as public expenditure, so that the important role of tax, which could extinguish money debt if set aside, is completely forgotten. So, both money issue and taxation must be under the control of the elected representatives of a nation-state, not under the control of a bureaucratic administration headed by the leading political party. Let us examine the case of Japan to see whether there is an effective coordination between money issue and tax imposition under the control of the elected representatives of a nation-state. Though it is under the strong influence of the prime minister and bureaucratic administration, the monetary control in Japan is conducted autonomously by the central bank. To this end, the Bank of Japan Act stipulates that ‘the Bank of Japan’s autonomy regarding currency and monetary control shall be respected’ (Japanese Law Translation 2017b, Article 3 (1)). Thus, the Bank of Japan is independent from the influence of the Diet, the elected representatives of Japan. In addition, any change to the articles of the Bank of Japan Act can be made without the consent of the Diet. To wit: ‘any amendments to the articles of incorporation shall not come into effect unless authorized by the Minister of Finance and the Prime Minister’ (Japanese Law Translation 2017b, Article 11 (2)). Banking licenses and capital requirements are also authorized without the consent of the Diet. On banking licenses, the Banking Act stipulates both: (i) ‘a person who has not obtained a license from the Prime Minister shall not engage in Banking’ (Japanese Law Translation 2017a, Article 4 (1)); and (ii) ‘the amount of the stated capital of a Bank shall be equal to or more than the amount specified by Cabinet Order’ (Japanese Law Translation 2017a, Article 5 (1)). It should now be clear that none of the banking activity in Japan is controlled by elected representatives. It is worth noting that the situation is like the cases of the United States and many other countries. In Japan, tax law is controlled by the Diet, the elected representatives of the nation. In fact, there are three articles in The Constitution of Japan that refer to taxation and national finance under the control of the Diet: 1. The people shall be liable to taxation as provided by law (Japanese Law Translation 1946, Article 30); 2. The power to administer national finances shall be exercised as the Diet shall determine (Japanese Law Translation 1946, Article 83); 3. No new taxes shall be imposed or existing ones modified except by law or under such conditions as law may prescribe (Japanese Law Translation 1946, Article 84).

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Fortunately, in Japan, tax imposition is effectively under the control of the Diet. In the context of such a circumstance,—one where tax imposition is under control of elected representatives of the state and money issue outside of the control of elected representatives of the state—there must still, however, be an effective coordination between money issue and the imposition of taxes. Before investigating the creation of credit through the banking system, it is first enlightening to reflect on what physics tells us about the possibility of creating energy out of nothing. The law of conservation of energy tells us that before and after a reaction process including but not limited to nuclear reaction processes, total energy is preserved. The law of conservation of mass is more nuanced in the sense it holds true for chemical reactions, but not for nuclear reactions. The law of conservation of mass does not hold true in the case of nuclear reactions due to the fact that the binding energy of nucleons (proton and neutron) is transformed into heat during the nuclear reaction. Still, importantly, total energy must be preserved. So, in summary, in the physical world, we cannot create energy or extinguish energy by human will. On the other hand, human will can both create, out of nothing, and extinguish, into nothing, credit in the banking system (Macleod 1889). Therefore, the creation of money defies, in a sense, the first law of thermodynamics. Indeed, the credit system represents a very innovative discovery in human history. To emphasize the point, in a system of bank ledgers or accounting books, we can both create a credit and extinguish that created credit. Therefore, within the banking system, it is possible to have a situation where one person has a certain amount of money and another person has that same amount of money. Ruskin strongly opposed the abuse of this sort of magic in our economic life in his compendium Unto This Last, originally published in 1862. In that work, Ruskin (1985, p. 227) states ‘care in nowise to make more of money, but care to make much of it; remembering always the great, palpable, inevitable fact—the rule and root of all economy—that what one person has, another cannot have’. Schumpeter also described the credit creation, stating that while ‘I cannot ride on a claim to a horse, I can, under certain conditions, do exactly the same with claims to money as with money itself’ (1951, p. 97 note). So, considering these concerns, why is the credit creation system legally and institutionally possible? In Roman mercantilism law, there existed two types of loan, one termed commodatum and the other mutuum (Macleod 1883). In the case of a commodatum-type loan, the borrower was able to directly use—and later return—a loaned object without acquiring the absolute property right to that object. Examples of objects suitable for commodatum-type loans include books and horses. In the case of a mutuumtype loan, on the other hand, the borrower consumed or otherwise destroyed the lent ‘thing’. While the borrower was still expected to return the borrowed ‘thing’ to the lender, the returned ‘thing’ was not the same as the borrowed ‘thing’, though it was, of course, similar for all intents and purposes. Examples of objects suitable for mutuum-type loans include, bread and wine. Surprisingly, or perhaps strangely, if a person lent money to another person, under Roman law, that money became the borrower’s property until that lender demanded

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the return of it. It seems, apparently, that money was treated as if money could be consumed. If a person makes a deposit into a bank account, that money was regarded as the absolute property of the banker. Hence, a loan of money was, under Roman law, a mutuum-type loan. In all cases, the loan of things such as wine, oil, bread, meat, and apparently also of money or postal stamps, the lender was regarded to have ceded to the borrower the property of the thing lent. A new property is thereupon called into existence and a new contract is created between the lender and the borrower. The justification of such a treatment of a monetary deposit perhaps derives from the custom in banking prescribing that a deposit be regarded as a contingent obligation: unless demanded from the depositor, it is not necessary for the banker to keep that deposit. I do not, however, see any ethical justification for neither the banker’s behavior nor Roman mercantilism law. Many people seem to misunderstand the true nature of a bank deposit. Suppose a banker’s customers pay a certain amount of money to their own accounts. Then, in that circumstance, the money paid becomes the banker’s absolute property. The exchange is a form of mutuum. In fact, what is actually occurring is that the banker is buying the money from his customers and in exchange for it, he or she is giving them a credit in their bank books. This right of action, either credit or debt, in banking language, is termed as deposit. After the exchange operation, the banker gains the exchanged amount of deposits as a liability and the same amount as an asset. Well, to be specific, no liability exists until the customer attempts to withdraw the deposited money. Macleod (1883) boldly states that banks ‘are nothing but Debt Shops, and the Royal Exchange is the great Debt Market in Europe’. While I am not sure whether or not Macleod properly grasps the dual nature of money, these statements reveal the essence of the dual nature of money from the communal perspective. To this end, Macleod (1883, p. 285) emphasized the excessive use of credit and its serious consequences: it is ‘chiefly by the excessive use of Credit that over production is brought about, which causes those terrible catastrophes called Commercial Crises’. The banking system’s creation of debt is one of the most treacherous items from the point of view of the national control of money. It must be remembered that there were heated discussions over how to control the checking account in the United States shortly after the stock market crash in 1929 (Phillips 1995). In fact, those discussions led to the Chicago plan for banking reforms, a plan that was signed by F. Knight as well as other distinguished economists of the University of Chicago. Around that same period of time, Fisher (1945) wrote a seminal book 100% Money, a book that served as a practical guide for controlling the checking accounts in the banking system. The Chicago plan was, however, never implemented. On the other hand, it must be remembered that there are three main methods of extinguishing monetary obligations besides money payment (Macleod 1889): 1. Release—if a creditor gives a debtor a formal written receipt for money due. 2. Novation—obligation may also be extinguished by substituting a new obligation for it. The new obligation pays, discharges, and extinguishes the preceding one and the extinction of the preceding obligation is the consideration for the new one.

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3. Compensation—in the case where two persons are mutually indebted at the same time, each person may claim that the debt which he has against the other will be taken in payment of the debt he owes. Therefore, as money payment is a very limited form of extinguishing obligations nowadays, there is no definite relation between money and other money substitutes such as credit. Thus, the ideas of 100% money or a fixed reserve ratio, ideas often proposed after a financial crisis are far from satisfactory to stabilize financial systems. After all, the relation between money and credit is not a mathematical function—the relation is contingent. Macleod (1894) writes that: in every credit system, there must be an ultimate reserve of money that can be used for releasing money obligation. That ultimate reserve does not, however, bear a constant fixed ratio to the quantity of credit created. We do not ascertain the momentum of each type of monetary substitute within the economic system where the momentum is obtained by the amount of each type of monetary substitute multiplied by the velocity of its circulation. Controlling the amount of credit is indeed very difficult to achieve. To this end, there is a very interesting and informative historical event, occurring in Scotland in the 18th century and concerning the proper use of a credit system. The credit system in question was called cash credit (Macleod 1883). In fact, the invention of cash credit was seen to advance the wealth of Scotland. What occurred was the creation of an enormous mass of exchangeable real property—out of nothing—by the mere will of the bank and its customers. The banks in Scotland at that time usually limited their advances to a certain moderate amount and they always took several sureties to cover any possible losses that might have arisen. Members of the ‘third-party’ in Scotland, those with a superior credit rating referred to as cautioners in Scottish law, kept a watchful eye on the proceedings of borrowers and ensured the right to borrowers to inspect their bank account at any time and also, if necessary, to close their bank account at any time. These cash credits were extended to the domain of agriculture and public works as well. The principle of the limits of credit is the present value of the estimated future product. Thus, in these cases credit, was used as productive capital exactly in the same way money is. These marvelous results, results which raised Scotland from the lowest depths of barbarism up to her proud current position in the space of 170 years or so, are the children of cash credit. To realize the true nature of the cash credit system in Scotland we must pay due attention to the distinction between commercial paper and accommodation paper. Commercial paper is an unsecured, short-term debt instrument issued by a corporation, typically for the financing of accounts receivable, inventories and the meeting short-term liabilities. Maturities on commercial paper rarely range any longer than nine months. Commercial paper is typically issued at a rate discounted from face value and reflective of prevailing market interest rates. On the other hand, the marvelous results Scottish people produced are due to accommodation paper. Accommodation paper is a negotiable instrument that provides a third-party promise of payment in the case the original borrower defaults. Accommodation papers are typically used to support one party’s creditworthiness through endorsement by a second party with

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a better credit rating. When strong credit rating cautioners entered into a transaction, the lender’s exposure to default risk decreases dramatically. In such a case, the lender would then be more willing to extend a lower interest rate or negotiate lower fees.

4.5 Conclusion Money can be regarded as a perpetual motion machine as it defies both the first law of thermodynamics and the second law of thermodynamics. Since money is a form of wealth from individual perspective, money stock, therefore, tends to expand rapidly if circumstances allow. Yet, ultimately, money is used for the exchange of goods and services. To produce goods and services, a certain amount of exhaustible energy and materials must be consumed. So, money must be regarded a biophysical debt from communal perspective. Both the money issue, in the broadest sense of the term, i.e. general liquidity, and taxation as well must be under the strict control of the elected representatives of a nation-state. In this sense, the Euro currency system is a very dangerous creation, a creation that must assume a superstructure beyond each nation-state within the European Union (Sandbu 2015). Unfortunately, there are several other important channels through which the worldwide and large-scale creation of ‘money’ is occurring beyond the control of any individual nation-state: (i) debt creation through bond issuing, debentures and derivatives that spreads out into the world market at an accelerated pace, situations where investment banks and investment management companies play a crucial role; (ii) the open market purchase or sale of national bonds by a particular nation that is intending to expand or contract the monetary base; and (iii) tax evasion (within a list of countries called tax havens) legally made but vitiating the national budget system by internationally active industries or individuals (Palan et al. 2010). The existence of a positive interest on money and assets, and interest rate manipulations by the major central banks are the most dangerous cause of financial market fluctuations. If any single central bank of one of the major economies such as the United States, the European Union, the United Kingdom or Japan adopts a new level of interest rate, used for discounting the bills of exchange, this internal change directly influences, through the world financial market, the effective exchange rates of the other major economies. Internal change in effective exchange rate can indirectly trigger a stock market response, the monetary base and, by extension, many other monetary and real changes. The problems associated with the existence of money interest and its eternal volatility across various countries are omnipresent under the present legal and institutional arrangement. What is ‘the value of money’? The value of money for the exchange of goods and services is equal to the inverse of the general price level—that is, a weighting average of all goods and services prices. However, there are certain items that also have sales prices, items such as shares or derivatives. These items are not usually linked to general price level arguments in economics. The possible link between ordinary

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goods and services, and share or derivative prices is not sufficiently investigated in the conventional analysis of the price stability. An increase in stock price is usually regarded as good, whereas an increase in the price of ordinary goods and services is regarded as bad. While I understand the way in which conventional economists deal separately with goods and services included in GDP, and the way they exclude assets not included in GDP, what is missing in conventional economics is consideration of the general price index (GPI), that which contains not only ordinary goods and services but also share and other financial commodities. It is imperative to study the complicated link between these distinct classes of ‘commodities’. On the other hand, what is the value of money for the exchange of loan money or credits or assets? The price of credit, for example, is the interest rate that can produce a profit (discount) for the owner of credit. The interest rate here, termed the general interest index (GII), is a sort of weighted average of all the interests (returns) associated with various money and money substitutes. There must exist a close link between the price level of financial commodities associated with GPI, and the general interest associated with GII. In any case, the distinction between the two values of money is important when considering the influence of money and of general credit expansion or contraction on both GPI and GII. In relation to the influence of money expansion on both GPI and GII, it is useful to consider, for example, the quantitative easing policy adopted by the Bank of Japan around April 2013 and maintained ever since. This quantitative easing is nothing but large-scale national bond purchase, mainly from the private banks in Japan. This easing is an atypical expansionary monetary policy used to stimulate the Japanese economy and aimed at increasing the general price level by up to 2%. Unfortunately, the Bank of Japan fails to understand the two different aspects of the consequences of quantitative easing. Its policy target, a 2% price increase, was not materialized. On the other hand, what we are witnessing is a tremendous increase in the Nikkei Stock Average from 9,486 on 2 December 2012 to 21,504 on 25 February 2019 (a 227% increase!). Conventional economists never do pay due attention to changes in GII, such as changes in the Nikkei Stock Average. During that period (2012–2015), the interest rate on deposit account in Japan’s leading private banks was only 0.002%. That rate dropped further to 0.001% in 2019 due to monetary expansion by the Bank of Japan. It is imperative for conventional economists to seriously reconsider the meaning of price level both in terms of GPI and GII. Thus far, real productive capital such as buildings or machinery, belonging to the exosomatic population defined in Chap. 1, was excluded from the category of the general liquidity. However, real productive capital can also be evaluated in terms of money. So, from a purely economic consideration, real productive capital must be included in general liquidity. On the other hand, there must be a distinction between real productive capital and general liquidity. Real productive capital is already produced. Because exhaustible energy and materials have been used in producing real productive capital, the exhaustible portion already used as an eternal loss could never be recovered. Biophysically irreversible debt can never be recouped using money. In fact, it is in most cases impossible to directly transform real productive capital into the consumable goods and services. Furthermore, since things that can be capitalized in

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the financial market are regarded as wealth from the individual person’s perspective, real productive capital can also be easily transformed into money by those people trying to make income and looking for higher profit in terms of interest or other profit opportunities. Thus, a nation-state should make a proper balance among the scale of the real capital production, of financial assets as general liquidity and of goods and services production. General liquidity is the totality of the virtual liquidity that will be demanded for the exchange of consumable goods and services in the future. This virtual liquidity of promise to pay on a community will to expand indefinitely as long as the positive interest or other financial returns is guaranteed. Thus, we are forced to create a further increase of real wealth in terms of goods and services. Furthermore, more production of goods and services inevitably increases unnecessary competition, resulting in the deterioration of the environment, something which is indispensable for maintaining the biological life on our planet. Inevitably, people in the capitalist systems are very busy, that is the reality of such economic systems. We should refer to this system of debt world as a running solvency world, a description used long ago by Mark (1934). It must be remembered that the most important principle of commerce is that a person or nation is only solvent if there are immediately available credits equal at least to the amount of their debts immediately due and presented for payments. If, therefore, the sum of the immediate debts exceeds the sum of the immediate credits, the real value of these debts to creditors will fall to an amount which will make them equal to the amounts of credits (Iness 1913). Note 1. In his sixth memoir, Clausius (1862) reached essentially the same expression as Eq. 4.1 for a reversible path where ∫ d Q +T d H + ∫ d Z = 0 is held true. It must be noticed that in his sixth memoir, the heat given off is reckoned to be positive. Despite the fact that Clausius discussed the entropy concept using the relation above, it was in his ninth memoir (Clausius 1865) that he, for the first time, named the magnitude S as entropy. So, the disgregation concept was very important for Clausius, who made his final formulation of the entropy concept in 1865.

References Clausius R (1862) On the application of the theorem of the equivalence of transformations to interiorwork. In: Hirst TA (ed) The mechanical theory of heat with its applications to the steamengine and to the physical properties of bodies. John van Voorst, London, pp 215–250 Clausius R (1865) On several convenient forms of the fundamental equations of the mechanical theory of heat. In: Hirst TA (ed) The mechanical theory of heat with its applications to the steam-engine and to the physical properties of bodies. John van Voorst, London, pp 327–376 Fermi E (1936) Thermodynamics. Dover, New York Fisher I (1945) 100% money, 3rd edn. The City Printing Company, New Haven

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Fisher I (2012) The theory of interest. Maritino Publishing, Mansfied Centre, CT Georgescu-Roegen N (1971) The entropy law and the economic process. Harvard University Press, Cambridge, Mass Georgescu-Roegen N (1977) The steady state and ecological salvation: a thermodynamic analysis. Bioscience 27(4):266–270 Gesell S (2013) The natural economic order (trans: P Pye). Isha Books, New Delhi Gibbs JW (1994) Rudorf julius emanuel clausius. In: Bumstead HA, van Name RG (eds) The scientific papers of J. Willard Gibbs, vol 2, pp 261–267. Ox Bow Press. Woodbridge Graeber D (2011) Debt: the first 5,000 years. Melville House Publishing, New York Hayek FA (1990) Denationalisation of money, 3rd edn. The Institute of Economic Affairs, London Holton RJ (2011) Globalization and the nation state, 2nd edn. Palgrave Macmillan, New York Innes AM (1913) What is money? Bank Law J 30(5):377–408 Innes AM (1914) The credit theory of money. Bank Law J 31(1):151–168 Japanese Law Translation (1946) The constitution of Japan. http://www.japaneselawtranslation.go. jp/law/detail_main?id=174 Japanese Law Translation (2017a) Banking act. http://www.japaneselawtranslation.go.jp/law/ detail/?id=1967&lvm=01 Japanese Law Translation (2017b) Bank of Japan act. http://www.japaneselawtranslation.go.jp/law/ detail/?id=92&vm=&re=02 Keynes JM (1932) Saving and usury. Econ J 42:135–137 Keynes JM (1964) The general theory of employment, interest, and money. A Harper Book, London Klein MJ (1961) Gibbs on clausius. Hist Stud Phys Sci 1:127–149 Legal Information Institute (2017) The code of federal regulations. https://www.law.cornell.edu/ cfr/text/31/subtitle-B Lucas RE Jr (2003) Macroeconomic priorities. Am Econ Rev 93(1):1–14 Macleod HD (1883) The theory and practice of banking, vol 1, 4th edn. Forgotten Books, London Macleod HD (1889) The theory of credit, vol 1. Longmans, Green and Co., London Macleod HD (1894) The theory of credit, vol 2. Longmans, Green and Co., London Mark J (1934) The modern idolatry being an analysis of usury and the pathology of debt. Chatto & Windus, London Mayumi KT (2019) Money, credit and interest in light of unconventional perspective. In: Cante FE, Torres WT (eds) Nonviolent political economy. Routledge, London, pp 27–44 Mayumi K, Giampietro M (2018) Money as the potential cause of the tragedy of the commons. RomIan J Econ Forecast 21(2):151–156 Palan R, Murphy R, Chavagneux C (2010) Tax havens: how globalization really works. Cornell University Press, Ithaca Phillips RJ (1995) The Chicago plan and new deal banking reform. M.E. Sharpe, New York Planck M (1945) Treatise on thermodynamics, 7th edn. Dover, New York Popper K (1995) The open society and its enemies. The spell of plato, vol 1. Routledge, London Ruskin J (1985) In: Wilmer C (ed) Unto this last and other writings. Penguin Books, London Samuelson PA, Nordhaus WD (2010) Economics, 19th edn. MacGraw-Hill, New York Sandbu M (2015) Europe’s orphan: the future of the euro and the politics of debt. Princeton University Press, Princeton Schumpeter JA (1951) The theory of economic development. Harvard University Press, Cambridge, MA Smith T (1832) An essay on currency and banking. Jesper Harding, Printer, Philadelphia Smith A (1976) In: Cannan E (ed) An inquiry into the nature and causes of the wealth of nations. The University of Chicago Press, Chicago Smith A (1995) In: Playfair W (ed) An inquiry into the nature and causes of the wealth of nations, vol 1. William Pickering, London Soddy F (1926) Wealth. George Allen & Unwin Ltd, Virtual Wealth and Debt, London Soddy F [1934] (2003) The role of money. George Routledge and Sons, Ltd., London

Chapter 5

Capital Interest, the Financial Sector and Debt Expansion: Toward a More Sustainable and Equitable World Order

5.1 Introduction Capital is a form of purchasing power exchangeable for money. So, capital interest is related to money interest, as it was discussed in Chap. 4. Yet, capital interest rate is usually higher than the money interest rate. The gap between the two interest rates is related to investment uncertainty and to the expansion of production scale and capacity, expansion due to the superiority of fossil fuels and monetary systems. Unified treatment of capital and money paves the way towards discussing four important topics that are not touched upon in Chap. 4. Those topics are: (i) the role, for their balance sheets, of the expanding financial sectors of Sony, Toyota and Honda; (ii) the dubious role of the International Monetary Fund and the World Bank in terms of their economic development strategy for poor countries; (iii) the ratio of external debt to national income for each of a set of selected countries caught in debt trap; and (iv) the Macleod-Soddy-Allais (MSA) relation and its grave implication for the world economic system—presently trapped with a status of running solvency. Section 5.2 discusses the origins of capital interest. There are three additional factors for the case of capital interest, namely: the biophysical factor, the monetary factor and the anticipatory factor. None of those factors can be attributed to the case of the origin of money interest. Section 5.2 also reexamines five theories of capital interest and proposes an alternative new theory of capital interest. Section 5.3 first introduces F. Knight’s analysis of uncertainty. The four forms of uncertainty, related to perception, modelling of the future, effect and implementation, are discussed in relation to the forward-looking character of humans—the key element of investment activity. The four forms of uncertainty are examined in terms of perspectives for lenders and borrowers of capital associated with the anticipatory, biophysical and monetary factors that influence capital interest. The steady growth of the financial and insurance sector is a highly conspicuous trend in developed society, in particular, post-World War II. In relation to that trend, Sect. 5.4 examines the balance-sheet of three representative producers, i.e. Sony, Toyota and Honda. It is perhaps not well known that the operating income of each of © Springer Nature Switzerland AG 2020 K. T. Mayumi, Sustainable Energy and Economics in an Aging Population, Lecture Notes in Energy 76, https://doi.org/10.1007/978-3-030-43225-6_5

99

100

5 Capital Interest, the Financial Sector and Debt Expansion …

those three companies derives mainly from their respective financial divisions. For example, Sony is involved in the business of life insurance, non-life insurance and banking. Similarly, car loans, car lease contracts and auto insurances are typically arranged by automobile manufacturers, such as Toyota. The balance sheet status of each of the three representative producers assessed is discussed in Sect. 5.4 in relation to the quantitative easing policy of the Bank of Japan, a policy which began 2013 and was accompanied by an increase in monetary base. Section 5.5 discusses the role of the World Bank and the International Monetary Fund, both powerful and influential organizations that create broad world economic policy consensus, through weighted votes and majority rules. The main points of Sect. 5.5 are: (i) the International Finance Cooperation, an affiliation of the World Bank, provides attractively termed loans to multinational companies with outstanding returns and fails to give loans to local banks and private-equity firms that might otherwise improve the economic situation of the poor; and (ii) the rigid article structure of the IMF prevents, unfortunately, developing countries from escaping debt trap and favors of the economic policy of economically influential nations. Section 5.6 discusses serious debt trap in terms of external debt to national income ratios. The countries examined are grouped into three categories: (i) the United Kingdom, France, Germany, Sweden and Greece; (ii) Japan and the United States; and (iii) Argentina, Brazil, China, India and Indonesia together with Low-Income Economies. A paradox, inevitable as it may seem, is that the richer a country is the more that country can borrow and the larger external debt that country can create: Who has the right to issue money and money substitutes emerges as the key to understanding this paradox. Section 5.7 discusses the meaning of the Macleod-Soddy-Allais (MSA) relation. The MSA relation holds deep meaning for the present world economic condition, a condition which can be termed as running insolvency and understood as a condition worse than running solvency. It is argued that the MSA relation represents the theoretical base for explaining financial instability, which has plunged the economic system as a whole into trends of sporadic yet unremitting financial explosions and collapses. Section 5.8, a conclusion of this chapter, discusses the implication of the MSA relation in terms of three parts of general liquidity: (i) a part that is used to provide the means of payment for exchanging goods and services; (ii) a part that is used to provide investment means for acquiring real capital; and (iii) a part that is only used for acquiring additional money and money substitutes. The third part should be minimized by reducing, as close to zero, the interest rate difference among political entities that are entitled to issue general liquidity.

5.2 The Origin of Capital Interest: An Alternative Theory Capital in this book is considered to be employed in activities that either reproduce or expand productive capacity. Capital provides entrepreneurs, producers and merchants with the command of purchasing power useful for the purchasing goods and services.

5.2 The Origin of Capital Interest: An Alternative Theory

101

That said, capital should not be used only to increase money and money substitutes. Land and labor, two other agents of production, are not counted as capital. Credit, furthermore, enters into the discussion of capital as an arrangement to give capital as purchasing power to borrowers who then attempt to render their services for communities. To repeat and restate, acquiring capital is equivalent to acquiring purchasing power in terms of money and money substitutes. So, the origin of capital interest must be related to the origin of money interest, explained in Chap. 4. However, money interest did exist from Babylonian times, where no industrial activities of investment associated with capital were systematically conducted. Therefore, the origin of capital interest should have additional factors that cannot be attributed only to the origin of money interest. Since the Industrial Revolution, there emerged three conspicuous characteristics in socioeconomic systems, keys to understanding the additional factors which describe the origin of capital interest: 1. The biophysical factor—establishment of a worldwide transportation and information processing network and rapid expansion of productive capacity in the form of facilities and machines due to the large-scale consumption of fossil fuels. This factor is related to the expansion of production scale, not only in terms of the quantity of production but also in the spectrum of new goods and services. 2. The monetary factor—establishment of worldwide financial markets and organizations in order to facilitate commercial transactions and investments. 3. The anticipatory factor—not only capital borrowers and lenders, but also the general public in the industrial society, anticipate, based on glorious biophysical and monetary factors, rosy future perspectives in production and consumption patterns. These three factors, describing the origins of capital interest, are closely linked to each other. Keeping these factors in mind, the main five theories of capital interest, criticized by Böhm-Bawerk in his work Capital and Interest (2008, originally published in 1890), are briefly reconsidered: (i) fructificatrion theory; (ii) capitalist labor theory; (iii) exploitation theory; (iv) abstinence theory; and (v) productivity theory. Then, Böhm-Bawerk’s own theory, described in The Positive Theory of Capital (2007, originally published in 1891), is critically reexamined. Finally, an alternative new theory, based on the biophysical factor, the monetary factor and the anticipatory factor, is presented. Fructification theory assumes that capital interest derives from rent on land. Capital is the general purchasing power economic agents have at their command, useful to generate circulation of commodities out of which economic agents reap their profit. So, according to fructification theory and, since it is exchanged in the market to obtain purchasing power, land can be regarded as a form of capital. Furthermore, since fossil fuels are land-based products produced in the past, the mentioned biophysical factor can be regarded as indirect evidence of the fructification theory. However, the defect of this theory derives from the fact that land as the source of rent, is always treated as a distinctive fund element, completely different from capital in economic theory.

102

5 Capital Interest, the Financial Sector and Debt Expansion …

Accordingly, it is almost impossible to identify a close connection between capital interest and rent on land. Capitalist labor theory declares that capital interest emerges from the capitalist’s special role of investment activities, based on strong motivation and reasonable future perspectives, generating profit. This portion of capitalist’s ‘labor’, according to the capitalist labor theory, is not fully included in the earnings of capitalists. Therefore, capitalist’s labor should be looked for separately in profit. However, it is impossible to clearly distinguish the role of capitalist’s special labor for investment activities from their earnings, since the capitalist’s special role is in fact already paid for at a specific rate by means of the sum of amortization contained in the annuities. Thus, capitalist labor theory is untenable. Schumpeter proposed a theory similar to capitalist labor theory, except Schumpeter emphasized the role of the entrepreneur rather than the role of the capitalist who supplies purchasing power to the entrepreneur. Schumpeter emphasized the entrepreneur’s role as being different from the capitalist. He opined that only capitalists provide purchasing power. According to Schumpeter, the essence of the entrepreneur’s role is to carry out new combinations that can be a source of interest within ‘entrepreneurial’ profit in the process of economic development. Schumpeter argues that no interest would appear in the economic system under steady-state and that there would be no interest payment without development (Schumpeter 1951). While Schumpeter’s theory is interesting, he did not emphasize the role of the three factors mentioned in relation to the origins of credit interest. In particular, he failed to emphasize the biophysical factor and the anticipatory factor, thereby creating a superb center stage for economic development. Schumpeter focused solely on the role of the entrepreneur in the development process. Exploitation theory explains capital interest simply as a forcible deduction from the labor products that capitalists can extract, since the role of workers in production is very limited without production instruments provided by capitalists. Marx, for example, devoted Chap. 10 (‘The Working Day’) of Volume I of Capital to the issue of the working day, a chapter where a detailed analysis of labor hours is discussed (Marx 1990). According to Marx, laborers are deprived of all production instruments necessary to accomplish full labor power. Thus, surplus value is captured by the capitalist without paying out to laborers. However, the fundamental error of Marx is his belief that all products must come solely from labor power. Marx seems to assume that the private property institution by itself automatically secures to a set of people, capitalists, exclusive command over the indispensable means of large-scale industrial production. To produce goods and services, there must be a concerted combination of three fund elements, i.e. land, labor and capital. Those three elements are inseparably connected with each other in production and consumption activities. Furthermore, as is evident from socioeconomic history, the biophysical factor has facilitated a dramatic reduction in labor hours and has increased material standards of living, even for wage workers in the industrial world. The explanation given by exploitation theory is not at all convincing. It is, in fact, extremely arbitrary.

5.2 The Origin of Capital Interest: An Alternative Theory

103

Abstinence theory is related to the interplay between the supply and demand of capital. The theory assumes that humans are spendthrifts who prefer present enjoyment rather than to future enjoyment and that the owner of capital does not provide the purchasing power of capital without interest payment on capital. Thus, capital interest owes its existence to the scarcity of capital. The emergence of capital interest can, therefore, be regarded as the compensation for postponing present gratification. There are two problems associated with this theory. According to Gesell (2013), abstinence theory is a production-oriented theory and underestimates the enjoyment of consumption activities. In my view, the anticipatory factor, rather than present abstinence, is more important. This reflects the fact that not only capital borrowers and lenders, but also the general public in the industrial society, anticipate rosy future perspectives in production and consumption patterns, based on glorious biophysical and monetary factors. Abstinence theory also seems to ignore the biophysical factor. It is impossible to deny the fact that, due to the tremendous increase in production and consumption activities based on fossil fuel consumption, we can expect further development towards a more intensive use of real capital. Productivity theory claims that production instruments are, without a doubt, the source of capital interest. It is obvious that the biophysical factor is indispensable for the production, using the means of production, of goods and of services. On the other hand, productivity theory underestimates the influence of the capital loan in the emergence of capital interest. Profit naturally arises from the proper use of capital. That said, on account of the unvarying possibility of the production of profit derived from the use of capital, interest invariably arises from the loan of capital. The monetary factor and the anticipatory factor are also important since, without these two factors, investment activities through monetary and financial institutions could not be operated in a robust forward-looking manner based on rosy future perspectives by investors. Böhm-Bawerk’s theory of interest assumes without any theoretical and empirical proof that present goods have a higher subjective value than future goods of like kind and number (Böhm-Bawerk 2007, pp. 248–249). Böhm-Bawerk’s rationale is certainly very strange. Biophysically speaking, the owner of present goods must incur an additional cost of storage in order to take care of those goods and due to the material decay dictated by the entropy law. So, the owner of present goods naturally gives a higher subject value to future goods of like kind and number because the owner does not have to pay any additional storage cost for the present goods and can enjoy the consumption of present goods if the owner chooses to do so. Because of the entropy law, perishable goods should be consumed sooner rather than later to avoid the cost of storage. Böhm-Bawerk, on the contrary, states: Even in the case of those perishable goods, such as meat and drink, wood and candles, which we keep ready for immediate consumption in our domestic economy, only one portion of their use is strictly speaking, devoted to the service of the moment; the greater part is carried over into the future. (Böhm-Bawerk 2007, p. 243, emphasis added)

104

5 Capital Interest, the Financial Sector and Debt Expansion …

In continuation, Böhm-Bawerk goes yet further in the wrong direction. He states: The only exception occurs in those comparatively rare cases where it is difficult or impracticable to keep the present goods till the time of worse provision comes. This happens, for instance, in the case of goods subject to rapid deterioration or decay, such as ice, fruit, and the like (Böhm-Bawerk 2007, p. 251, emphasis added).

On this statement, Wicksell made a strong point (Wicksell 1954, p.108): ‘This is certainly a great exaggeration’. Wicksell properly indicates that Böhm-Bawerk’s examples such as ice and fruit cannot be regarded as exceptions and that all foodstuffs are perishable goods without exception. The crucial flaw in Böhm-Bawerk’s theory appears to the insufficient paying of attention to structural decay, related to the entropy law. In contrast, all goods are interpreted as durable. Thus, BöhmBawerk’s theory is not applicable to capital interest in general. Instead, it is only applicable to money loans, in which money loaned has immediate need for goods or investment activity. If Böhm-Bawerk’s statement—present goods have a higher subjective value than future goods—describes the situation of the borrower of money, it is understandable. The borrower of money, as an investor, must buy present goods as soon as possible in order to take advantage of the money to be received for the investment purpose. In comparison with future goods, present goods, in terms of money, must be more important for the borrower of money. Perhaps Böhm-Bawerk intentionally avoided revealing his own tacit belief that a positive money interest should be socially acceptable, a belief made without any theoretical arguments!

5.3 Capital Interest: Forward-Looking Is Essential In relation to money and capital interest, Knight’s (1964) analysis of uncertainty is useful in relation to the discussion of capital interest rates. Knight was particularly interested in the forward-looking nature of humans. His theory consists of four elements of uncertainty that can be closely linked to the anticipatory factor, one of the mentioned determining factors of capital interest: 1. Present perception uncertainty refers to two aspects: (i) we cannot perfectly perceive the present as it is; therefore (ii) we cannot represent the present in its totality. 2. Future modelling uncertainty refers to two aspects: (i) we must infer the future from a representation of the future based on a partial present perception; therefore (ii) we cannot represent the future situation in a precise manner. 3. Effect uncertainty refers to an insufficient knowledge of all the consequences of our own actions as well as of the actions of others people, since those actions are influenced by both present perception uncertainty and future modelling uncertainty. 4. Implementation uncertainty refers to the fact that socioeconomic decisions, made by governments and economic agents, cannot be implemented in the same manner as, the investment decisions were made by those actors.

5.3 Capital Interest: Forward-Looking Is Essential

105

These four forms of uncertainty, i.e. perception, future modelling, effect and implementation, can be related to the capital interest rate. For the purpose of simplifying the discussion, these four forms of uncertainty are considered in terms of perspectives for lenders and borrowers of capital: 1. Both lenders and borrowers of capital cannot perceive the whole picture of present investment opportunities plus all socioeconomic conditions. Therefore, their perception of these opportunities and conditions is far from satisfactory. 2. Neither lenders nor borrowers can infer the precise future. Both lenders and borrowers base their anticipation on a partial knowledge of present investment opportunities and socioeconomic conditions. Therefore, their modelling representation of these opportunities and conditions are not necessarily precise. 3. When investment decisions are made, neither lenders nor borrowers can know in advance the ultimate consequences of their own investment behaviors, or those of other investors’ behaviors. 4. Neither lenders nor borrowers can predict the whole spectrum of decisions made by governments, monetary agents and financial institutions over time and around the world. Therefore, when they predict future economic conditions, there is a significant discrepancy between actual implementations by the governments and the implementations imagined by lenders and borrowers. While, thus far, the four types of uncertainty discussed were discussed only in association with the anticipatory factor, those four types of uncertainty can be similarly applied to the biophysical factor and the monetary factor of capital interest. Additionally, the discussion, thus far, proceeded as if there were only one capital interest level in the market. In fact, there are a variety of financial assets available in the market, termed in this book general liquidity. Both the quantity of general liquidity and changes in general liquidity exhibit indeterminacy concerning changes in the general price level of goods and services. They also exhibit indeterminacy concerning the general price level of financial commodities. Both the general price level of goods and services and the general price level of financial commodities belong to the general price index (GPI). The quantity of general liquidity and its change also exhibit indeterminacy concerning changes in the general price level of financial commodities and the general interest index (GII). These two types of indeterminacy depend on changes in general liquidity between the goods and services market and the general liquidity market. The GII is a sort of weighted average associated with money and money substitutes and belongs to general liquidity. It is very unfortunate to see that the relation between the capital interest level and the interplay of the four types of uncertainty associated with biophysical, monetary and anticipatory factors is a contingent function, like the relation between money and credit discussed in Chap. 4. This is furthermore the case since capital is a form of purchasing power that is intimately connected with money and money substitute interests. Money and capital interests often move in similar directions. Yet, the actual capital interest level depends on the combination of the three factors, biophysical, monetary and anticipatory. So, these additional factors do not always raise capital interest rates higher than money interest rates.

106

5 Capital Interest, the Financial Sector and Debt Expansion …

Furthermore, after the collapse of the Breton Woods System in 1971, several major economically influential units, such as, for example, the United States and the European Union, were enabled to issue their currencies practically at will. This ability is problematic. Enormous currency issues can result in distortion of market fundamentals. General liquidity can be exchanged in the world market and thus influence the commodity price levels, the asset prices and the interest levels (or asset returns) in any other country, thereby causing changes in GPI and GII. The discount rate determined by the Federal Open Market Committee, for example, could create a variety of repercussions mainly through the effective exchange rate fluctuations of the major currencies. So, while interest rates related to certain items belonging to GII can be identified, predicting how GII is determined in the market is nearly impossible.

5.4 The Financial Sector of Certain Manufacturing Companies: A Lucrative Business The steady growth in the financial and insurance sector represents a highly conspicuous trend in developed industrial society post-World War II. Figure 5.1 shows time series data reflecting the financial and insurance sector in the United States from 1947 through 2017 as a percentage of GDP. Except for a short period after the collapse of Lehman Brothers in 2008, a share of more than 6% of GDP has been maintained since 1991. Although the locus is slightly shifted on the time axis, according to the Office of National Statistics of the United Kingdom, a similar trend is identified for the United Kingdom where a share of more than 5% of GDP has been maintained by the financial and insurance sector since 1990. 9

GDP share (%)

8 7 6 5 4 3 2 1 0 1947

1957

1967

1977

1987

1997

2007

2017

year Fig. 5.1 Percentage of GDP share in the financial and insurance sector in the United States 1947– 2017

5.4 The Financial Sector of Certain Manufacturing Companies …

107

monetary base (JP ¥ trillion)

Before examining the balance sheets of Sony, Toyota and Honda, let us consider the temporary consequences of the Bank of Japan’s quantitative easing policy on the exchange rate of the Japanese yen against the United States dollar. In particular, it is important to note that the Bank of Japan’s quantitative easing policy, which started April 2013, triggered an increase in export of Japanese products to the United States due to the relative weakening of the Japanese yen. The policy in question is conducted by purchasing a large amount of Japanese national bonds from a variety of private banks, trust banks and credit unions, thereby increasing Japan’s monetary base (MB). Note that MB is equal to banknotes and coins in circulation, as well as current account deposits in the Bank of Japan. As of 7 May 7 2019, current account deposits within the Bank of Japan are held by 124 Japanese private banks, 50 foreign banks, 251 Japanese credit unions, 13 Japanese trust banks, and 4 Japanese governmental banks. The current account deposits on 1 January 2019, for example, consisted of 77% of Japan’s MB. Current account deposits were, therefore, the most important item in Japan’s MB. Figure 5.2 shows Japan’s MB for Japan 1970–2019 (from the Bank of Japan site http://www.boj.or.jp/statistics/index.htm/). In particular, it shows an extraordinary increase in Japan’s MB after the quantitative easing policy, effectuated in April 2013. MB increased from JP¥131.9 trillion in 2013 to JP¥499.8 trillion in 2019, 280% over six years. Thus, despite counter quantitative easing policies enacted by other economically influential countries and regions, made in order to prevent an increase in the value of respective currencies, the exchange rate of the Japanese yen against the United States dollar, for example, decreased considerably over the period shown in Fig. 5.3. In fact, before the policy of quantitative easing was adopted, from 2011 through the latter half of 2012, the exchange rate between the yen and dollar was maintained more or less around JP¥80 to US$1. 600 500 400 300 200 100 0

year Fig. 5.2 Monetary base for Japan 1970–2019

5 Capital Interest, the Financial Sector and Debt Expansion …

exchange rate (JP

US$1)

108 140 120 100 80 60 40 20 0

recorded dates Fig. 5.3 Exchange rate of the Japanese yen against the United States dollar 2011–2018

In October 2013, however, the exchange rate in question reached JP¥98 to US$1, and between March 2015 and January 2016, the exchange rate remained above JP¥120 to US$1. This means that the purchasing power of the United States dollar appreciated by almost 50% compared with the Japanese yen, implying that the general price level of Japanese products for a United States citizen dropped by 50%— thereby, ceteris paribus, stimulating import export from Japan. These general price level changes did actually occur for and affect products of Sony, Toyota and Honda. However, during the short period after the United Kingdom decided to leave the European Union in June 2016 and for a period of one year so, the Japanese yen appreciated slightly against the United States dollar. After that period, the yen stayed around at JP¥115 to US$1, up through until the end of 2018. As of May 2019, the yen has remained more or less around at the level of JP¥110 per US$1. Anyway, the yen has remained weak from 2013 through 2018, so many Japanese producers are supposed to have received windfall profits. These supposed profits are mainly due to the cheap exchange rate of the yen and due to the Bank of Japan’s consistent quantitative easing policy. The general public of Japan, as well as foreign people, probably does not well recognize the importance of the financial business divisions of the companies such as Sony and Toyota. Indeed, the financial business divisions of both Sony and Toyota, two of the major manufacturing companies, earn a relatively large share of company operating income (OI), compared with sales and operating revenues (SOR). OI is an accounting figure that measures the amount of profit realized from a company’s operations after deducing operating expenses such as wages, capital depreciation and the cost of goods and services sold. SOR represents all monetary flows into a company’s accounts including sales of products and services. In summary statement, a considerable part of the corporate profit of Sony and Toyota derives from financial activities.

5.4 The Financial Sector of Certain Manufacturing Companies …

109

Tables 5.1 and 5.2 show the operating income and the percentage share of operating income in comparison with sales and operating revenues among different sectors of Sony and Toyota 2010–2017 (data from https://www.sony.co.jp/ and https://global. toyota/). There are four sectors for Sony in Table 5.1: (i) consumer products and devices (CPD) and networked products and services (NPS); (ii) pictures; (iii) music; and (iv) financial services (FS). In relation to FS, Sony has three sub-divisions, namely, life insurance business, non-life insurance business and banking business. The life insurance sub-division is the largest in Sony’s FS division. In the case of Toyota Table 5.1 Operating income and ratio of operating income to sales and operating revenues for Sony 2010–2017 JP¥100 million OI

2010

2011

2012

2013

2014

2015

2016

2017

CPD/NPS

471

−2221

−435

−1,539

−2422

119

1,272

3,870

Pictures

387

341

478

516

585

385

−805

411

Music

389

369

372

502

590

873

758

1,278

FS

1,188

1,314

1,458

1,703

1,933

1,565

1,664

1,789

OI/SOR (%)

2010

2011

2012

2013

2014

2015

2016

2017

CPD/NPS

0.8

−4.5

−0.8

−2.6

−4.2

0.2

2.6

7.0

Pictures

6.5

5.2

6.5

6.2

6.7

4.1

−8.9

4.1

Music

8.3

8.3

8.4

10.0

10.8

14.1

11.7

16.0

FS

14.7

15.1

14.5

17.1

17.8

14.6

15.3

14.6

CDP: Consumer Products and Devices NPS: Networked Products and Services FS: Financial Services

Table 5.2 Operating income and ratio of operating income to sales and operating revenues for Toyota 2010–2017 JP¥ 100 million OI

2010

2011

2012

2013

2014

2015

2016

2017

Auto

860

216

FS

3,582

3,064

9,447

19,387

23,253

24,480

16,929

20,111

3,158

2,948

3,618

3,392

2,224

AO

352

2,855

420

536

642

656

665

813

1,008

OI/SOR (%) Auto

2010

2011

2012

2013

2014

2015

2016

2017

0.5

0.1

4.6

8.2

9.3

9.4

6.7

7.6

FS

30.0

27.8

29.5

20.7

21.8

17.9

12.2

14.2

AO

3.6

4.0

5.0

5.6

5.2

5.6

6.2

6.1

Auto: Automobiles FS: Financial Services AO: All Others

110

5 Capital Interest, the Financial Sector and Debt Expansion …

shown in Table 5.2, there are three divisions; (i) automotive (Auto); (ii) financial sector (FS); and (iii) all others (AO). In the case of Sony, the FS division is the most powerful division both in terms of the OI/SOR ratio and in terms of the amount of operating income. The FS division earned an operating income of JP¥118.8 billion (14.7%) in 2010 and of JP¥178.9 billion (14.6%) in 2017. For the case of Toyota, a decrease in OI/SOR ratio is observed, from 30.0% in 2010 to 14.2% in 2017. Yet, Toyota earned an operating income of JP¥358.2 billion in 2010 and JP¥285.5 billion in 2017. So, the FS divisions for both Sony and Toyota are indeed lucrative divisions, nearly independently of the Bank of Japan’s quantitative easing policy. On the contrary, car sales activity and financial instruments are closely related to each other in the automobile business. Applying for a new or used car loan or a refinancing of an existing auto is typically arranged for by automobile makers, such as Toyota. Lease contracts of cars for companies are ubiquitously provided for by automobile makers, such as Toyota, as well. The case of auto insurance is again similar. Car-makers obtain data, without much cost, on people or companies who wish to enter loan, lease and insurance contracts in order to earn profit. Those companies, such as Toyota, then make preferable proposals to those people and companies, since Toyota has been in a good condition in terms of fund-procurement cost, so that these contract proposals are attractive to those people and companies. On the other hand, over the period 2011–2014, before and shortly after the quantitative easing, Sony’s OI in CPD and NPS division was negative, as shown in Table 5.1. Sony’s average OI deficit in that division over that period was JP¥1,654 million. Thanks to the favorable exchange rate of the yen, Sony’s OI in CPD and NPS division 2015–2017 maintained a positive level and gradually increased from JP¥119 million in 2015 to JP¥3,870 million in 2017. I do not think that the increase in Sony’s OI in the CPD and NPS division, starting in 2015, had anything to do with qualitative improvements in products within Sony’s CPD and NPS division. Irrespective of the monetary policy of the Bank of Japan, Sony’s FS division, in particular, the insurance sub-division, represented the largest share of the company’s OI: 48.8% of total OI in 2010 and 57.6% of total OI in 2016. It must be remembered that in the 1980s, Sony was a rising sun in the global electronics industry. Now, Sony has transformed into quite a different company, one that does not earn from their production division. It must be emphasized that the ratio of OI to SOR for the FS division of Sony was greater than that of all other company divisions, save for the year 2017. Before the Bank of Japan’s quantitative easing, the automotive division of Toyota earned, in 2010, JP¥860 million, and, in 2011, JP¥216 million. Due to the favorable exchange rate of the Japanese yen against the United States dollar, Toyota’s OI reached JP¥23.3 billion in 2014 and JP¥20.1 billion in 2017. On the other hand, Toyota’s FS division has remained, in terms of OI, relatively stable from 2010 through 2017, ranging between JP¥2.2 billion and JP¥3.6 billion, for an average value of JP¥3.1 billion. The FS division’s share of Toyota’s total OI was a full 74.7% in 2010. Of course, after the Bank of Japan’s quantitative easing, Toyota’s automotive division financially recovered, thanks to a substantially cheaper yen, and the automotive division’s share of Toyota’s total OI reached 83.8%. Though it is true that the sale of

5.4 The Financial Sector of Certain Manufacturing Companies …

111

electric vehicles has triggered substantial growth of the automotive market and is to be thanked for a significant portion of Toyota’s increase in OI, is one of the growing car market that triggered a lot of OI for Toyota, I do not think that the increase in OIs starting in 2015 is closely linked with qualitative improvements in products within the automotive division of Toyota. The ratio of OI to SOR for Toyota’s FS divisions is, among company divisions, always the highest and indeed much higher than any other division. Without showing the detailed figures, for the case of Honda (https://www.honda. co.jp), first of all, the motorcycle division has remained more or less stable in terms of both actual OI and the OI/SOR ration. Honda’s motorcycle had an OI of JP¥1,385 million (10.7%) in 2010 and JP¥2,670 million (13%) in 2017. It, therefore, remained nearly independent of the Bank of Japan’s quantitative easy policy. OI levels of FS division increased slightly from JP¥1,862 million in 2010 to JP¥1,960 million in 2017. However, because of favorable conditions for the motorcycle and four-wheel vehicle divisions triggered by the quantitative easing policy, the OI/SOR ratio of the FS division decreased considerably from 33.1% in 2010 to 9.1% in 2017. In my view, this phenomenon of the decrease of the OI/SOR ratio can be attributed nearly entirely to the monetary factor.

5.5 The World Bank and the International Monetary Fund Reexamined The World Bank (WB) and the International Monetary Fund (IMF) are very powerful and influential organizations in terms of their ability to create broad world economic policy consensus, by way of weighted votes and majority rules (Woods 2006; Peet 2009; Toussaint and Millet 2010; Colomar 2014). Both the WB and the IMF are exempt from all forms of tax and all custom duties on their assets, property, income and transactions. If an IMF member country withdraws its membership from the IMF, that country will also automatically lose its membership to the WB after three months’ time, unless the member country acquires a 75% share of votes in the WB. The WB consists of five groups: (i) the International Bank for Reconstruction and Development (IBRD), which is the largest development bank in the world, one that mainly provides; (ii) the International Finance Corporation, which finances the private sectors in developing countries; (iii) the International Development Association (IDA), which makes loans to poorer countries; (iv) the International Center for Settlement of Investment Disputes, a court to which private companies can turn to settle conflicts; and (v) the Multilateral Investment Guarantee Agency, which encourages investment in developing countries. As of 19 August 2019, there are 25 members in the Board of Executive Directors and 8 countries (the United States, Japan, Germany, France, the United Kingdom, Saudi Arabia, China and Russia) have the privilege of appointing a director. The voting power in the WB, as of 1 September 2018, has been heavily lopsided towards

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5 Capital Interest, the Financial Sector and Debt Expansion …

economically influential countries: the United States (15.98%); Japan (6.89%); China (4.45%); Germany (4.03%); France (3.78%); the United Kingdom (3.78%); the Netherlands group (4.2%); the Italy group (3.45%); the Canada group (3.58%): the Switzerland group (3.12%); and the Denmark group (3.10%). The total votes for these countries and groups consist of more than 56% of the total votes. A coalition of the United States with nearly any other of the countries listed above could overturn any motion that is unfavorable to the coalition, assuming the coalition has more than 20% of the total votes. The International Finance Cooperation (IFC) was established in 1956 as an affiliate of the WB. It was established with the mandate of providing help to the private sectors of developing countries and, it focuses on the alleviation of poverty and job creations. The IFC is able to make equity participation in private companies, underwrite debentures and make loans to private companies in developing countries without the direct financial support of the member countries of the IBRD. In order to encourage the development of private enterprise in countries that might lack the infrastructure or liquidity for businesses to secure financing, the IFC also provides investment and asset management services. The investment fund for the IFC is provided for by each member country, the amount of which is proportionate to the IBRD fund of each member country. The IBRD makes loans to the IFC with attractive terms of yearly interest payments between 1% and 1.5% on the outstanding portion of any such loans for the first ten years. Of course, in order to compensate for the interest payment of the IFS to the WB, private sectors that obtain investment money must perform well. IFC funds are often tied heavily to multinational companies. Therefore, the IFC’s practice of providing loans at attractive terms to multinational companies or wealthy tycoons with outstanding return, means that it also frequently fails to give loans to local banks and private-equity firms that might otherwise improve the economic situation of the poor (Einhorn 2013). As long as the IFC investment fund is allocated in proportion to the IBRD fund, such unfortunate situations for the poor will never improve. At the end of the day, the IFC is a parasite institution, feeding on the blood of the poor and because of the fact that the behavioral criterion of the WB and the IFC is based on an efficiency criterion that mandates the maximization of the present value of monetary investment. Furthermore, the aggregate amount of debt (including the guarantee of any debt) incurred by the IFC is allowed to increase up to an amount equal to four times that of the IFC’s unimpaired subscribed capital and surplus (Unimpaired capital is a balance sheet condition where a company’s total face value of assets is greater than its market value). The goal of the IMF and the WB for countries in the Global South is clear and has always been clear: export more, spend less. The IMF and the WB’s Structural Adjustment Programs have been known, since the 1990s, as the Washington Consensus. These programs have injected billions of monies and have not been used effectively to provide subsidies for basic necessities needed for the helping of the poorest populations, nor to create jobs and protect local products. The administrative structure of the IMF is similar to that of the WB. For example, the number of Executive Directors in the IMF is twenty-four and the voting system

5.5 The World Bank and the International Monetary Fund Reexamined

113

is advantageous for economically influential countries. As of 20 November 2019, eight executive directors both in the IMF and the WB are citizens of each of the same set of eight countries: belong to these in of 24 members are the same for WB (the United States, Japan, Germany, France, the United Kingdom, Saudi Arabia, China and Russia). One major difference between the IMF and the WB, however, is that, while the WB, borrows on financial markets through IFC activities, it is the contributions of member states in terms of Special Drawing Rights (SDRs) that enables the IMF to build loan reserves for countries with a temporary deficit. Such an arrangement is usually conditional upon the signing of an agreement stipulating the measures that the signed country must take in order to obtain loans. A typical example of such measures is a structural adjustment to stimulate more export from a signed country. Toussaint and Millet (2010, p. 110) presented 20 cases, including Benin and Niger. In the case of Benin, cotton had an 84% share of total export revenue, and in the case of Niger, uranium had a 51% share of total export revenue. According to Toussaint and Millet (2010), opening up the these commodity markets often leads to increasing subsidized foreign products that come to the local markets and ultimately causes destabilization of those local markets. SDRs have been the special accounting units in the IMF since 1969 when the Bretton Woods System was in trouble due to gold shortage in relation to the ever expanding supply of the United States dollar in the world money market. SDRs are neither a currency nor a claim on the IMF. Rather, SDRs are a possible claim on the freely usable currencies of the IMF, currently a weighted average of five currencies: the United States dollar, the Euro, the Japanese yen, the Chinese yuan and the British pound. Interest on SDRs is paid at the same rate for all holders, based on the respective amounts of SDR holdings. Economically influential countries are again in a superior position since interest rates are determined by a seventy percent majority of the total voting power. In general in the IMF, if three-fifths of the members, representing at least eightyfive percent of the total voting power, have accepted a proposed amendment, that amendment is passed (refer to Article XXVIII of IMF procedures on the subject of making an amendment to IMF articles). However, it must be noticed that it is virtually impossible to make any amendment on the following three items, unless all members accept the amendment: (i) the right to withdraw from the IMF; (ii) the SDR quota of any member cannot be changed without their own consent; and (iii) the par value of any member’s currency cannot be changed unless that member itself proposes to the change. Therefore, the rigid article structure of the IMF prevents, unfortunately, developing countries from escaping debt trap. It favors the policies of economically influential nations. Furthermore, the arrangement of capital transfers (Article VI of the IMF) is strictly limited to the case of meeting a large or sustained outflow of capital. This constraint is severe for developing countries because these countries usually do not have much foreign currency and cannot circumscribe the outflow of foreign capital if a financial crisis occurs. The only provision for capital transfer available for these countries is reserve tranche purchase to meet capital outflows. The reserve tranche is

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a segment of the IMF member country’s quota accessible without fees or economic reform conditions. Unfortunately, the reserve tranche for these countries is a tiny amount, thus forcing these countries to look for private financial arrangements with significantly worse conditions compared with the conditions of the IMF.

5.6 Running Solvency World: Who Can Create Debt? In a most interesting book, The Modern Idolatry being an Analysis of Usury and the Pathology of Debt, Mark (1934) described the economic situation of nations contemporary to the 1930s as running solvency. An economic organization is said to be in a state of running solvency if a realization of its total capital assets at current market value would not be sufficient to cover their total liability, yet, in one way or another, that organization is able to maintain their activities by either paying, at minimum, interest payments, or by continuing to borrow money and capital from other economic agents, such as banks, so as to never actually go bankrupt. The definition of running solvency, however, refers only to monetary valuation, i.e. the difference between the current market value of the total monetary assets that an organization holds and the current market value of the total monetary liabilities that that same organization owes. Any asset (real or monetary) excepting land and water areas that produce net primary production, is a debt to the whole community. Perhaps surprising to conventional economists as well as laypersons, real assets, such as buildings, are a biophysical debt, i.e. a deficit in entropy terms. This is the case, since, in many occasions, real asset was produced using exhaustible energy and mineral resources. Moreover, additional energy and mineral resources are required to maintain such real asset. Real asset has the further difficulty of being directly transformed into goods and services that humans can enjoy as real wealth to survive (Soddy 2003, originally published in 1934). Net primary production, for survival purposes, also belongs to the category of real wealth (Georgescu-Roegen 1971). Instead of using the current market value of the total monetary assets a nation holds as wealth, GDP is used to represent real wealth. In the following, the external debt to GDP ratio of a nation is used as an index to measure monetary debt of that nation in relation to the real wealth of that nation. It must be admitted that, while GDP is measured in money terms, GDP can be used as a first proxy for real wealth. Figure 5.4 shows the external debt (ED) to GDP ratios for the United Kingdom, France, Germany Sweden and Greece 2006–2017. While only ED to GDP ratios in Fig. 5.4 are shown, a complete quantitative assessment of two numbers and their relation requires the knowledge of both their ratio, such as ED/GDP—an intensive variable, and their actual value—an extensive variable. For example, in 2017, the United Kingdom’s GDP was US$2,628 billion and UK’s ED is US$8,225 billion. In the same year, Germany’s GDP was US$3,700 billion and Germany’s ED is US$5,180 billion, while Greece’s GDP was US$200 billion and Greece’s ED was US$454 billion.

external debt t GDP ratio (%)

5.6 Running Solvency World: Who Can Create Debt?

115

450 400 350 300

France UK Germany Sweeden Greece

250 200 150 100 50 0

year Fig. 5.4 External debt to GDP ratios (%) for the United Kingdom (UK), France, Germany, Sweden and Greece 2006–2017. (Data from https://www.ceicdata.com/en)

Although Greece’s high ED to GDP ratio during the period analyzed has been severely criticized by major European countries, such as Germany, the United Kingdom’s ED to GDP ratio was yet higher, having exceeded 300% every year 2006– 2017 excepting in 2015. Perhaps the United Kingdom’s ED is permissible because the strength of the United Kingdom’s financial sector allows the United Kingdom to sustain a huge amount of ED. The existence of general liquidity by itself constitutes a debt to the whole world community, independently of who creditors or borrowers are. The crucial issue for any country to survive in debt conditions is whether or not countries can become the issuers of general liquidity, something which is continuously traded on the international financial market. In fact, Greece’s ED scale is not so huge compared with those of the other countries listed in Fig. 5.4. While Greece can still increase debt to the world, it cannot become the issuer of debt without the consent of other economically influential countries, such as the United Kingdom—countries that are already in serious debt situations themselves. Within the European Union, there is a criterion for judging whether a country is in a serious budget deficit. It is understood that the amount of budget deficit to GDP should not increase above 3%. It must be emphasized that money and money substitutes, i.e. general liquidity, represent debt in any form. In this respect, all other countries listed in Fig. 5.4 are also in serious trouble in terms of external debt! The difference between Greece and other countries is who can issue debt without the consent of other countries. Furthermore, to the fairness of Greece, the following fact should be noted. The United Kingdom’s deficit to GDP ratio 2009–2015 was more than 4.3%, a period during which that same ratio was below 3.3% for Greece. France’s budget deficit to GDP ratio 2009–2014 was more than 5.5%, a period during which that same ratio was less than 3% for Greece. So, in this regard, it is difficult for the United Kingdom and France to condemn Greece.

5 Capital Interest, the Financial Sector and Debt Expansion …

external debt t GDP ratio (%)

116 120 100 80 60

Japan

40

USA

20 0

year Fig. 5.5 External debt to GDP ratios (%) for Japan and the United States (USA) 2006–2017. (Data from https://www.ceicdata.com/en)

Figure 5.5 shows the external debt to GDP ratios for Japan and the United States 2006–2017. In 2017, Japan’s GDP was US$4,873 billion and Japan’s ED is US$3,606 billion. In the same year, GDP of the United States was US$19,485 billion and ED of the United States was US$19,113 billion. Figure 5.5 seems to show that, when considering only ED to GDP ratios, the debt situation of Japan is much better than that of the United States. However, it must be noted that Japan’s domestic financial debt is not counted for in ED. In fact, however, the face value of total outstanding Japanese national bonds in 2018 was JP¥1,013 trillion, out of which 46% is held by the Bank of Japan, 40.4% by Japanese banks, and only 6.4% by foreign governments and agents. Regardless of who is responsible for any given debt, debt is debt after all. In fact, the total debt to GDP ratios for Japan 2011–2018 were all greater than 220%. Japan is trapped in a state of running solvency, the situation described by Mark (1934). Gross national income (GNI) is the sum of a country’s GDP plus net income from abroad. GNI represents the monetary value produced by a country’s economy in a given year, regardless of whether the source of the monetary value created is domestic production or receipts from overseas. Net transfer income from abroad for poorer countries is important for the welfare level of those countries. So, GNI, instead of GDP, is used in Fig. 5.6. According to the 2019 classification by the WB: (i) a per capita GNI of US$12,056 or more is regarded as a high-income economy, such as Argentina; (ii) a per capita GNI of US$3,896–US$12,055 is regarded as a upper-middle-income economy, such as China and Brazil; (iii) a per capita GNI of US$996–US$3,895 is regarded as a lower-middle-income economy, such as India and Indonesia; and (iv) a per capita GNI of less than US$996 is regarded as a low-income economy (LIEs). The simultaneous analysis of Figs. 5.6 and 5.7 is useful in order to better understand the debt situation of modern countries. Figure 5.7 depicts the ratio of total

5.6 Running Solvency World: Who Can Create Debt?

117

45

ED/GNI ratio (%)

40 35 30

China

25

India Brazil

20

Indonesia

15

Argentina

10

LIE

5 0

year Fig. 5.6 External debt (ED) to gross national income (GNI) ratios (%) for Argentina, China, Brazil, India, Indonesia and Low-Income Economies (LIE) 2008–2016. (Data from The World Bank 2017)

TDPS/ED ratio (%)

25 20 China 15

India Brazil

10

Indonesia Argentina

5

LIE

0

year Fig. 5.7 Total debt service paid (TDPS) to gross national income (GNI) ratios (%) for Argentina, China, Brazil, India, Indonesia and Low-Income Economies (LIE) 2008–2016. (Data from The World Bank 2017)

debt service paid (TDSP) to ED for the same countries listed in Fig. 5.6. TDSP is all cash payment that is required to cover the repayment of both the interest and principal on a debt for a particular period and for a particular country. Since the ED to GNI ratio of LIE countries is high enough, i.e. yearly income is much smaller compared with external debt (ED/GNI is 33% in 2016 for LIE), cash is not sufficient to pay for the interest and principles of ED. So, TDSP/ED is less than 5% during the period assessed. China generates a huge GNI and accompanies that huge GNI with a comparatively smaller external debt. Thus, for China, the ratio between ED and GNI was less than 15% for nearly the entire period assessed. It was the lowest among the countries listed. Yet, it seems that for China, due to a steady increase in

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Table 5.3 External debt (ED), gross national income (GNI) and total debt service paid (TDPS) with two indicators in 2016 for China, India, Brazil, Indonesia, Argentina and Low-Income Economies (LIE) (Data from The World Bank 2017) US$ billion in the year 2016 China

India

Brazil

Indonesia

Argentina

LIE

1,429

456

543

316

190

121

GNI

11,172

2,235

1,758

900

533

367

TDSP

127

77

117

67

25

6

ED/GNI (%)

12.8

20.4

30.9

35.1

35.7

33.0

TDSP/ED (%)

8.9

16.9

21.6

21.4

13.5

5.4

ED

the size of external debt, the ratio between TDSP and ED remained low through the period assessed (it remained less than 10%). Argentina, Brazil, Indonesia and India are paying a high rate of TDSP/ED, between 10 and 20% during the period assessed. Table 5.3 summarizes three extensive variables ED, GNI and TDPS, and two intensive variables, ED/GNI and TDSP/ED, in 2016 for China, India, Brazil, Indonesia, Argentina and LIE. In this section, the debt situation of twelve countries plus low income economies was discussed. The situation facing each country is different and depends on both the stage of economic development and the organization of financial markets in the respective countries. That said, those countries discussed in this section are all in a state of running solvency, or rather, alternatively termed, running insolvency.

5.7 Expansion of General Liquidity and the Unavoidable Repetition of Financial Instability Money and money substitutes, i.e. general liquidity, are the only things that functionally defy the second law of thermodynamics. Perhaps Soddy (1926) was the first person who in quantitative terms recognized the inherent explosive nature of general liquidity compared with the actual quantity of goods and services produced and exchanged in the economy. Soddy based his work on Macleod’s intuitive considerations (Macleod 1883). More recently, in more precise terms, Allais (1987)2 derived the same relation that Soddy suggested (1926, p. 270f). The present value of all interest payments (PVAIP) between the initial point of time t 0 and the final point of time t f can be represented as: x

tf

− ∫ i(τ )dτ − ∫ i(τ )dτ   t f  PVAIP t0 , t f , i(x) : x ∈ t0 , t f = ∫ i(x)e t0 d x = 1 − e t0 t0

(5.1)

5.7 Expansion of General Liquidity and the Unavoidable Repetition …

119

Equation 5.1 can be easily obtained if change in a variable is made such that i(τ )dτ = dx. As t f approaches to infinity, the final form is obtained. ∞

PVAIP = ∫ i(x)e t0

x

− ∫ i(τ )dτ t0

dx = 1

(5.2)

Due to the tremendously high, decreasing speed of the function exp(t), Eq. 5.1 entails that a PVAIP with 5% interest is 0.393 in ten years and 0.631 in twenty years, meaning that the total interest to be received is nearly 40% of the principal in ten years and 63% of the principal in twenty years. The interest payment on money is so large only because of the superiority given to the issuer of money. In my view, there is no reason, a priori, to justify interest payment that allows an exponential growth such as that indicated in Eq. 5.2: the principal of US1$ increases to US2$ (the principal of US$1 plus the present value of interest payment over time, i.e. another US$1). In many occasions, immediately after the redemption of a national bond is completed, a new contract of another bond is signed. In this way, it is impossible to prevent the endlessly emerging series of new monetary assets in the world economy. The author of this book suggests to call the final equation form, Eq. 5.2, as the MacleodSoddy-Allais relation (MSA relation), thereby, paying due homage to the works of those precursors. Equation 5.2 can be regarded as a fundamental instability factor of modern financial markets, that factor always tends to point the financial market in the direction of running insolvency, a worse condition than running solvency. The MSA relation simply means that the present value of a perpetual flow of interest on one unit is equal to one unit and starting at any initial time t 0 , is equal to one unit whatever the level of future interest rates, as long as i(t), is positive at all points in time. The owner of general liquidity could obtain one unit of principal and another one unit of interest payments, ceteris paribus. Naturally, those entities which are entitled to issue money and money substitutes cannot resist the temptation of issuing more and more money, circumstances allowing. The MSA relation exactly illustrates such a temptation. According to the second law of thermodynamics, the quality of a structural component must decay. Only money can avoid functional decay, so only money can expand, with accumulated interest payments, from one unit of principal all the way to two units. The prestigious position given to issuers of money, such as governments and private financial institutions, is extraordinary. The MSA relation represents the theoretical basis explaining financial instability, and the reason why the whole economic system experiences occasional, yet endlessly repeating, financial explosions and ultimate collapses. Money interest emerges from the nature of money, which can maintain its functional component due to the institutional settings created by humans even while its structural component decays due to the entropy law. The interest rate of each type of financial asset can be theoretically determined by the supply and demand relation of that particular asset. However, an investigation calculating the general level of interest rate for all financial assets including money would be made in vain. In fact, there

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is a variety of material objects that structurally decay at a variety of different speeds, so that it is almost impossible to make any prediction of the general interest rate level. Furthermore, as already discussed in Chap. 4, any change in general liquidity will affect both the general price index (GPI) and the general interest index (GII). Indeed, as embodied in the MSA relation, what we can say is that the present value of a perpetual flow of interest on one unit of principle is equal to one unit whatever the level of future interest rates. This means that the general level of interest cannot be properly defined, let alone determined fairly and justly. In any case, money issuers occupy the most prestigious position in the present economic world order.

5.8 Conclusion The quantity of general liquidity, i.e. money and money substitutes, tends to expand, if circumstances allow the issuers of general liquidity to take advantage of receiving interest payments and recovering the original quantity of principals. The temptation of expanding the quantity of general liquidity as much as possible on the part of money issuers is theoretically embodied in the MSA relation. In physics, two kinds of perpetual machine are impossible. Perpetual motion machines of the first kind are machines that can do work indefinitely without energy input. Since they violate the first law of thermodynamics, the existence of perpetual motion machines of the first kind is impossibility. Perpetual motion machines of the second kind are machines that produce mechanical work from a single heat source. Since they violate the second law of thermodynamics, this type of machine is also impossible. Heat by itself cannot be transferred from a colder to a hotter body without cyclic motions. However, the creation of general liquidity and its self-expansion over time can be considered as two kinds of a human-made perpetual machine, impossible in nature. Jointly, these two machines are the root cause of general liquidity expansion, since general liquidity is regarded as wealth for individuals. Unfortunately, general liquidity ultimately becomes a biophysical debt to the whole society since general liquidity is supposed to be materialized in goods and services to the owners of general liquidity and producing goods and services requires low entropy energy and mineral resources, which result in biophysical deficit in entropy terms. General liquidity, in this book, consists of three parts: virtual money 1 (VM1), virtual money 2 (VM2) and other monetary forms (OMF). The terminologies of these three parts are different from those of Soddy’s original theory. To be precise, VM1 is used to provide the means of payment for exchanging goods and service in the economy. The amount of VM1 should be compatible with the production and consumption pattern of the economy. That means that the quantity of VM1 must correspond to the idea of quantity theory of money, which is usually assumed to function in actuality. VM2 is used to provide investment means mainly for producers to expand current production or to introduce new ways of production and, leading to the acquisition of real capital such as factories, machinery and office buildings. VM2 is also used

References

121

to provide the means for central and local governments to construct public facilities and infrastructures. While the quantity of VM1 is usually kept in good harmony with the scale of the goods and services transaction, the quantity of VM2 should be carefully controlled by the representative body of a democratic society. First of all, once constructed, any form of real capital such as factories and infrastructures cannot be directly transformed into real wealth such as goods and services. Secondly, exhaustible energy and mineral resources are usually expended to create real capital. So, because of the second law of thermodynamics, such energy and mineral resources will never be recovered. Therefore, as soon as the construction of these real capitals is completed, the corresponding part of VM2 must be extinguished. In this way, the meaningless expansion of VM2 is to be evaded. On the other hand, the quantity of OMF, such as financial assets, must be minimized in order to prevent unnecessary repetitions of monetary expansion and occasional collapses from happening. Those monetary forms are often used only for obtaining additional monetary forms, in order to take advantage of positive returns on money and often have nothing to do with real economic activities for the decent economic life of humans. There must exist an international cooperation that prevents the irrelevant expansion of OMF and reduces the set of interest rates to zero. In this way, the temptation to hold financial assets will be effectively extinguished. In my view, an international common property tax system on OMF must be established in order to minimize the sinful economic activity of increasing money in order to acquire more money. In Chap. 4, a procedure of paying loan interest was considered if the principal is to be decreased with the interest rate. The idea of decreasing money value, i.e. free money was proposed by Gesell. The fraction of the principal accruing as interest was derived in Chap. 4 as if interest were independent of time. Even if interest changes over time, a similar result can be obtained. The final form of that relation, related to Eq. 4.5 in Chap. 4, is f (t0 + t) = 1 − e−{(t0 +t)i(t0 +t)−t0 i(t0 )} where f is the fraction of the principal accruing as interest and i(t) is an interest rate function over time t. t o is the initial time when loan interest payment of a bond is to be started. Under these circumstances the total interest accruing becomes closer and closer to the value of the principal, though it can never exceed the principal, regardless of loan duration. This scheme is useful to drastically reduce the incentives of potential issuers and buyers of monetary assets, leading to a decrease in the quantity of OMF in the world. This scheme of decreasing bond principals is discussed in Chap. 8 in relation to the redemption of national bonds. Notes 1. The utility theory of capital is regarded as the offspring of the productive theory of capital by Böhm-Bawerk (2007, 2008). So, utility theory is treated as the productive theory of capital in this section. 2. The mathematical proof of the MSA is elementary. See Allais (1987).

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References Allais M (1987) The credit mechanism and its implications. In: Feiwel GR (ed) Arrow and the foundations of the theory of economic policy. Macmillan, London, pp 491–561 Böhm-Bawerk E von [1890] (2008) Capitan and interest. Berkshire: Dodo Press Böhm-Bawerk, E von [1891] (2007) The positive theory of capital. Alabama: Ludwig von Mises Institute Colomar JM (2014) How global institutions rule the world. Palgrave Macmillan, New York Einhorn CS (2013) ‘Can you fight poverty with a five-star hotel?’ Foreign Policy January 2, 2013, 3:22 AM Georgescu-Roegen N (1971) The entropy law and the economic process. Harvard University Press, Cambridge, Mass Gesell S (2013) The natural economic order, translated by P Pye, New Delhi: Isha Books Knight FH (1964) Risk, uncertainty and profit. A. M. Kelley, New York Macleod HD (1883) The Theory and Practice of Banking Volume 1, 4th edn. Forgotten Books, London. Mark J (1934) The modern idolatry being an analysis of usury and the pathology of debt. Chatto & Windus, London Marx K (1990) Capital, vol I. Penguin Classics, London Peet R (2009) Unholy Trinity: The IMF, World Bank and WTO, 2nd edn. Zed Books, London Schumpeter JA (1951) The theory of economic development. Harvard University Press, Cambridge, Mass Soddy F (1926) Wealth. George Allen & Unwin Ltd, Virtual Wealth and Debt, London Soddy F [1934] (2003) The role of money. London: George Routledge and Sons, Ltd The World Bank (2017) International debt statistics 2018. The World Bank Group Toussaint É, Millet D (2010) Debt, the IMF and the world bank. Monthly Review Press, New York Wicksell K (1954) Value, capital and rent. Augustus M. Kelley, New York Woods N (2006) The Globalizers. Cornell University Press, Ithaca

Chapter 6

Aging Population, Vacant Dwellings and the Compatibility Problem Between Human and Exosomatic Populations

6.1 Introduction Promethean technologies, technologies supported by the petroleum-based metabolism of modern society, share a common undesirable characteristic. Namely, they relentlessly accelerate energy consumption, which is an ‘explosive’ characteristic. Both the abundant supply of high-quality oil in the past six decades and the continuous achievement of technological improvements have led to an increased occurrence of the Jevons’ paradox worldwide. Simply put, while Promethean technologies in modern society have yielded improvements in energy efficiency— improvements aimed at cutting back on energy consumption—an increase in total energy consumption in the long-term has unfortunately been realized (Polimeni et al. 2008). From a rosier perspective, however, modern petroleum-based Promethean technologies have helped realize tremendous reductions in labor and land requirements in production processes. These reductions have temporarily emancipated modern society from both labor and land constraints (Mayumi 1991). Concurrent with the rise in prevalence of Promethean technologies, an optimistic anticipation of perpetual growth has permeated into the minds of people. Money and money substitutes, entities which share a similar explosive characteristic for the economy, are principally responsible for that optimism. Money and money substitutes are human-invented perpetual motion machines that defy both the first and the second laws of thermodynamics. Money and money substitutes can be created out of nothing, an aspect which violates the first law of thermodynamics. Money and money substitutes also expand at the rate of interest, an aspect which violates the second law of thermodynamics. With the support of scientific and technological advancement, the explosive characteristics of Promethean technologies based on fossil fuels and money have dramatically improved the material standard of living. Both of those advances also considerably increased income levels in modern industrial society. At an early stage of industrial development, in the years following the advent of the Industrial Revolution, population size increased rapidly. Importantly, while the population size © Springer Nature Switzerland AG 2020 K. T. Mayumi, Sustainable Energy and Economics in an Aging Population, Lecture Notes in Energy 76, https://doi.org/10.1007/978-3-030-43225-6_6

123

124

1.3M

6 Aging Population, Vacant Dwellings and the Compatibility Problem …

1.3M

Fig. 6.1 Population pyramids of Japan in 1930 (left) and 2020 (right) (data from the National Institute of Population and Social Security Research www.ipss.go.jp)

changed, the demographic structure also changed. The population pyramid shown in the left panel of Fig. 6.1 depicts the bell shape structure of the Japanese population in 1930. Japan’s 1930 population structure is not preserved in modern Japanese society (depicted in the right panel). Along with further improvements in material standard of living and thanks to the materialization of rapid growth in average income levels, dramatic change in human time allocation has occurred in recent decades. Emancipation from strenuous labor work has brought wondrous opportunities to spend time performing activities outside of the primary productive sectors, activities such as recreation, higher education and scientific research. These time use changes are reinforced by improvements in nutritional and sanitary conditions and supported by medical care systems. They have resulted in a society with a longer average lifespan. This new society, with a longer lifespan and lower birth rates, is characterized by late marriage. This situation described is exemplified in the right panel of Fig. 6.1, the case of Japan in 2020. The demographic structure of the Japanese population in 2020 is clearly distinguishable from that in 1930, with a clear increase in the number of elderly evident and notable. For the sake of cross-examining this increase in the number of elderly, the trend of increasing lifespan in Japan is depicted in Fig. 6.2. The average female lifespan reached 86.4 years in 2010, having increased from 61.6 years in 1950. The average male lifespan also increased substantially, from 58 years in 1950–79.6 years in 2010. Japan now boasts one of the longest average lifespans in the world. The most significant factor driving the increase in the average lifespan in Japan is an aging population—a rising population bubble. There are several additional significant factors to be considered too, however, factors which accelerate the increase in average lifespan. Section 6.2 presents three crucial drivers of the rapidly aging population in Japan, namely, late marriage, a decreasing birth rate and an increasing cost of raising children. A detailed socioeconomic analysis of the decreasing total number of children for couples married for 15–19 years is also provided in Sect. 6.2. In Chap. 1, all durable things are proposed to be termed as exosomatic population in order to distinguish them from the human population. It is noted that if the stock size of exosomatic population, which includes such things as houses, becomes large enough, a relatively huge amount of energy and mineral resources will be

6.1 Introduction

125

average lifespan (years)

90 85 80 75

male

70

femal

65 60 55 1950

1960

1970

1980

1990

2000

2010

year Fig. 6.2 Change in average lifespan of the Japanese people 1950–2010

required to be spent to maintain it. On the other hand, the population of aging Japan is predicted to decrease rapidly without much change in demographic structure. Indeed, the population size of Japan began a trend of steady decline in 2011. A serious new problem is emerging under such circumstances, and the stable relationship between the aging population and the exosomatic population is losing its balance. An increasing quantity of vacant dwellings is one problem that is emerging as a result. Section 6.3 discusses various socioeconomic issues associated with vacant dwellings in Japan. Three types of vacant dwellings and their associated problems are examined; namely, vacant rental dwellings, vacant condominiums and vacant private dwellings are discussed. Among the most crucial issues associated with vacant dwellings is the increasing number of households with either a single elderly person or a single elderly couple. Lastly, Sect. 6.4, the conclusion, discusses the financial problems of Japan Railway (JR) in Japan’s Shikoku and Hokkaido areas. Maintaining a minimum transportation railway is necessary for all citizens, yet, due to depopulation and inherent economic disadvantage, the branches of JR in Shikoku and Hokkaido are in grave financial trouble. In fact, in light of the issues previously discussed in this chapter, this problem is nothing but the problem of compatibility between the human population and the exosomatic population. In addition to its discussion of JR, Sect. 6.4 also considers possible ways of mitigating the rapid aging of the population structure in Japan.

6.2 The Aging Population of Japan There are several factors working to accelerate the aging of the Japanese population. In particular, three crucial fundamental and conspicuous factors are: (i) a strong tendency towards late marriage; (ii) a steady decrease in the average birth rate; and (iii) an increase in the average cost of raising children.

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The factor of increasing late marriage has itself derived from two further factors: 1. An increase in the number of young people able to enter higher education accompanied by increasing opportunities for women’s participation in economic activities. These increasing opportunities are due primarily to a decrease in the salary difference between males and females and the trend of a lowering job entry barrier to women. 2. A change in socioeconomic conditions allowing young people to enjoy a longer period of single life without any detrimental consequences, thanks to a rapid expansion of the food-service industry, the wide prevalence of electric household equipment such as washing machines and vacuum cleaners, and an increasing reliance on frozen and instant food-stuffs by young people. While these two factors would likely be welcomed by any society, they result in an unfortunate negative side effect, increasingly late marriage and, by way of which, an overall aging of the Japanese population. The mean age of first marriage in Japan has been steadily increasing in recent decades. The mean age of first marriage for males, for example, raised from 27.2 years in 1975–31.1 years in 2015. In a similar fashion, the mean age of first marriage for females reached 29.4 years in 2015, up from 24.4 years in 1975. Additionally, the number of ‘lifetime unmarried’ persons—defined as persons who remain unmarried until 50 years of age—has been sharply increasing. Figure 6.3 depicts changes in the percentage of ‘lifetime unmarried’ persons in Japan between 1920 and 2015. The dramatic increase in persons unmarried until 50 years of age began in earnest in the 1990s. Until the early 1990s, this percentage rate remained lower than 5% for both males and females. It should be noted, however, that the trend of an increase in ‘lifetime unmarried’ person has proved much stronger for males than for females. In 2015, that same rate increased to 23.4% for males and 14.1% for females.

percentage of unmarried until at least 50 (%)

25.00 20.00 15.00 male 10.00

female

5.00 0.00

year Fig. 6.3 Percentage of persons in Japan who remain unmarried until at least 50 years old of age 1920–2015

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4.00

total fertility rate

3.50 3.00 2.50

Japan

2.00

Norway

1.50

Germany

1.00

USA

0.50 0.00

year

Fig. 6.4 Total fertility rate in Japan, Norway, Germany and the United States 1960–2005

Understandably, the trends of late-marriage and no-marriage have had a crucial impact on the two numerical indicators typically associated with birth rate, the total fertility rate and the average total number of children of married couples. The total fertility rate (TFR) is defined as the average number of children who would be born to a woman assuming that woman were to pass through her childbearing years. The TFR is obtained by summing single-year age-specific fertility rates estimated at a given point in time. A TFR of at least 2 is believed to be required to maintain a given population size. Figure 6.4 compares the TFRs of Japan, Norway, Germany and the United States between 1960 and 2005 (National Institute of Population and Social Security Research www.ipss.go.jp). The pattern of change of the United States in Fig. 6.4 is of particular interest. Beginning with a high value of more than 3.5 in 1960, the TFR of the United States steadily decreased through to the late 1980s. The rate started increasing again in the 1990s, however, and maintained a value slightly over 2.0 up through 2005. In contrast, the TFR for Japan in 1960 was already 2.0, barely sufficient to maintain the size of Japan’s population. Since 1975, the Japanese TFR has remained below 2.0. By 2005, the TFRs for Japan, Germany and Norway had converged around 1.3. So, among the four countries listed in Fig. 6.4, only the TFR of the United States would be more or less sufficient to maintain population size. An additional important indicator is found in the average total-number of children per couple who, married for the first time, remain married for 15–19 years. This indicator, termed TNCMC, represents a key indicator that helps explain the decreasing birth rate in Japan. Note that the TNCMC rate indicates the birth rate itself for a married couple who are together for a substantial period of time. Figure 6.5 depicts the TNCMC rate in Japan between 1940 and 2015. The TNCMC rate was greater than 4.0 in 1940. Afterward, the TNCMV rate started to decline, nearly halving and reaching a value of 2.2 in 1972. It remained at that level until 2002, and then proceeded to drop to a value of less than 2.0 by 2010. By analyzing the trend of late

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6 Aging Population, Vacant Dwellings and the Compatibility Problem … 4.5 4

TNCMC

3.5 3 2.5 2 1.5 1 0.5 0

year Fig. 6.5 The average total number of children of couples in their first marriage married for 15– 19 years (TNCMC) in Japan 1940–2015

marriage and the steady decrease in birth rate, it is not difficult to predict the future movement of the TNCMC rate in Japan. Besides the trend of late marriage and the steady decrease in birth rate, there are several other socioeconomic factors that indicate a great possibility for a continued decrease in the TNCMC rate. Those factors are discussed in the following. The first important socioeconomic factor is concerned with the collapsing of the traditional lifetime employment system of Japan, where the lifetime employment system has a distinctive characteristic. Large companies hire regular workers right out of school and keep those workers until retirement. New employees are typically chosen for their general potential, not for any special skills and previous training. Such employees are considered the company’s crucial human capital, to be trained, cultivated, and assigned to posts in the company’s best interest. Although there is no written contract that guarantees lifetime employment, both employer and employee understand their strong mutual obligations. The employees are to serve the company loyally and not try to leave for a better job. This system also means that large firms train and promote their own employees to fill higher managerial positions, rather than hiring specialists or senior managers from outside the company. The lifetime employment system represented a symbol for the glorious period of economic development following World War II. However, this traditional system was shaken rapidly post-1995, due to both a decrease in the GDP productivity of Japanese companies, and a rapid increase in the number of non-regular workers, as shown in Fig. 6.6. The number of non-regular workers in 1990 was 9.88 million, while the number of regular workers in 1990 was 37.6 million. In 2019, the number of non-regular workers reached 21 million, an increase of 113%, while the number of regular workers at that same point in time decreased to 34.5 million. In fact, during the period between 1990 and 2019, the number of regular workers remained more or less between 31 million and 38 million. The considerable increase in the number of non-regular workers

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non-regular workers (%)

45 40 35 30 25 20 15 10 5 0

year Fig. 6.6 Percentage of non-regular workers 1995–2019, excluding the sectors of agriculture, forestry and fishery

strongly indicates the sluggish increase in GDP in the Japanese economy over the period considered. Unless they have regular work, unmarried single people tend to hesitate before entering into a married life, instead remaining single. Even married couples with children may not be able to afford to have another baby unless they expect to have a decent economic life and a regular work. A stable income flow from regular work is, in fact, essentially a prerequisite for anyone looking to get married and have children. Increasing the number of non-regular workers is an important factor driving the decrease in the TNCMC rate of married Japanese couples. The second socioeconomic factor is concerned with change in the expected role of children of parents working as either sole proprietor in small business or in the agriculture, forestry or fishery sectors. In those three sectors, children traditionally took over the business of their parents and took care of their parents after retirement. However, nowadays in Japan and especially in those three sectors, the incentive for parents to have children for such a purpose has been weakened. Furthermore, even in the three sectors mentioned, basic pension money–a, yet decent amount—is provided by the Japanese pension system. So, parents themselves do not expect to be taken care of by their children after retirement thanks to the relatively well-prepared system of social security, an aside from the pension system. Elderly people have been able to lead an independent life without financial support from their children. Additionally, a steady decrease in the size of the workforces in the agriculture, forestry and fishery sectors has been realized. Children in those sectors, rather than taking over the jobs of their parents, tend to choose other jobs. In this way, the workforces in such sectors are rapidly transferred to other industrial and services sectors and more and more workforces in those sectors are aging. Change in the role of children of parents in small business or in the agriculture, forestry or fishery sector, accompanied by a decrease in the workforces in these sectors, tends to further decrease the TNCMC rate.

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The third socioeconomic factor is concerned with an increasing number of nuclear families, in particular in urban areas. The number of nuclear family type households steadily increased from 17.2 million in 1970 to 29.8 million in 2015, while the amount of nuclear family type households out of all households has remained around 55% since 1970. It is often difficult for nuclear families to ask assistance for taking care of children, even when that assistance is desperately required. This factor of increasing nuclear families tends to decrease the TNCMC rate. The fourth socioeconomic factor is concerned with a lack of day-care centers for children. An increasing number of young parents who go to work leave their children at day-care centers. However, there does not exist a sufficient number of day-care centers. There are several reasons why this was, and still is, the case. First, there are not enough nursery school teachers. In 2017, roughly 460 thousand nursery school teachers were necessary, yet only 386 thousand were provided. The basic problem at work is related to a lower salary for nursery school teachers in Japan, employees who are often non-regular workers. In fact, the average annual salary for nursery school teachers at 35 years of age is JP¥3.1 million, compared with an average salary of JP¥4.1 million for all other occupations (Ministry of Health, Labour and Welfare https://www.mhlw.go.jp). Additionally, it is not easy for nursery school teachers to take paid holidays while they themselves have their own children. When all is said and done, only half of all qualified nursery school teachers work for child-care centers. One fourth of all qualified nursery teachers retire from care centers after less than five years of employment. This situation is, however, understandable, and is due to the fact that the responsibility and risk of accidents is high in the nursery school occupation and as well as the fact that there are complicated problems when it comes to complaining parents. In the end, the unfavorable situation described above has led to a lack of day-care centers for children. Thus, certain children are not able to enroll in day-care centers, even after they reach an age where they are eligible for admittance into a day-care center. In addition to the first three factors, this factor contributes to a decrease in the TNCMC rate. The fifth socioeconomic factor is concerned with the opportunity cost associated with childbirth and child-raising, in particular the opportunity cost, to female workers. The opportunity cost to female workers associated with childbirth and childcare has been increasing due to the advanced academic training of women and the decreasing wage gaps between male and female workers. According to a 2003 study by the Cabinet Office of Japan (Cabinet Office https://www.cao.go.jp/index-e.html), for example, a 28 years old female worker, who graduated from university and took maternity leave from a company directly after childbirth, then reentered that same company, loses JP¥85 million on average when compared to a female worker who did not take maternity leave. This opportunity cost is substantial enough to cause hesitation in the decision to have a child, resulting in a decrease in the TNCMC rate. The sixth socioeconomic factor is concerned with the problem of workplace environments in Japan, in particular for a working couple with children. Unfortunately, the workplace environment in Japan is not conducive for the balancing of productive work and the raising of children. Difficulty in taking paternity leave for a husband is one serious problem that is complicating the workplace environment. Japanese

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people should start to think seriously about how current workplace environments have been built into the traditional Japanese society and how alternative workplace environment modalities can be introduced in order to remedy the trend of a decrease in the number of childbirths. The seventh and final, socioeconomic factor, is concerned with increasing education expenditure in Japan. In fact, the percentage of education expenditure out of household consumption expenditure doubled between 1970 and 2000. During this 30-year period, parents with a child in attendance at a private university in a big city annually spent more than JP¥2 million on education expenditure. One of the primary driving forces behind increased education expenditure is the fact that, in April of 2004, national universities in Japan were transformed into national university corporations. Historically, the expenditure for national universities was supplied by the special account budget of national schools. In the time following April of 2004, grants from the Japanese government to national university corporations termed management expenses grants are supplied every fiscal year in support of their research and education operations. During the period 2004–2018 and as a result of this change, management expenses grants for national university corporations decreased from JP¥124.2 billion to JP¥109.7 billion in 2018, a 12% decrease. Further decrease in management expense grants is planned by the Ministry of Education, Culture, Sports, Science and Technology. Tuition fees for national universities, on the other hand, increased from JP¥339.6 thousand in 1990 to JP¥535.8 thousand, a 58% increase. In this way, the trend of decreasing management expense grants has been compensated by increasing tuition fees and has resulted in additional financial burden for parents. It is not well recognized by the Japanese public that, in Japan, the ratio comparison of total public expenditure versus GDP, just 36%, is not particularly high. In terms of this ratio, Japan was ranked, in 2017, 107th among Organisation for Economic Co-operation and Development (OECD) countries. Table 6.1 indicates the public expenditure spent for a person between 6 and 23 years of age (PEP), the percentage of the total public expenditure on primary and secondary education (PSEE) divided by GDP, and the percentage of the total Table 6.1 Public education expenditure in 2015: compiled from https://data. oecd.org/ and https:// population.un.org/wpp/ Publications/

PEP (2011 US$)

PSEE/GDP (%)

TPEE/GDP (%)

Japan

4,990

2.5

0.5

Korea

10,190

2.6

1.0

USA

17,260

3.2

0.9

Germany

7,120

3.5

0.7

Sweden

14,160

3.6

1.4

PEP (2011 US$): Public Expenditure per Person between 6 and 23 years old PSEE/GDP (%): (Primary and Secondary Education Expenditure)/GDP TPEE/GDP (%): (Tertiary Public Education Expenditure)/GDP

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public expenditure on tertiary education (TPEE) divided by GDP. The table indicates these variables, for Japan, Korea, the United States, Germany and Sweden for the year 2015. Among that cohort of countries and for that year, PEP, the percentage of TPEE·GDP−1 and the percentage of PSEE·GDP−1 were all the smallest for Japan. The problem with Japanese public education expenditure is not restricted to the percentage of public education expenditure compared with GDP, however. More importantly, the absolute amount of public education expenditure for a person between 6 and 23 years of age in Japan was only US$4,992, extremely meager in comparison to the other countries listed. In order to improve the future welfare of a nation, public expenditure on education is the most crucial component in a situation of an aging population. Yet, the Japanese government and Japanese citizens do not recognize the importance of public education expenditures. Lack of public education expenditure is another factor that contributes to the increasing cost of child-raising, a factor in turn related to a decrease in the TNCMC rate.

6.3 Vacant Dwellings in Japan Thus far in this chapter I have discussed the aging population of Japan and several basic factors that accelerate the aging of the Japanese population. There is another important issue, however, one that is associated with the mode of human evolution by way of exosomatic instruments. These instruments, which include, for example, highways, railways, factories and cars, were termed exosomatic population in Chap. 1. When the human population of a country is growing, the provision of services and production of goods must also increase accordingly. Soddy termed the flow of goods and services within an economy as real wealth. According to Soddy, producing real wealth is the ultimate objective of economic activities. On the other hand, when a human population is growing, exosomatic population must not only increase but increase in a manner compatible with the size of both the human population and the production and provision of goods and services. After an exosomatic population is produced, that population becomes real debt, biophysical debt in terms of entropy deficit, since exosomatic population cannot be easily transformed into real wealth, goods or services for final consumption and exhaustible energy and materials are already used for the fabrication of the exosomatic population. This type of debt cannot be recoverable unless an exosomatic population is utilized to produce goods and services, where it should be noted that additional energy and materials are required by that process. The current population of Japan is rapidly decreasing, and its demographic structure is aging. One serious problem that is emerging is that the fine line of compatibility between the quantity of people and the quantity of each type of exosomatic population is losing its balance. In fact, the increasing number of vacant dwellings in Japan is indicative of just such a problem.

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133

In order to assess this situation in more detail, the definition of vacant dwellings in Japan must first be introduced. A dwelling is a self-contained unit of accommodation used by one or more households as a home. Examples of dwellings include, a house, an apartment, a mobile home or any such habitable construction having substantial structural components. In 2018, according to the data from (Ministry of Internal Affairs and Communications http://www.soumu.go.jp/), the total number of dwellings in Japan was 62.42 million. Out of the total number of dwellings, 53.66 million were occupied. So, the number of unoccupied dwellings was 62.42 million minus 53.66 million, i.e. 8.76 million. These unoccupied dwellings have not always been used for accommodation or other purposes. They included dwellings under construction or in the process of renovation. Such dwellings, dwellings under construction, cannot be used for accommodation purposes and are termed dwellings under construction, the number of which was 0.09 million in 2018. There are also different types of residential dwellings that are temporarily put to use as offices. This type of dwelling may be declared as a temporary occupants only dwelling. The number of such dwellings was 0.22 million in 2018. Subtracting these last two numbers from the number of unoccupied dwellings results in the number of so-called vacant dwellings, we arrive at a total of 8.45 million dwellings in 2018. Incidentally, in 1963, the number of dwellings in Japan was 21.1 million and the number of vacant dwellings was just 0.53 million. Not only the absolute number of vacant dwellings, but also the percentage of vacant dwellings among all dwellings considerably increased between 1963 and 2018. Figure 6.7 shows the percentage of vacant dwellings in Japan between 1963 and 2018. The fact that the percentage of vacant dwellings has steadily increased since 1963 implies that residential dwellings, as a component of social infrastructure, have already exceeded the saturation point of dwellings. This observation, indicates the loss of a subtle balance between the local human population and the form of

vacant dwellings (%)

16 14 12 10 8 6 4 2 0

year Fig. 6.7 Percentage of vacant dwellings in Japan 1963–2018

6 Aging Population, Vacant Dwellings and the Compatibility Problem …

number of houses (ten thousands)

134 180.0 160.0 140.0 120.0 100.0 80.0 60.0 40.0 20.0 0.0

1989

1994

1999

2004

2009

2014

year Fig. 6.8 The number of newly constructed houses in Japan 1989–2017

exosomatic population represented by dwellings. In other words, in comparison with its population, dwellings are in oversupply in Japan. Figure 6.8 indicates the number of newly constructed houses in Japan between 1989 and 2017. As shown in the figure, and although short-lived increases can still be observed during the period visualized, the overall number of newly constructed houses has exhibited a clear tendency to decrease. The situation of vacant dwellings in Japan, in all actuality, is a serious one. This seriousness is due to the fact that the number of newly constructed houses is decreasing, yet the percentage of vacant dwelling continues to increase. The implications and nuance of this situation are explained in the following. There are four types of vacant dwelling, listed in the following with quantity estimations referring to the year 2018 (Ministry of Internal Affairs and Communications http://www.soumu.go.jp/): (i) vacant rental dwellings (4.31 million); (ii) vacant private dwellings (3.47 million); (iii) vacant dwellings as second dwellings, such as holiday villas (0.38 million); and (iv) vacant dwellings for sale (0.29 million). Figure 6.9 shows the change in the number of vacant rental dwellings and vacant private dwellings, depicted jointly with the change in the number of total vacant dwellings in Japan between 1978 and 2018. During that 40-year period, the quantities of vacant rental dwellings and vacant private dwellings increased by 275% and 354%, respectively. These two types of vacant dwelling are particularly crucial in order to understand the serious situation of the aging population of Japan. Before discussing each type of vacant dwellings, it is advisable to understand the relative change in the number of those two types of vacant dwellings, in comparison with the relative change in the number of total vacant dwellings in Japan. Figure 6.10 visualizes those changes for the period 2003–2018. Figure 6.10 shows relative changes in the number of each type of vacant dwellings in Japan over the past decade and a half. Figure 6.10 clearly indicates that the relative size of vacant private dwellings has been increasing (155%) more rapidly than the

number of vacant dwellings (million)

6.3 Vacant Dwellings in Japan

135

10 9 8 7

vacant dwellings

6 5

vacant rental dwellings

4 3

vacant private dwellings

2 1 0

year

relative change in vacant dwellings

Fig. 6.9 The number of vacant dwellings in Japan 1978–2018 1.6 1.5 1.4

vacant dwellings

1.3

vacant rental dwellings

1.2

vacant private dwellings

1.1 1 2003

2008

2013

2018

year Fig. 6.10 Relative changes in the quantities of each type of vacant dwelling in Japan 2003–2018

relative number of both total vacant dwellings (125%) and vacant rental dwellings (117%). While the relative change in the number of vacant rental dwellings is small in comparison to that of vacant private dwellings, the absolute number of vacant rental dwellings is larger than that of vacant private dwellings. Many owners of rental houses are economically suffering since residents in rental houses tend to move out to newly constructed rental houses, if circumstances allow them to do so, and the number of old rental houses without a sufficient number of residents to maintain financial viability has been increasing due to an excessive supply of newly constructed rental houses. Rental house owners suffer in this context due to the fact that rental homeowners

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must pay a regular property tax which depends on the occupied space of renthouses, regardless of the number of people actually staying at an owner’s rental house. A still more serious problem concerns the rapid relative change in the number of vacant private dwellings. Two different types of vacant private dwellings, condominiums and private houses, are discussed in that light. Due to this rapid relative change, problems arise in relation to a rapid increase in the number of households. The rapid increase in the number of households is in turn due to an increasing quantity of nuclear families and of an increasing quantity of elderly people who live in either condominiums or private dwellings until they pass away. In particular, the number of households consisting of only elderly people has been seen to dramatically increase since 1980. Figure 6.11 illustrates for Japan the relative change in the number of four types of households, namely, single-person households, elderly couple households (inhabitants over 65 years of age), single-elderly households (over 65 years of age) and single-elderly households (over 75 years of age). Figure 6.11 depicts these changes every five years and assigns the year 1980 a value of 100. Relative changes are predicted up until 2035 (Ministry of Internal Affairs and Communications http://www. soumu.go.jp/). The first observation is that the relative size of single-elderly households over 75 is rapidly increasing. In 2035, a value of 1,700 is predicted, while the relative number of all single households is predicted to reach 260. Traditionally, a majority of single-person households consist of young people who have moved from local areas to urban areas after either obtaining a job or having been given an independent residence from their parents following graduation from college. Nowadays, single-elderly households have become a sort of norm and have come to represent the typical situation of the aging population in Japan. As the population size of Japan has increased, and as the number of nuclear families continues to increase, the number of households in Japan has been seen to grow. Beyond simple growth, however, a drastic change in the composition of household

relative changes in four types of household (%)

2,000 1,800 1,600

single-person households

1,400 1,200

elderly couple's household(+ 65)

1,000

single-elderly households(+ 65)

800 600

single-elderly households(+ 75)

400 200 0 1980 1990 2000 2010 2020 2030

year Fig. 6.11 Relative changes in four types of single-person and elderly households 1980–2035 (1980 = 100)

6.3 Vacant Dwellings in Japan

137

members is being observed. The number of households with two or three occupants that are transitioning to a single-person status is increasing substantially—a transition that occurs when either children obtain independence from their parents, or divorce occurs or a widowing occurs. After the owner of an old condominium passes, it is also occasionally difficult to know whether an heir exists. Though heirs are supposed to make an inheritance registration procedure, but the making of such a procedure is not a legal obligation. Therefore, in many cases, the renewal of the registration of ownership of condominiums is often not even attempted. Other residents in the same condominium are also not often able to hold a general meeting to discuss how to maintain the whole structure of the condominium. An even worse situation occurs in the case where it is difficult to collect enough money to repair or demolish a communal structure, such as a mechanized parking system. In such situations, the entire building in question, left as it is without any renovation, remains fragile and at high risk. So, when elderly residents pass away, there are quite a few problems involved with old deteriorated condominiums. Once the elderly occupants of condominiums pass away, it occasionally arises that nobody in the condominium building knows who the real owner of that condominium is. In fact, the number of old or deteriorated condominiums is increasing rapidly. According to the Ministry of Land, Infrastructure, Transport and Tourism (http:// www.mlit.go.jp/), in 2018, the number of condominiums aged between 30–40 years was 1.16 million, those between 40–50 years was 0.75 million and those over 50 years was 0.06 million. It is predicted, however, that those three numbers are to increase, respectively, to 1.93 million (a 66% increase), 1.70 million (a 126% increase) and 1.98 million (a 3200% increase) by 2038. Such high numbers of old and deteriorated condominiums would or will indeed cause a set of serious problems. Children who inherit old condominium often do not intend to live in them, since working places are often distant or because the inherited aging condominium is not up to living standards. Such old condominiums present a further difficulty in the fact that they are difficult to sell or rent. Demand for condominiums that are located less than a 10-minute walk to bus or railway station is, on the other hand, very high. Conversely, the demand for otherwise desirable condominiums that do not satisfy these conditions, is not at all high, perhaps because the percentage of car owners in urban areas in Japan is decreasing and the number of dual-income families who wish to have a home near a bus or metro station is rising. Dual-income families also often wish to have condominiums with good access to supermarkets and railway stations, condominiums that do not require the use of personal cars. Therefore, old condominiums not satisfying these conditions are difficult, in general, difficult to sell. Finally, there is yet another problem related to vacant private houses. As it stands, the owner of a private house is authorized to pay a reduced property tax, the reduction of which depends on the occupied space. For example, in Osaka, only one-sixth of regular property tax is imposed on an owner with a private house of less than 200 m2 . Only one-third of regular property tax is imposed on a piece of occupied space that exceeds 200 m2 . If a person inherits an old private house from their parents and yet does not intend to live there, there are usually two options for the person: to either sell

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6 Aging Population, Vacant Dwellings and the Compatibility Problem …

the house or rent the house. Demand for such old houses is not at all rosy and it is very difficult to sell such houses or rent them to others. Furthermore, if the house owner decides to sell their space after reclamation work, they must pay regular property tax without the benefit of paying the lower property tax rate mentioned above.

6.4 Conclusion In this chapter, the aging population of Japan and a compatibility problem between the human population of Japan and the exosomatic population of Japan have been discussed. The vacant dwelling problem is only one example of a subtle yet steadily deteriorating balance between the two types of population, human and exosomatic. Another serious problem of that population balance emerges in the case that public transportation networks experience financial difficulty in providing sufficient levels of transportation service to depopulated areas. Such difficulty might arise, for example, due to an aging population. Among other concluding remarks, it is worthwhile to briefly touch upon this issue. The former national railways of Japan were privatized into a form of public corporation named Japan Railway (JR) in April of 1987. JR consists of six regional networks of railway companies, each of which has its own accounting unit. Nowadays, four of the six JRs are listed on the Tokyo Stock Exchange. The listing of those four JRs is thanks to the fact that those four JRs occupy an area of Japan where a very high and stable demand from railway passengers and freight transportation is secured. The other two JRs, located in Shikoku and Hokkaido, remain in financial trouble due to them being located in areas of low demand from railway passengers and low quantities of freight transport. In reality, the deficit of these two financially troubled JRs is covered by the Japanese government fund for stable management, a fund which amounts to over JP¥890 billion. The government fund for stable management for these two JRs was not intended for investment gain, but rather to compensate deficit and allow those two JRs to continue operating. The deficit of those two JRs is considered inevitable due to the assignation of those two JRs to depopulated areas. The Japanese government effectuates its financial aid by lending money to the unique shareholder of the Shikoku and Hokkaido JRs, i.e. Japan Railway Construction, Transport and Technology Agency (JRTT). Interest levels are determined such that projected deficit is supposed to be completely financed by the government fund for stable management. Naturally, the interest rate determined in this way is artificially much higher than the commercial interest rate. This is indeed a notable trick since a large-sum of public money is injected into the Shikoku and Hokkaido JRs, which were originally supposed to be privatized and not use public money. However, the case of these two JRs is nothing but the compatibility problem between human population and exosomatic population. In this case, the exosomatic population corresponds to the railway network. This type of exosomatic population, a public railway system, is absolutely necessary in order to enable local people that live in ‘inconvenient’ places, places where public transportation proves indispensable for them. Yet,

6.4 Conclusion

139

Table 6.2 Japanese population size and its demographic structure for the years 1965, 2000, 2065 and 2115 Year

1965

2000

2065

2115

Capita

Total

98,275

126,925

88,076

50,555

1,000

0–17

32,265

22,960

10,980

6,353

18–34

29,442

30,088

13,285

7,535

%

60+

9,525

29,790

39,405

22,612

0–17

32.8

18.1

12.5

12.6

18–34

30.0

23.7

15.1

14.9

60+

9.7

23.5

44.7

44.7

if railway service is provided by private railway companies, people do not have good access to transportation due to a deficiency of demand for passenger transportation. So, the compatibility balance problem between human population and exosomatic population is always with us, particularly when population is decreasing in some areas. This type of problem is emerging as a new type of bioeconomic problem that Georgescu-Roegen did not encounter in the 1970s. The speed of decline of the Japanese birth rate, alongside Japan’s aging population, is amazingly devastating. Japan’s problem is more devastating still than industrial nations commonly referred to as having similar socioeconomic problems, countries such as Italy or Sweden. Table 6.2 illustrates the population and its structural change in Japanese society for the years, 1965, 2000, 2065 and 2115. Data is compiled from the National Institute of Population and Social Security Research website (http://www.ipss.go.jp/), a resource belonging to the Ministry of Health, Labour and Welfare (https://www.mhlw.go.jp). The population of Japan is predicted to decrease to less than 51 million by 2115, a population size which would represent less than 40% of the population in 2000. That substantial decrease in population is predicted to be realized within less than 100 years! Some would say that over-population will cease to be an issue and that the population density problem will be solved for good. Furthermore, energy consumption and environmental burden will be substantially reduced. Looking closely at Table 6.2 should convince the reader that there is no rosy future for Japan’s aging population, however, since the population structure in 2115 is expected to be more or less the same as that of 2065—the point in time when the current aging structural process is expected to climax. The percentage of people over 60 years of age is predicted to be 44%, a percentage much higher than that in the year 2000, where it was estimated to be just 24%. The implication of this statement, that of the present author, is that, unfortunately, the situation of the aging population in Japan will be worse than ever in the coming decades. In order to cope with a declining population size and the aging problem, there must be both a systematic institutional change and a change in the behavior of people. It is absolutely necessary that a legal and socioeconomic environment which encourages people to have more children is reestablished. This new socioeconomic

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6 Aging Population, Vacant Dwellings and the Compatibility Problem …

environment could reverse the current trend of declining average birthrate. Furthermore, it is socially necessary to promote the employment of women and elderly, two groups who indeed have a strong motivation to work. Promoting the employment of women and elderly means more than simply compensating the trend of a decreasing workforce, a trend which has been observed in the long-term. In particular, a challenge exists in establishing both a more comfortable work environment and socially supported institutional settings where a couple feels secure in having children, i.e. where couples do not anticipate any serious problems. It is absolutely necessary for the Japanese government and private companies to amend the seven socioeconomic factors mentioned in this chapter, factors which have unfortunately caused the average total number of children per couple, married for the first time and having maintained their marital status for 15–19 years (TNCMC), to decrease substantially. A somewhat high level of economic growth in terms of GDP is necessary in order to overcome the decreasing working-age population and the decrease in saving rate. Increases in the workforce of women and elderly itself will mitigate tax payments and the social security burden for the whole workforce. In this way, the financial status of public sectors will be substantially improved, hopefully decreasing the frequency of national bond issuing. There remains a contradictory dual situation facing the aging population of Japan, a situation with contradictions between the individual perspective and community perspective. A duality of this kind is not limited to the case of duality of money. A decreasing birthrate is the result of the making of best choices from an individual perspective. However, this behavior is not at all favorable from the community perspective in the case the trend of decreasing birthrate continues. An excessive trend of decreasing birthrate would seriously influence the size of the workforce and the national social security situation. So, certain policy measures must be implemented to support the raising of the birthrate and the increase of public assistance for raising children. Local government should get involved in enhancing childcare support. Companies should also reconsider promoting work-style reforms, in particular for male workers who have difficulty in taking paternity leave under the current conditions in Japan. There are three problems associated with a decreasing aging population, problems that come to light for Japan when considering that the future prospects of fossil fuel supply and monetary management are not rosy. First of all, there are serious problems in the agriculture, forestry and fishery sectors in Japan. These sectors are, of course, suffering substantially at the hands of an aging workforce population. However, these sectors must be reconsidered as being the foundations of human survival and as the source of net primary production activities. This problem is to be dealt with in Chap. 7. The second problem is associated with the eternal budget deficit of general and special accounts, resulting in the continuous large-scale issuing of national bonds. This second problem is related to how to redeem national debt for the sake of future generations and is dealt with in Chap. 8. Lastly, Japan’s social security system, i.e. the pension, medical care and elderly care system, is collapsing due to the rapid aging process. This third problem is indeed a formidable one and it represents a

6.4 Conclusion

141

problem associated with an aging population. The social security problem is dealt with in Chap. 9. To be brutally honest with the readers of this work, I do not see any immediate effective remedies capable of correcting the tragedy of such grave aging population problems in Japan unless drastic measures, such as the taking on of a large number of immigrants from foreign countries, are considered and adopted.

References Mayumi K (1991) Temporary emancipation from land: from the industrial revolution to the present time. Ecol Econ 4:35–56 Polimeni J, Mayumi K, Giampietro M, Alcott B (2008) The Jevons Paradox and the Myth of resource efficiency improvements. The Earthscan, London

Chapter 7

Reconsidering Agriculture, Forestry and Fishery in Japan: Searching for a Responsible Development Pathway

7.1 Introduction As briefly touched upon in Chap. 1, Clark’s (1940) work based on Petty’s law identified the industrial development process with the rapid transfer of workforce from primary industry to manufacturing industry. In particular, workforce movement from agriculture, forestry and fishery to manufacturing is realized. Such workforce movement is typically accompanied by a lowering of the share of GDP in agriculture, forestry and fishery. These two trends for Japan, workforce and GDP, are clearly observable in Figs. 7.1 and 7.2. Figure 7.3 presents the sum to hundred percent GDP of the agriculture, forestry and fishery sectors in Japan between 1970 and 2017. In 2015, for example, the workforces in those three sectors were 2,083 thousand capita (agriculture), 45 thousand capita (forestry) and 166 thousand capita (fishery). Rates of GDP per employee for that same reference year were JP¥2.35 million (agriculture), JP¥4.57 million (forestry) and JP¥4.81 million (fishery). For comparison, the GDP per employee rate of the manufacturing sector was JP¥8.5 million in 2015, a figure substantially greater than that of the agriculture, forestry and fishery sectors. Yet, it must also be remembered that people in those three sectors typically inherit dwellings, equipment and related spacious land property from their parents. So, the mere comparison of per capita income itself does not necessarily represent the true economic welfare of the people working in those three sectors. As predicted by Clark, what has occurred in Japanese agriculture, forestry and fishery in recent decades corresponds exactly with the rosy early phase of industrial development—the phase in which fossil fuels first exhibit their superiority and monetary systems flourish. Activities associated with agriculture, forestry and fishery remain closely related to biological activities associated with net primary production (NPP), however. It cannot be stressed enough that NPP ultimately constrains longterm productivity and dictates the survival of both human and biological species on Earth (Vitousek et al. 1986). Conventional economic analysis cannot offer any serious insight into the crucial role of NPP. © Springer Nature Switzerland AG 2020 K. T. Mayumi, Sustainable Energy and Economics in an Aging Population, Lecture Notes in Energy 76, https://doi.org/10.1007/978-3-030-43225-6_7

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percentage of workforce (%)

144 50 45 40 35 30 25 20 15 10 5 0

year Fig. 7.1 Percentage of Japan’s workforce in agriculture, forestry and fishery 1951–2017

percentage GDP share (%)

7 6 5 4 3 2 1 0

year Fig. 7.2 Percentage GDP share of agriculture, forestry and fishery in Japan 1970–2017

If the climate change described by the Intergovernmental Panel on Climate Change is real, the current path of economic development may be approaching a crucial point of bifurcation in human history. According to Shingu (2013), Nitin Desai, the previous Deputy Secretary-General of the United Nations Conference on Environment and Development at the Rio Earth Summit in 1992, had the intention to propose the term ‘Responsible Development’ rather than ‘Sustainable Development’ to the Rio Earth Summit assembly. However, it seems that, due to his duty in the Secretariat in relation to the development of Agenda 21, Desai decided not to suggest such a challenging label. Perhaps, for political reasons it was easier for Desai to sell the combination of two quite contradictory words, sustainable and development.

relative percentage GDP share (%)

7.1 Introduction

145

90 80 70 60 50

agriculture

40

forestry

30

fishery

20 10 0

year Fig. 7.3 Sum to hundred percent GDP share of agriculture, forestry and fishery in Japan 1970–2017

In the light of responsible development and on behalf of future generations, the purpose of this chapter is to reconsider the basic role of Japanese agriculture, forestry and fishery. Section 7.2 reconsiders the basic characteristic of agriculture and manufacturing. These inherent characteristics, associated with two different modes of economic production, can be reexamined and highlighted in view of ecological succession and mechanized agriculture. Section 7.2 suggests that sustainable forms of agriculture inherently differ from the way modern mechanized agriculture is conducted. Section 7.3 then discusses various problems related to current agriculture in Japan. The origin of these problems is shown to trace back to the Japanese government’s policy on rice production, a policy in effect since World War II, which has not increased rice export. The Japanese government’s heavy subsidy policy is responsible for the poor performance of Japanese agriculture and the trend of increasing net imports of agricultural commodities. Section 7.3 also discusses the several problems of Japanese Agricultural Cooperatives (JA), the most important organization charged with the promotion of Japanese agriculture. 70% of JA’s business profit derives, unfortunately, from credit business and insurance business—two lines of business that do not directly relate to agricultural production. Section 7.4 introduces the basic points of sustainable forest management in relation to the Montréal Process. Section 7.4 then discusses the trend of a decreasing number of forest workforce and the decreasing timber supply self-sufficiency rate. Section 7.4 also reexamines the basic role of various activities associated with silvicultue, activities such as cleaning and weeding, and suggests a certain special arrangement for Japanese forestry: small-scale management by family foresters. Section 7.5 introduces the world fishery situation, where aquaculture is seen to be increasing disproportionately. In contrast to aquaculture, catches are seen to not increase at all. Section 7.5 then discusses the vicious circle of Japanese fishery where, overfishing is causing marine resources to decrease thereby resulting in decreasing catches and subsequently, desperate efforts

146

7 Reconsidering Agriculture, Forestry and Fishery in Japan …

to increase ever-decreasing marine resources. A set of measures aimed at making fishing sustainable are proposed based on scientific research. The proposed measures indicate different types of catch quantity such as an ‘overfishing limit’ and ‘total allowable catch’. Lessons from the fisheries of New Zealand and Norway are examined. Those lessons are useful to promote a sustainable Japanese fishery. Section 7.6, the conclusion, reexamines the role of agriculture, forestry and fishery in view of maintaining NPP, something which should be an important target for sustainability.

7.2 Reconsidering Agriculture Versus Manufacturing Ecological succession typically refers to an orderly and predictable process by which the structure of a biological community evolves over time (e.g. Kurihara 1975). The characteristics of ecological succession can be summarized as follows: (i) in the early stages of ecological succession, the variety of living creatures is initially limited, later becoming complex with the advancement of stages of ecological succession; (ii) the quantities of organic and inorganic elements are more or less the same except in the early stages of ecological succession. In the early stages, the quantities of these elements are very small and, therefore, the utilization rate of nourishment is higher in the early stages; (iii) the weight of living things per unit area is smaller in the early stages than that in the matured stages; (iv) the rate of increase in total production in the early stages is higher than that in the matured stages; and (v) after a dynamic equilibrium is reached, i.e. after a climax has been reached, that equilibrium state is more or less stable, unless a human intervention is made. If agricultural production is to be successful, it is absolutely necessary to artificially create the early stages of ecological succession. In successful agriculture, achieving a high productivity per unit area is attempted and establishing a simple community, full of plants and animals for human benefits, is preferred. Overcoming the disadvantages of the early stages of ecological succession is crucial for successful agriculture. In fact, from the perspective of modern agriculture, there are some annoying characteristics associated with the early stages of ecological succession. First, the weight of plants per unit area tends to be light. A large-scale yield per unit land area in the early stages of ecological succession cannot be expected. Second, as flora is simplified in the early stages of ecological succession, so fauna, which depends on the size and variety of flora, also becomes simplified. The extent of certain groups of herbivora, tends to become larger because of favorable conditions enjoyed by those groups. Third, the early stages of ecological succession are not stable and easily succumb to external disturbances. Agriculture must artificially overcome these three unfavorable aspects of the early stages of ecological succession. It is necessary to increase the weights of plants per unit area through the intensive use of fertilizer and practices of plant breeding. Then, because of the simplified collections of flora and fauna, which exist due to the intensive use of chemical fertilizers, specialized groups of herbivora become increasingly dominant. As a result, harmful insects which have co-evolved with prevailing groups of hervibora enjoy a field day. Furthermore, extra

7.2 Reconsidering Agriculture Versus Manufacturing

147

energy, materials and labor are required to cope with the early stages of ecological succession. Due to its inherent instability, additional labor input for cultivation, control and weeding as well as for the spreading of fertilizers, pesticides and herbicides is necessary. It must be emphasized that agriculture itself is up against the pattern of nature represented by the ecological succession of ecosystems (Mayumi 1991). On the other hand, because of inherent disadvantages dictated by nature and the rate of NPP, agriculture is placed in unfavorable production conditions in comparison with manufacturing. Georgescu-Roegen expounded the fundamental difference between agriculture and manufacturing by indicating the asymmetry of the two common sources of low entropy used, i.e. solar energy and fossil fuels. In fact, the disadvantage of agriculture has three primary aspects. First, nature dictates the time when an agricultural operation must be started if that operation is to have a chance at being successful (Georgescu-Roegen 1971). Second, because of the impossibility of controlling the flow rate of solar energy onto Earth, patience is to be required from humans. As Adam Smith noted, in agriculture nature labors along with humans (Smith 1976). Humans are forced to wait for nature to work. Nature, as the silent partner of humans in agriculture, not only dictates to humans when they should start an agricultural production, but also forbids them to stop the production process until it is completed. In manufacturing, on the other hand, it is quite easy to interrupt and later start again at almost any moment whenever humans prefer. Third, most fund factors used in agriculture, factors such as machines and tools must remain idle for a great portion of production time. This idleness, i.e. the low capital utilization in agriculture, is an unavoidable consequence of the material conditions of agriculture itself. In essence, manufacturing exhibits superiority over agriculture. Manufacturing can create an artificial process that is relatively independent of natural cycles. As a result, production of goods per unit time can be raised dramatically and technical idleness can be greatly reduced. Line processes, i.e. uniformly staggered elementary processes in time, can be created without much difficulty. Line processes can eliminate the technical idleness of fund elements almost completely. What mechanized agriculture effectively achieves is an increase in photosynthesis per area of cultivated land. This increase is achieved, however, by a more than proportional increase in the depletion of fossil fuels and related material inputs, two resources that are critically scarce. Mechanized agriculture can take advantage of some techniques of manufacturing processes, for example, by increasing use of chemical fertilizers and pesticides, and increasing cultivation of new high-yield resilient varieties of cereal grains. However, contrary to the general indiscriminately shared notion, mechanized agriculture is against the most elementary bioeconomic interest of the human species in the long-run. If growing food by ‘agro-industrial complexes’ becomes the general rule, many species associated with old-fashioned organic agriculture and permaculture (Holmgren 2019) may gradually disappear. Humans may enter into an ecological cul-de-sac from which there would be no return. Land, not Ricardian land, is the most important production factor for agriculture. In this regard, the situation of agriculture is essentially the same as that of forestry and fishery. Land cannot be moved and its full functioning for agricultural production

148

7 Reconsidering Agriculture, Forestry and Fishery in Japan …

is heavily dependent upon location, landscape and local climate conditions. Moreover, soil and water resources associated with land, are inseparable joint inputs for agriculture. Certain types of production factors in agriculture, factors such as breeding cows and dairy cows, play a dual role as both a fund and a flow. Among socioeconomic systems, the two roles of such factors are special to agricultural production: maintaining a fund intact and simultaneously generating a stable flow. The two roles of such factors also can apply, however, to the vast majority of biological species, active in NPP, including biological species active in forestry and fishery. The maintaining of a production factor as both a fund and a flow is an indispensable action in relation to responsible development.

7.3 Japanese Agriculture and Its Basic Problems According to the definition in the Census of Agriculture and Forestry, organized by the Japanese Ministry of Agriculture, Forestry and Fisheries, a small-scale farm household either has more than 1,000 m2 of farm-land or earns an annual commercial agricultural sale of more than JP¥150,000. A commercial farm household, on the other hand, either has more than 3,000 m2 of farm-land or earns an annual commercial agricultural sale of more than JP¥500,000. These two types of households, smallscale and commercial, are collectively referred to as farm households. In 2015, the number of farm households in Japan was 2.2 million. One important characteristic of farm households is that many of them have other sources of income besides farming. Specifically, there are two main types of part-time farm households. The first type of part-time farm household, the number of which was 0.17 million in 2015, is such that the main source of income comes from agriculture. The second type of part-time farm households, the number of which was 0.72 M in 2015, is such that the main source of household income comes from other gainful activities, i.e. non-agricultural activities. As of 2015, these two types of part-time farm households represent about 42% of all farm households. On the other hand, the number of people over 15-years old who are members of farm households that are either engaged exclusively in agriculture or engage more hours in agriculture than in other economic sectors is termed as agricultural workforce. The size of the Japanese agricultural workforce was reduced to 2.1 million capita in 2015, by a reduction of 84% compared with the 13.1 million capita workforce in 1960. As is easily imagined, and as can be observed in Fig. 7.4, the age structure of the agricultural workforce also drastically changed between 1960 and 2015. Japan is situated in the Asian monsoon region and Japanese landscape is relatively steep. The soil of most of Japan’s land does not contain high levels of calcium, magnesium or potassium. So, the land in Japan is not suitable for growing cereals such as barley or wheat. However, in the paddy field, on the average 150 thousand liters of water per 100 m2 is supplied. This amount corresponds to a water depth

7.3 Japanese Agriculture and Its Basic Problems Fig. 7.4 Age structure of the Japanese agricultural workforce in 1960 and 2015

80~ 75~79 70~74 65~69 60~64 55~59 50~54 45~49 40~44 35~39 30~34 25~29 20~24 15~19

male

female

1960

1000000 800000 600000 400000 200000

85~ 80~84 75~79 70~74 65~69 60~64 55~59 50~54 45~49 40~44 35~39 30~34 25~29 20~24 15~19

149

0

male

1000000 800000 600000 400000 200000

200000 400000 600000 800000 1000000

female

2015

0

200000 400000 600000 800000 1000000

of 1.5 m. On the paddy field, in these circumstances, calcium and magnesium are supplied by the large quantities of water. Indeed, rice is a very important crop in the cultural tradition of Japan and has been the country’s staple food for a long period of time. For example, in the Edo period of Tokugawa Shogunate (1603–1860 CE) the geopolitical and economic power of a daimyo, i.e. a Japanese feudal lord, was represented by the amount of annual rice production in that daimyo’s territory, measured in koku volumetric units (1 koku = 0.18 m3 ). Despite the devastating damage incurred during World War II, rice production in Japan gradually recovered over subsequent decades and reached its highest volume, 14.26 million tons, in 1967. The West’s dietary habits were also rapidly introduced in Japan following World War II, however. The result of those habits was a relative decrease in domestic rice demand. In addition to those factors, a gradual but distorted governmental policy of reducing paddy fields was recommended from the early 1970s until very recently. The serious consequences of that policy have not yet been recognized. By recommending farmers to reduce the area of paddy fields, the main policy objective of the Japanese government was to reduce rice production and, thereby, maintain a stable rice price. When the government’s policy proved unsuccessful at stabilizing the price of rice price—actually a further decrease in the price of rice price occurred—an additional reduction in paddy fields was attempted without any attempt to increase the export

150

7 Reconsidering Agriculture, Forestry and Fishery in Japan …

of rice. This vicious circle between Japanese government reducing paddy fields and stabilizing the price of rice continued up to the present (the Japanese government finally terminated its policy of reducing paddy fields in 2018). Though a variety of subsidy measures have been introduced over the years, those measures failed to halt the vicious circle. In my view, the true cause of the government’s policy failure was to mistakenly distinguish between two essentially similar kinds of paddy field. Whereas a first kind of paddy field is recommended to reduce cultivation area, a second kind of paddy field is instead recommended to increase rice production. This latter type of paddy field has three purposes: (i) producing rice to maintain a sufficient reserve level in the case of an emergency, such as a bad harvest; (ii) producing rice for extra processing purposes, such as the production of sake and rice cracker; and (iii) producing rice for the creation of new demand, such as for the creation of new animal feeds, rice flour and rice-ethanol. In fact, the Japanese government’s policy concerning rice is very bizarre. Crop diversification typically refers, on a particular farm, to the addition of either new crops or different cropping systems. Crop diversification typically takes into account the different returns from value-added crops with complimentary marketing opportunities. According to the Japanese government’s policy, there are two different types of rice. In actuality, there is just one type of rice that is, at times, somewhat arbitrarily regarded as a different new crop. The average price of rice for the three purposes previously mentioned, i.e. for the purposes of maintaining emergency reserve, supplementary processing and stimulating new rice demand, is set lower than the price of rice produced on paddy fields that are subject to the recommendation to reduce paddy field area. As a result, the government was obliged to preferentially give a variety of different subsidies to rice paddies as differentiated by the end-use of their rice production. For example, JP¥12,000 per 1,000 m2 is awarded for reserve rice and JP¥20,000 per 1,000 m2 is awarded for processing rice. In 2018, the paddy fields which underwent area reduction amounted to 13,860 km2 . On the other hand, paddy rice fields producing reserve rice amounted to 220 km2 , those producing additional processing rice amounted to 510 km2 and for those set for the creation of new rice demand amounted to 1,320 km2 . In total, paddy rice fields producing one of the three categories of rice recommended for increased production amounted to 2,050 km2 in 2018. In addition to the three previously mentioned categories, rice for export is regarded as another separate category of rice. Rice for export, therefore, represents, a fourth category. The Japanese government seems to have assumed that rice for export has no great influence on the domestic rice market. The policy of the Japanese government is indeed very strange since the reduction in paddy field area has, contrary to policy objective, led to increasing rice export without any technological advancement in rice production. Although increasing rice exports were increasing at the time, Japan, in order to avoid tariffs on rice, accepted an import quota of rice at the Uruguay Round of the General Agreement on Tariffs and Trade (GATT) in 1993. This import quota was called minimum access. Specifically, the agreed compensation was an increase

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in minimum access from 5% of Japan’s total rice consumption to 8%. Effectively, Japan’s agreement meant that Japan was required to accept a higher level of imports. In 1999 the Japanese government ceased to tolerate minimum access, however, and shifted its preference to tariffs. Whereas it was just 5% at the time of Japan’s refusal to allow a tariff imposition on rice, the minimum access quota had increased to 7.2% of total consumption in 1999. In 2019, while domestic rice consumption was 8,614 × 103 tons, Japan still imported 888 × 103 tons of rice, 10% of the domestic consumption. Heavy subsidies for Japanese agriculture can be understood using two indicator rates, the nominal rate of assistance and the gross rate of assistance. The nominal rate of assistance (NRA) is defined as the percentage increase or decrease in gross returns, caused by government policies, to farmers. A positive number means a country’s policies are raising agricultural prices and returns. A negative number implies the opposite. The gross rate of assistance (GRA), on the other hand, is the NRA multiplied by the value of agricultural production in a country then divided by the number of farmers in that country. The GRA is the increase or decrease in gross returns, caused by agricultural subsidy policies, to the average farmer in a specific country and expressed in absolute dollar terms. Whereas a positive number implies a nation’s subsidy policies are supporting higher agricultural prices and returns, a negative number implies otherwise. According to Lusk (2016), between 2000 and 2010, Japan’s average GRA was more than US$8,000. This value was the highest among the set of nations assessed by that study. It must also be emphasized that nine countries out of the twelve assessed as having a GRA greater than US$4,000 of GRA are located in Europe: Denmark, Norway, Switzerland, Ireland, the Netherlands, France, Iceland, Germany and the United Kingdom. Lusk’s assessment implies that, without heavy subsidies provided by respective national governments, agricultural sectors in those countries would not be sustained. Although the situation in Europe is not rosy, the situation in Japan is altogether worse. The GRA per farmer in Japan rose over the entire period considered by Lusk (2016), from just US$536 per farmer per year in the 1960s to US$8,653 per farmer per year in the 2000s. Judging from the consistently poor agricultural policy following World War II, it is understandable that gross imports of agricultural products in Japan have been consistently exceeding gross exports of agricultural products. Figure 7.5 shows the net import of Japan, China, Germany, the United States and the Netherlands for five years, 1970, 1980, 1990, 2000 and 2010. It should be noted that Japan’s gross export of agricultural products is much smaller than those of the other countries listed. For example, in 2010 Japan’s export was US$3.22 billion. China, Germany, the United States, the Netherlands exported, respectively, US$36.16 billion, US$66.71 billion, US$118.8 billion, and US$77.34 billion. It should also be noted that export by, for example, the Netherlands, mainly derives from food processing processes— processes that are not necessarily related to agricultural production itself. Japan has been the largest net importer of agricultural products in the world since 1984.

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net import (US$ billion)

60 50 40 30

Japan

20

China

10

Germany

0

the United States

-10

the Netherlands

-20 -30 -40 1970

1980

1990

2000

2010

year Fig. 7.5 Net import of agricultural products (US$ billion) by Japan, China, Germany, the United States and the Netherlands (data is from the site of FAOSTAT http://www.fao.org/faostat/en/#home)

To understand Japan’s agricultural policy, it is absolutely important to understand the history of Japan Agricultural Cooperatives (JA) and its role in Japan’s agricultural sector. JA is an organization of farmers and small-sized corporations that farm under the control of the Agricultural Cooperatives Act. Corporations with either more than 300 employees or more than JP¥300 million worth of capital are unable to enter JA. Nearly all farmers are members of JA. After the Meiji Restoration, Japan was a newly born capitalist country without industrial sectors. So, Japan attempted to obtain capital money from its agriculture sector, its largest economic sector at that time (late 1870s). While the export of silk and tea gradually increased and effectively promoted Japan’s agriculture sector, the standard of living of farmers did not sufficiently improve for a long time period. In fact, it did not improve until 1900, the year in which an industrial union was created and thereby, a way to establish a cooperative union for Japanese farmers was paved (Chiba 2019). Years later, the Second Sino-Japanese War, starting in 1937, plunged Japan into a war-time regime. Simultaneously, the role of the cooperative union for farmers changed radically. The cooperative union for farmers became a government body tasked with the distribution of manures, the collection of rice crops and the purchasing of national bonds under the strict control of the then Japanese government. Every farmer was obliged to become a member of the union and, from 1943, no one was allowed to withdraw from the union. In 1945, after the cessation of World War II, the union for farmers was dissolved by General Headquarters (GHQ) and a new institution of peasant proprietorship was introduced by discarding the landlord-tenant relationship system. Two years later, in order to improve the socioeconomic status of farmers and increase agricultural production, the original form of JA was established under the Agricultural Cooperatives Act. In the present day, as of 2017, there are 652 agricultural cooperative bodies within JA.

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Article 1 of the Japanese Agricultural Cooperatives Act states JA’s objective. JA aims to contribute to the national economy by endorsing: (i) an advancement of cooperative organizations of farmers; (ii) a promotion of agricultural production; and (iii) an improvement of the socioeconomic status of farmers. There are five main business divisions that together encompass JA’s activities: (i) purchasing business; (ii) marketing business; (iii) guidance business; (iv) insurance business; and (v) credit business. Purchasing business deals with supplying fertilizer, pesticide and agricultural machines and tools. Daily necessities for farmers are also supplied by the purchasing business division. Marketing business deals with the sale of agricultural products through distribution networks of JA. Guidance business deals with facilitating technological and management instruction of agriculture, providing information on agricultural and livestock product markets, introducing new crops and technologies for agriculture and providing other forms of farm support knowhow. Guidance business should be given a top priority among all business divisions of JA. Insurance business deals with the National Mutual Insurance Federation of Agricultural Cooperatives, a federation through which life insurance and property insurance are provided. Credit business deals with activities of JA Bank including bank deposits, loans, exchanges and securities sales. In fact, JA Bank is authorized such that it has the same status as a commercial bank under the Checks Act of Japan and enjoys many forms of privileged status. According to the Japanese Agricultural Cooperatives Act, a member of a farm household who either quits being a farmer or is an heir of a famer, regardless of whether or not they have engaged in farming, can keep their membership as a farmer as long as certain business relations with Japanese Agricultural Cooperatives remain intact. So, in 2015, the total number of farm households was 2,155 × 103 , while the total number of members of Japanese Agricultural Cooperatives was 10.3 × 106 capita (4.5 × 106 regular members and 5.8 × 106 associate members). In 2015, the total number of farm households was, therefore, only 21% of the total number of JA members. In fact, the vast majority of JA’s shared facilities are in financial deficit, a reality due to the fact that JA’s shared facilities are shared at low premiums by members who actually have nothing to do with agriculture. Most of JA facility users are petty farmers who engage in farming during the weekend, perhaps with stable income from other non-farming jobs. Figure 7.6 shows the business profit for five divisions of JA. Three relatively smallscale businesses, such as utilization business, are excluded. The total profit of JA in 2017 was JP¥1.768 trillion. Guidance business, which is supposed to be the most important business division of JA, earned a negative profit of JP¥24 billion. On the contrary, the joint profit of the credit and insurance divisions was JP¥1.216 trillion for that same year. Those two financial divisions jointly earned 69% of JA’s total profit in 2017. Profit deriving from purchasing, marketing and guidance business accounted for only 23% of JA’s total. In Chap. 5, it was shown that the main operating income of Toyota, Honda and Sony derives from the financial divisions of those companies. In a similar way, JA, which is supposed to earn from agricultural production, earns little from agricultural production and activities related to agricultural production.

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business profit (JP¥ billion)

900 800 700 600

CB

500

IB

400

PB

300

MB

200

GB

100 0 -100

1998

2003

2010

2017

year Fig. 7.6 Profit (JP¥ billion) in Japan Agricultural Cooperatives (JA) 1998–2017, differentiated by in credit business (CB), insurance business (IB), purchasing business (PB), marketing business (MB) and guidance business (GB)

Financial divisions seem to expand too much in many sectors of the Japanese economy, sectors which do not enact a traditional way of producing goods and services such as agricultural products. Financial sectors across the world have grown to the point where they are lucratively able to generate essentially unearned income. This reality is thanks to the privileged status of money and money substitutes, two human inventions that defy the first and second law of thermodynamics.

7.4 Japanese Forestry and Its Basic Problems As of 2015, the world’s forest area was approximately four billion hectares, 31% of global land area (FAO 2016). During the five years between 2010 and 2015, the world’s forest area decreased at a rate of 3.31 × 106 hectares per year. FAO points out that even though, the extent of the world’s forest continues to decline as the human population continues to grow, even though the demand for food and land increases, the rate of net forest loss has been cut by over 50% over the past 25 years. Still, promoting sustainable forest management is vital in order to achieve the Sustainable Development Goals (SDGs) adopted at the UN Sustainable Development Summit in September 2015. It is estimated that at least 80% of Earth’s remaining terrestrial biodiversity is found in forests. In the wake of the discussion made at Earth Summit in 1992, a set of crucial criteria and indicators for sustainable forest management was approved by the United Nations. The voluntary agreement is officially known as Montréal Process Working Group on Criteria and Indicators for the Conservation and Sustainable Management of Temperate and Boreal Forests. For short, it is referred to as the Montréal Process.

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Set in 1995, in total, the Montréal Process entails seven criteria and 67 indicators. Specifically, according to the Montréal Process, the seven criteria are (i) conservation of biological, ecosystem, species and genetic diversity; (ii) maintenance of the productive capacity of forest ecosystems; (iii) maintenance of ecosystem health and vitality; (iv) conservation and maintenance of soil and water resources; (v) maintenance of forest contribution to global carbon cycles; (vi) maintenance and enhancement of long term multiple socioeconomic benefits to meet the need of society; and (vii) adoption of legal, institutional, and economic framework for forest conservation and sustainable management. Sustainable silviculture requires the maintenance of healthy ecosystem functions without reducing human benefits in terms of the quality and quantity of timbers and other forestry-related products. Understanding of how a stand, i.e. a group of trees or tall plants, and its surrounding forest area, responds to silvicultural activities is critical. Furthermore, it is crucial to understand the influence that silvicultural treatment of a stand has on timber production. The first five criteria of the Montréal Process emphasize the role forest plays in sustaining the public goods aspect of forest management. The last two criteria emphasize the benefits humans receive from forest management. In silviculture, it is impossible to simultaneously achieve maximum timber production and maximum ecosystem health functions. The reason being for this situation is analogously explained by the discussion previously made with regard to the early stages of ecological succession and agricultural production. In a forest ecosystem, the maximum net production of a stand is achieved at the later end of the early stage. After that point in time, the net production of the stand gradually decreases over time. At the early stage of a stand, biodiversity is limited in terms of the variety of flora and fauna. During its early stage, a stand also cannot retain much water as both soil macropores and extensive canopy buffers are insufficiently developed. Carbon accumulation in soil at the mature stage of a stand is maximized and it is at that point that carbon balance is maintained. The workforce of forestry is an important element for silviculture in Japan. The total number of forest workers in Japan decreased substantially from 146 thousand capita in 1980 to 45 thousand capita in 2015, a decrease of more than 30%. On the other hand, the number of forest workers over 65-years old remained stable between 11 thousand capita and 20 thousand capita during that period. Perhaps the relatively younger generation left the forestry sector after the retirement of the older generation, without substantial new entry. The percentage of workers over 65-years old for all economics sectors has been steadily increasing in Japan between 1980 and 2015, from 5% in 1980 to 13% in 2015. On the other hand, the percentage of workers over 65 years old in the forestry sector has always been higher than that of other economic sectors. The percentage of forestry workers over 65 years was, except for in the year 2010, above 20% during the entire period 1980 through 2015. About 70% of Japanese territory consists of forested land. In the year 2010, the total forest area of Japan was 25.1 × 104 km2 , out of which private forest occupied 14.5 × 104 km2 (58%), national forest 7.7 × 104 km2 (30%), and public forest 2.9 × 104 km2 (12%). Figure 7.7 shows the volume of planted and natural forest in Japan between 1966 and 2010. Based on silviculture management, a planted forest, is defined as a forest

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forest volume (Hm3)

6000 5000 4000 planted forest

3000

natural forest total

2000 1000 0

1966 1976 1986 1995 2002 2007 2010

year Fig. 7.7 Volume of planted and natural forest (Hm3 ) in Japan 1966–2010

that is predominantly composed of trees established through planting and deliberate seeding and exists at the mature stage. Planted forest includes but is not limited to plantation forest. Plantation forest, based on silviculture management, is defined as an intensively managed planted forest that is composed of one or two species, has just one age class, and has regular tree spacing at the mature stage. Figure 7.7 indicates that the volume of planted forest in Japan has steadily been increasing, along with natural forest, since 1966. Yet, in reality, in Japan, about 70% of planted forest is not well managed. In fact, the basic principles of silviculture management have not been properly practiced since the end of World War II. In Fig. 7.8, change in the self-sufficiency rate of timber supply in Japan is depicted for the period between 1955 and 2016. Complete import liberalization of timber

self-sufficiency rate (%)

120 100 80 60 40 20 0

year Fig. 7.8 Self-sufficiency rate (%) of timber supply in Japan 1955–2015

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began in 1961. Demand for fuel-wood and other wood related products, such as wood for shiitake production, was satisfied by import from foreign countries. In the 1970s, the self-sufficiency rate of timber supply in Japan receded to a value of less than 50%. There are several factors that worked to decrease the self-sufficiency rate up until 2000. First, the demand for wooden houses was reduced. The number of large coniferous trees suitable for oversized timber supply gradually decreased due to large-scale clear-cutting practice. A gradual change in materials used for the construction of residential housing also occurred, and, the process of substituting wood for alternative materials was effectively advanced. Furthermore, certain parts of modern wooden houses do not require domestic forest resources. Instead, imported timber is often used. There is a lack of know-how needed to do effectively market timber and related products. There is also a lack of a good distribution network for wood-related products in Japan. This observation is true, starting at the logging stage and remains valid all the way through to the distribution of final products. It should be noted that the area occupied by planted forest did steadily increase between 1966 and 2010, as shown in Fig. 7.7. Starting around 2000, however, the self-sufficiency rate of timber supply in Japan began increasing. One reason for this is the revival of and increased attention paid to the traditional way of constructing Japanese houses, known generically as the ‘wooden framework method’. There are, of course, other more recent factors that work to raise Japan’s self-sufficiency rate: (i) the depreciation of yen due to the Bank of Japan’s quantitative easing policy; (ii) increase in timber production from the matured stage of silvicuture begun in the years following World War II; (iii) the increased tariff on the timber exported from Russia; and (iv) increased production of plywood made from coniferous trees and associated with the introduction of technological improvements, such as adhesives, realized since 1995 and following shortly after the Great Hanshin-Awaji Earthquake. Looking more closely into the causes of increased timber production, realized since 2000, one notes that the expansion of timber production was realized mostly by family forestry with family labor and not by a large-scale forest management body (Sato et al. 2014). For example, despite the fact that the number of forest management entities decreased by 5% between 2005 and 2010, total timber production increased by 13%. In 2010, about 30% of timber production came from family forestry management, a number which increased by more than 30% between 2005 and 2010. More than 90% of family forestry management occupies less than 1 km2 of forest area. These family forestry management entities are typically also engaged in agriculture. Figure 7.9 shows a time series of data on domestic wood for industrial use, imported round wood and wood products in Japan between 1955 and 2015. Until the early 1990s, wood product has increased in volume up to a maximum of 65.4 Hm3 (1 Hm3 = 1 million m3 ), the quantity attained in 1997. An important turning point for these three types of wood related items occurred in the late 1980s. Since that turning point, imported round wood and domestic wood for industrial use have more or less decreased. Wood product itself increased until 1997. It then fluctuated and followed a trend of general decrease until 2015.

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volume (Hm3)

60 50 40

domestic wood for industrial use

30

imported roundwood

20

wood product

10 0

year Fig. 7.9 Volume of domestic wood, imported roundwood and wood product (Hm3 ) 1955–2016

Silviculture is the practice of controlling the growth, composition, health, and quality of forests in order to meet diverse needs and values. Forest tending operations cover a set of important items that benefit forest crops at all stages of life. Tending operations essentially cover operation on the crop itself and competition for vegetation. They include cleaning, weeding, thinning, felling, pruning, climber cutting and, girdling but exclude actions such as soil working, drainage, irrigation, and burning (Fujimori 2001). Two major purposes of forest tending operations are the sanitation of trees, a practice which prevents chances of insect infestations and disease, and providing tress with more light and water nutrients. Tending operations proactively increase benefits to humans. Cleaning and weeding are two similar terms referring to the practice of selecting particularly desirable trees in a young stand and of removing or killing trees that threaten the further development or survival of those preferred trees. Cleaning refers to the removal or killing of over-topping competitors, trees that are significantly taller than desired trees, and is an action usually performed during the sapling stage. Weeding refers to the removal of herbaceous plants and shrubs that are of the same height, but still competing for resources that could otherwise be used by preferred trees. Weeding is, usually done during the seedling stage. Thinning is the selective removal of trees and is, primarily undertaken to improve the growth rate and health of remaining trees. Thinning is, for example, performed to prevent overcrowding. Overcrowded trees are trees under competitive stress from their neighbors. Felling is the process of cutting down individual trees, an element of the task of logging. Pruning is the process of removing branches of a standing tree flush with the branch collar. Pruning is aimed at increasing the safety of the forester, improving the health or appearance of a tree, or increasing its commercial value. Climber cutting is an operation of removal of a part of a tree that attaches itself to other plants or objects. Climber cutting increases the biomass of smaller trees and shrubs. Climber cutting also enhances the survival of enrichment plantings and seedlings. Girdling is a method of killing a tree, performed by removing a complete

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ring of bark, consisting of phloem and cambium, and thereby preventing the tree’s transport of soluble organic compounds from the leaves to the root. Forest tending operations, in particular thinning, are very important issues for silviculture in Poland and many other European countries. Systematic tending treatments facilitate the development of various functions of forests—both ecological and social. Thinning operations (occasionally combined with pruning) aim to increase the technical quality of wood, improve the hygiene of forests and enhance forest resistance to biotic and abiotic stress factors. The sustainable management of forests, usually serves many functions, although in some cases a given function can predominate over others. The role of thinning, for example, is of particular importance. Following the large-scale extraction of timber performed by the expanded silviculture of coniferous trees after World War II, many areas of Japanese forest were left without careful management operations. For example, thinning and pruning operations were not performed sufficiently. As a result, neglected forest areas were subject to serious soil erosion, landslides and floods as well as to biodiversity loss. The climate is relatively mild throughout the year in most parts of Japan. Most of Japan’s territory is located in Asian monsoon territory and the availability of water resources is more than sufficient for good forest management. It is both hot and humid in summer. Therefore, Japanese forest is full of broadleaf trees surrounded by densely growing herbs and woody plants. Forests full of Japanese beech trees are a typical example of deep Japanese forest representing a pleasant place for animals and birds as well as for humans. When cedar or cypress is planted in Japanese forest after complete clearcutting, a variety of herbs and woody plants begin growing densely. So, the cost of weeding, pruning and climber cutting for young cedar or cypress quickly becomes enormous. Therefore, a high frequency of clear-cutting is not suitable for silviculture in Japan for the case of coniferous trees such as cedar or cypress. A low frequency of cutting or felling is a necessary condition for forestry management in order for it to be successful in Japan because: (i) the cost of weeding, pruning and climber cutting can be dramatically reduced; (ii) the co-existence of trees remaining after thinning, and of their understory, can be enhanced; and (iii) the growth speed of trees remaining after thinning is increased and the sustainable productivity of timber is maintained thanks to enriched stand structures. These proclamations are compatible with the spirit of the Montréal Process. It is crucial to develop human resources in forestry in order to establish an institutional framework of sustainable forestry management. A good precursor, in this respect, is the German Forester system. A prerequisite of a good forester is the knowhow of the processes of selecting trees to be subject to thinning and constructing skid trail for logging. A good forester should take part in the process of determining the classification system for timber products and related material quality grades. A good forester must also guide others working in forestry as well as people who are inclined to enter into forestry in the future. A good forester should occasionally give classes to people who are not necessarily working in forestry. This is true due to the fact that the method of sustainable management of forests is important for understanding the meaning of responsible development. A good forester should also have a good ability to cooperate, intensely, with logging and timber producers as well as with

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building contractors. A good forester could also establish a good relationship with people working for sawmills and large-scale factories producing plywood or engineered wood, the location of which is outside of local forests. In this way, a good forester can obtain a sense of marketing timber and related products to consumers. A good forester should be given a sufficient salary and should have a say in the forest management policy of Japan. On the other hand, the local conditions of a forest area, not only in terms of natural conditions but also in terms of socioeconomic conditions, differ widely. Thus, a good forester should give fair treatment to the differing opinions expressed by various persons.

7.5 Japanese Fishery and Its Basic Problems Japan signed the United Nations Convention on the Law of the Sea in 1983. The preamble of that convention states that the exploration and exploitation of the sea must be carried out for the benefit of mankind irrespective of the geographical locations of nations. According to The State of World Fisheries and Aquaculture 2016 (FAO 2016), about 57 million people were engaged in fishery and aquaculture in 2014. Figure 7.10 shows that harvest from aquaculture surpassed that of catches in 2013 and has continued on a path of rapid increase ever since. World total catches plus aquaculture increased from 87.9 million tons in 1984 to 202.2 million tons in 2016. However, the relative share between catches and aquaculture, as well as, the actual size of those two categories, has changed dramatically. Aquaculture is a type of ‘mechanised’ agriculture occurring in the water and using a variety of external inputs. For example, raising 1 kg of yellowtail typically requires 5–9 kg of sardines (Katsukawa 2012). Emplying

mass (million tons)

120 100 80 60

catches aquaculture

40 20 0

year Fig. 7.10 Catches and aquaculture (million tons) in the world fishery, compiled from data reported by (https://www.jfa.maff.go.jp/j/kikaku/wpaper/h29_h/trend/1/t1_2_3_1.html)

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a terminology introduced previously in the context of energy transformation systems, the current practice of aquaculture is, in fact, a parasite technology. Aquaculture will end if the provision of the external inputs used cannot be maintained. The lesson to be learned from energy transformation systems is that aquaculture requires a huge amount of a specific energy carrier, i.e. fish food, which is mainly derived from small fishes. Sadly, aquaculture is conducted within the territorial waters of nations, locations in which international regulations currently do not apply. Therefore, this type of food production is, in the long-run, against the noble spirit of the United Nations Convention on the Law of the Sea. A new international framework regulating the practice of aquaculture must be implemented. A close look at Fig. 7.10 reveals that, since 2000, total catches seem to have reached a maximum level, a level fundamentally related to the net primary production (NPP) of the sea on Earth. However, according to Climate Change 2013 (IPCC 2013), warming of oceans plays a dominant role in the increase in energy stored in the climate system, accounting for more than 90% of the energy accumulated between 1971 and 2010. In contrast, only about 1% of the energy accumulated between 1971 and 2010 is stored in the atmosphere. A global increase in ocean acidification in all Intergovernmental Panel on Climate Change (IPCC) Representative Concentration Pathways (RCP) scenarios is projected by the end of the 21st century. A large fraction of freshwater species and marine species face increased risks of extinction due to climate change during and beyond the 21st century, especially as climate change begins to interact more with other serious global stressors. Therefore, the world fishing industry should expect to face grave consequences, not only caused by intensive aquaculture and increased worldwide fish demand, but more seriously by the acidification of sea waters due to climate change. Among all countries, Japan has the sixth-largest coastline. Furthermore, its coastline is rich in marine resources. So, the fishery sector in Japan has attracted many people. In fact, the workforce in the Japanese fishery sector was about 1 million capita in 1945. However, the workforce in the Japanese fishery sector has been steadily decreasing, down to 160 thousand capita in 2016, an 84% decrease was realized. The average age of a fishery sector employee in 2016 was 56.7-years old. In that same year, less than 2,000 individuals entered the fishery sector workforce. Curiously, per capita income in the fishery sector is not so bad. Per capita annual income remained relatively stable between JP¥3 and JP¥3.5 million during the period ranging 1986 through 2004, despite the fact that, due to an aging population of the fishery workforce and a decreasing number of fishermen, the total income in the fishing industry has been seen to be steadily decreasing. On the other hand, the Japanese fishery is in grave danger due to the catching of too many fish resources, Fig. 7.11 shares part of that story. In 1984, the quantity of the total catch and aquaculture in the Japanese fishery reached an all-time high of 12.8 million tons (catches 11.6 million tons and aquaculture 1.2 million tons). Since then, the total production of catches plus aquaculture has been continuously decreasing, reaching a minimum level of 4.3 million tons

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mass (million tons)

12 10 8 6 4 2 0

year Fig. 7.11 Catches and aquaculture production (million tons) in the Japanese fishery 1979–2016

(catches 3.3 million tons and aquaculture 1 million tons) in 2016. Under these relatively recently developed circumstances, Japan has imported large volume of fish to satisfy domestic fish demand—2.5 million tons in 2017 alone. Aonuma et al. (2017) describe a brief history of fish caught by trawler in the area of the East China Sea. In the 1960s, the amount of catches there remained more or less around the level of 300 kt (1 kt = 1 × 103 tonnes). Until the 1980s, catches remained around the level of 200 kt. However, since 2000, catches decreased to the level of 6–9 kt, reaching as low as 3.6 kt in 2016. Since the 1980s, fishing operations of the Japanese fleet have not been profitable. Nowadays, the sea near Japan is full of Chinese and Korean fleets, both of which maintain lower operating costs. Considerably diminished marine resources in the sea by Japan have resulted. An international cooperation agreement for the management of fishery resources should be established in order to effectively direct global fishery operations towards a responsible development path. Aonuma et al. (2017) work strongly suggests that: (i) the vicious circle of overfishing causes marine resources to decrease; and (ii) desperate efforts to increase catches ultimately result in far fewer marine resources. There are several policy measures that have incited the vicious circle of overfishing in Japan. Firstly, the United State set up an exclusive economic zone of 200 nautical miles in 1976. Five years later, the policy of the United States was followed in sprit by the United Nations Convention on the Law of the Sea. The Law of the Sea states that the state of origin of anadromous stocks shall ensure their conservation by the establishment of appropriate regulatory measures for fishing in all waters landward of the outer limits of its exclusive economic zone. In this way, Japanese fleets have been gradually have been expelled from good fishing grounds in foreign territories. Considering Japan’s history of large catches, the share of small-sized fish catch increased within Japanese shores. But of course, small-sized fish do not attract Japanese consumers. Thus, the total market value of landed fish decreased considerably.

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The fishery of Norway was once in trouble in another type of vicious circle. Discovery of oil fields under the seabed in 1960 endowed Norway, in an economic sense, a very large fortune. Consequently, the subsidy given to the Norwegian fishery was quite enough for Norwegian fishermen to enjoy technological improvement in their fishing boats and equipment. These improved types of fishing boats and equipment worked to dramatically raise Norway’s fishing capacity, thereby inciting increases in catches in shortened periods of time. The result of this change was, an ultimate decrease in fish stock in the sea areas surrounding Norway and a related decrease in catches over time. To ameliorate the situation in Norway, an individual vessel quota system was introduced. Since the individual vessel quota system in Norway is unique, it merits further discussion. In Norway, a quota is given to a fishing vessel and only when that fishing vessel is scrapped can the individual vessel quota can be transferred to another fishing vessel (Katsukawa 2012). In New Zealand, a quite different quota system is adopted. Introduced in 1986, the cornerstone of New Zealand fisheries management is the Quota Management System (QMS) (Johnson 2004; Fisheries New Zealand 2019). Under the QMS, a yearly catch limit—the total allowable catch—is set for every fish stock. The QMS system gathers an ever-growing body of information about the health of New Zealand fisheries and sets catch limits that ensure that fish stocks remain sustainable. Under the QMS, New Zealand considers 98 species (or species groups) divided into 642 separate fish stocks. Fish stocks in the QMS are separated by Quota Management Areas (QMR). Managing individual fish stocks in QMAs allows for finer control over fish stocks and reflects local conditions. Each year, quota owners receive an Annual Catch Entitlement (ACE)—the right to catch a certain quantity of a fish stock over the course of the fishing year. The amount of ACE that quota holders receive varies and, depends on the TACC (total allowable commercial catch) set for that year. ACE can be bought and sold during the year and commercial fishermen must have enough ACE to cover the QMS fish they catch during the year. If they do not, they face financial penalties. To help monitor and manage the fisheries of New Zealand, the QMS requires regular reporting from fishers and licensed fish receivers (LFRs) There must be scientific principles associated with responsible fishery management. Principles similar in spirit to those of the Norwegian and New Zealand fisheries should be established in Japan. Allowable catch must be set in a modest fashion and must be based on the precautionary principles, thereby allowing adult fish to regenerate sufficient juvenile fry that found the survival of future generations. First, based on available scientific information, an over-fishing limit (OFL) must be determined. An OFL is an annual possible catch of a particular stock of a particular fish species and is set at the maximum sustainable fishing mortality rate. Fishing mortality refers to the proportion of the available fish that are removed by fishing, measured over a small unit of time. Fishing mortality can be translated into a yearly exploitation rate expressed as a percentage of the OFL. In a second step, a harvest control rule is used to determine the acceptable biological catch (ABC). The ABC is a catch level equal to or less than the OFL. Scientific uncertainty is taken into consideration when estimating OFL. Finally, fishery managers use the ABC to establish a total allowable

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catch (TAC). The TAC is usually set to a level below the ABC and accounts for various ecological, social and economic factors in addition to uncertainty deriving from management controls. The final configuration of each TAC must be linked to the idea of fishing effort. Fishing effort represents the amount of fishing gear of a specific type used on a fishing grounds over a given unit of time, e.g. hours trawled per day, number of hooks set per day or number of hauls per day. Japan’s current system is not conducted according to scientifically based information such as OFL, ABC or TAC. Catching fish beyond the ABC will vitiate the sustainability of a fishery. However, in Japan, TAC is always set greater than ABC and even if more fish than TAC are caught, no penalty is made on the fishermen who are responsible. In 2006, Japan set a TAC for seven valuable species, i.e. horse mackerel, chub mackerel, sardine, walleye pollack, Pacific saury, tanner crab and squid. However, Japan catches roughly 350 different species of fish and a more systematic set up of TAC should be proposed. Regulation of those fish species for which no TAC is set, does not currently exist. Therefore, fishermen can catch unregulated fish species as much as they wish! To ascertain the proper regulation of TAC management, the amount of catches must be recorded and monitored using a vessel monitoring system enforced at several stages: (i) at sea, where catches are landed onto fishing vessels; (ii) at landing sites at the time of landing; (iii) at fish auction sites; and (iv) at retail locations. A set of rules must be enforced and properly regulated. In the case of violation of these rules, a financial penalty must be given. Occasionally, a precautionary reduction in TAC allocation can be made if actual catch is below a given TAC over a certain time period. TAC management must also consider the timing of landings and the local capacity of seafood processing facilities. To this end, numbers and localities of landing sites and fishing units, operating from or landing at each site, should be jointly considered. If the quantity of catches is stabilized in Japan, the quality of fish made available to consumers can be dramatically improved. The current system of investment in fisheries must also change, from the system of investment in a speedy catch of a depleting stock, to the system of investment in both improved fish pumps that do not give damage to catches and on-board freezing machines. Naturally, when a TAC and individual quota system is introduced, the amount of catches must be decreased in comparison with the previous non-TAC case. So, a certain type of subsidy must be provided to compensate for the decrease in the income of fishermen. If the TAC system is seen to work better in the long-run and the income of fishermen increases, as would be predictable, then a certain portion of the increased income should be returned to local governments. More detailed rules and regulation must be gradually set up for the individual allocation of the TAC of the region. A set of rules concerning fishing gear and fishing methods must also be set up. It is better to prevent fishermen from entering irrelevant competition aimed at catching fish as speedily as possible. It is also better to prevent over-capitalization of catch equipment aimed at simply making a speedy catch. The timing of landing at landing sites must also be planned in advance. Seafood processing companies should not have to withhold redundant processing capacity. Idle capital should be reduced.

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Such planning can also save on labor costs. When the weather is wild, fishermen should not have to go to sea, thereby maritime accidents could be reduced. An exclusive right to utilize coastal fishing grounds is given to local fishermen unions, but there are no systematic rules that regulate offshore fishing areas. Therefore, only certain types of marine resources, for example, shellfish such as sea urchin or abalone, are controllable by the current regulatory system.

7.6 Conclusion Fossil fuels are contributions made by biological debris that has undergone sedimentation. These hydrocarbon fuels are the result of biological activities by organisms, animals and plants over vast stretches of land and accumulated over half a billion years. Fossil fuels can guarantee the essential merits of the manufacturing sector, i.e. tremendous reductions in land and labor requirements. In this way, manufacturing can escape from natural cycles such as the diurnal cycle and, seasons and can establish an artificial process where it is possible to produce, both in terms of scale and in terms of variety, commodities at a higher rate than agriculture, forestry and fishery. Manufacturing can, in this way, become relatively independent of the conditions dictated by nature. Thus, the amount of production per unit area can be raised dramatically and the requirement of land can also be reduced dramatically. In this way, the meaning of land in economics is changed. In fact, land which includes the water zone—the zone that is the source of organic matters—is no longer used in the standard representation of economic production. Land in conventional economics is Ricardian land, i.e. indestructible pure space having essentially nothing to do with biological activities of soil and water areas (Ricard 1951). In traditional agriculture, land and water are two inseparable, related resources. Land and water are production factors in agriculture that serve as joint inputs and that are related to the surrounding landscape. As explained in Chap. 5, a strong anticipation of a sort of perpetual economic growth due to the speedy expansion of the manufacturing sector, supported by massive use of fossil fuels, has been accompanied by a rapid development of international monetary systems. International monetary systems have ingeniously facilitated an acceleration based on the intrinsic forward-looking character of investment opportunities aimed towards further growth. Therefore, fossil fuels and money have become a pair of driving wheels in our modern industrial society. On the other hand, in the process of rapid economic development, the fundamental role of agriculture, forestry and fishery has been completely forgotten. The analysis presented by Nordhaus (1992) in Science is a typical example of such an attitude. Conventional economists like Nordhaus ignore the biophysical significance of agriculture, forestry and fishery sectors simply because the monetary contribution to GDP by these sectors is small and has been continuously decreasing. In fact, climatic change is becoming a serious central concern that might threaten the stability of net primary production (NPP) systems related to agriculture,

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forestry and fishery. According to the IPCC’s Fifth Assessment Report (2014), most anthropogenic climate change is pervasive and irreversible on a multi-century to millennial time scale unless there is a sustained major reduction in greenhouse gas emissions. In many regions, changes in precipitation have altered hydrological systems including underground aquifers, thereby causing severe climate-related impacts such as heat-waves, droughts, floods, cyclones and wildfires. Such climate variability presents significant danger to ecosystems, particularly in developing countries with low income. Marine life such as coral reefs will face progressively lower oxygen levels and increased ocean acidification, with associated risks exacerbated by the ocean’s rising temperature. Global redistribution of marine species and a reduction of marine biodiversity in sensitive regions will endanger fisheries that rely on healthy marine ecosystems. Rural areas will likely experience major impacts on water availability, food security, infrastructure and agricultural incomes including shifts in the production areas of food and non-food crops. The IPCC (2014) report implies that unless fossil fuels, one of the two wheels of industrial development, can be replaced by alternative primary energy sources, climate change will seriously, perhaps catastrophically, threaten NPP, the most important biophysical basis for biological life on Earth and that which ultimately regulates the economic production of the agriculture, forestry and fishery sectors. While the GDP share of the agriculture, forestry and fishery together is a small fraction in the advanced modern economy, NPP is non-substitutable. Human life heavily depends upon it. Georgescu-Roegen (1992) stigmatized the idea of sustainable development as a dangerous snake oil. According to Georgescu-Roegen (1971), the primary objective of economic activity is the self-preservation of the human species. Self-preservation, first of all, requires the satisfaction of all necessities that are of a purely biological nature and that are absolutely indispensable for human survival. Those biological necessities derive mainly from NPP and closely relate the to agriculture, forestry and fishery sectors. Therefore, on behalf of the future generations, a serious reorientation of the agriculture, forestry and fishery sectors must be considered as part of a way towards responsible development, not only for Japan but also for all other nations.

References Aonuma Y, Sakai T, Kawauchi Y (2017) The 2017 Assessment of marine resources in the East China Sea’ (in Japanese). Fisheries Agency of Japan and Japan Fisheries Research and Education Agency. http://abchan.fra.go.jp/digests2017/details/201772.pdf Chiba JA (2019) The beginning of the Japan Agricultural Co-operatives (in Japanese) http://www. ja-chiba.or.jp/00page/01top_menu/01what_ja/whatja_3start.html. Accessed 6 Dec 2019 Clark C (1940) The conditions of economic progress. Macmillan, London FAO (2016) The State of World Fisheries and Aquaculture 2016. FAO, Rome Fisheries New Zealand (2019) Quota management system, Ministry for Primary Industries of New Zealand. https://www.mpi.govt.nz/law-and-policy/legal-overviews/fisheries/quotamanagement-system/. Accessed 6 Dec 2019

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Fujimori T (2001) Ecological and silvicultural strategies for sustainable forest management. Elsevier, Amsterdam Georgescu-Roegen N (1971) The entropy law and the economic process. Harvard University Press, Cambridge, Mass Georgescu-Roegen N (1992) Personal communication with Kozo Mayumi Holmgren D (2019) Essence of permaculture. https://files.holmgren.com.au/downloads/Essence_ of_Pc_EN.pdf?_ga=2.268524017.1237072340.1576544319-2059029809.1576197103. Accessed 17 Dec 2019 IPCC (2013) Climate change 2013: the physical science basis. In: Stocker TF, Qin D, Plattner G-K, Tignor M, Allen SK, Boschung J, Nauels A, Xia Y, Bex V, Midgley PM (eds) Contribution of working group I to the fifth assessment report of the intergovernmental panel on climate change. Cambridge University Press, New York IPCC (2014) Climate change 2014: synthesis report. Contribution of working groups I, II and III to the fifth assessment report of the intergovernmental panel on climate change. IPCC, Geneva, Switzerland Johnson D (2004) Hooked: the story of the New Zealand fishing industry, completed by J. Haworth. Hazard Press, Christchurch Katsukawa T (2012) The problems of the Japanese fishery (in Japanese). NTT, Tokyo Kurihara Y (1975) Yuugen no Seitaigaku (ecology in bounded systems). Iwanami, Tokyo Lusk JL (June 2016) The evolving role of the USDA in the food and agricultural economy. Mercatus Research. Mercatus Center at George Mason University, Arlington, VA. https://www.mercatus. org/system/files/Lusk-USDA-v1.pdf Mayumi K (1991) Temporary emancipation from land: from the industrial revolution to the present time. Ecol Econ 4:35–56 Nordhaus WD (1992) An optimal transition path for controlling greenhouse gases. Science 258:1315–1319 Ricardo D (1951) On the principles of political economy and taxation. In: Sraffa P (ed) The works and correspondence of David Ricardo, vol 1. Cambridge University Press, Cambridge Sato N, Kouroki K, Yanaka S (2014) A new era for forestry management (in Japanese). Ruralnet, Tokyo Shingu H (2013) Personal communication with Kozo Mayumi Smith A (1976) In: Cannan E (ed) An inquiry into the nature and causes of the wealth of nations. The University of Chicago Press, Chicago Vitousek PM, Ehrlich PR, Ehrlich AH, Matson PA (1986) Human appropriation of the products of photosynthesis. Bioscience 36(6):368–373

Chapter 8

Budget Deficit Problems and Reexamining Soddy’s Schemes of Compound and Simple Redemption

8.1 Introduction In Japan, the problems of general account budget deficit and increasing outstanding national bonds are due to the collapsing social security systems, the struggle to maintain an aging population and sluggish GDP growth. This chapter deals closely with several serious problems concerning budget deficit and how to redeem the increasing numbers of outstanding national bonds. The trend of increasing government debt in relation to national budget deficit is a common symptom of materially advanced nations. The percentage of government gross debt divided by GDP for Japan, the United States, Germany, France and Italy between 2004 and 2019 is shown in Fig. 8.1 (the data is from IMF 2019). Gross debt consists of all liabilities that require the payment or payments of interest and/or principal by debtors to creditors at a specific future date or dates. Gross debt includes debt liabilities in the form of special drawing rights (SDRs), currency and deposits, debt securities, loans, insurance, pensions, standardized guarantee schemes, and other accounts payable. Thus, all liabilities in the Government Finance Statistics Manual (GFSM) 2001 are debt, except for equity and investment fund shares as well as financial derivatives and employee stock options. During the entire period between 2004 and 2019 and among the countries assessed, Japan’s relative government gross debt compared with GDP has remained outstandingly high. For example, in 2019, the percentage of Japan’s government gross debt divided by GDP was 237.5%—much higher than Italy’s 133.4%. Of course, some claim that Japanese governments and Japanese citizens have enormous amounts of financial assets. However, recall that all forms of money and money substitutes are, after all, a debt on the Japanese community as a whole. Ultimately, they are a debt on the whole world since those money forms require payment to the owner of the debts in terms of goods and services. Too much money stock is, in reality, a menacing curse cast on a global scale. Under the gravest debt trap of Japan described above, this chapter discusses several serious problems concerning budget deficit in Japan and a theoretical scheme © Springer Nature Switzerland AG 2020 K. T. Mayumi, Sustainable Energy and Economics in an Aging Population, Lecture Notes in Energy 76, https://doi.org/10.1007/978-3-030-43225-6_8

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government gross debt/GDP (%)

170 250 200

Japan

150

USA Germany

100

France Italy

50 0

year Fig. 8.1 Percentage of government gross debt compared with GDP at the 2019 prices for Japan, the United States, Germany, France and Italy 2004–2019

of how to redeem the increasing numbers of outstanding national bonds of Japan. Section 8.2 deals with the general principles of national budget that must be followed by any national government. Particular attention is paid to the situation of Japan. Section 8.3 mainly discusses the two types of national budget, i.e. general account budget and special account budget. The history of special account budget is also discussed. Section 8.4 begins with a discussion on the status of the balance of outstanding Japanese bonds. According to Article 5 in the Public Finance Act of Japan, the Bank of Japan is not legally permitted to underwrite newly issued national bonds. It is shown, however, that the recent monetary policy of the Bank of Japan, i.e. the drastic quantitative easing policy that started in April 2013, is an act of violation of Article 5 of the Public Finance Act. The amount of national bonds held by the Bank of Japan is shown to currently be greater than that of all of Japan’s commercial banks. Soddy once proposed an interesting scheme of bond redemption, a scheme which he termed compound redemption. The compound redemption scheme is unique in that the interest upon past bond purchases made by a government and the income tax payment on bond-holders are both employed for the redemption of national bonds. Namely, the income-tax levied on unearned incomes is earmarked for use as bond redemption and the interest on the bonds outstanding is used to purchase the remaining principals of bonds. Both the income tax and the interest acquired by the government are not used as sources of revenue for the defraying of government expenditures. In Sect. 8.5, Soddy’s two schemes, including compound redemption, are introduced along with a set of tax rates and interest rates. Numerical examples are given to understand the fundamental redemption framework that effectively reduces the irrelevant growth of virtual capital. Virtual capital includes financial assets that are sources of unearned income which do not by themselves make any contribution to the increase in useful real capital, capital such as public works. Section 8.6 provides a summary of Chapter 8 and discusses two crucial factors that incentivize the

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perpetual deficit of public expenditure: (i) the context of the current society, where the maximization of present monetary value is situated on the center stage of individual decisions, and (ii) the power of expansion of bureaucratic organization. People within industrial society are exceptionally accustomed to financial transactions that discount the benefits of future generations. Therefore, not only monetary burden but also biophysical burden tends to be shifted onto future generations. Bureaucratic organizations, on the other hand, attempt to find niches in which to expand organizational power whenever circumstances allow. These two factors are also crucial when reconsidering how to reduce unnecessary public expenditures.

8.2 The General Principles of Public Budget In order to raise the level of public welfare when budgetary activities are conducted, all national and local governments must follow proper procedures and efficient operations. All budgets must specify revenue sources and the allocation of expenditures for various governmental activities. Allocations of expenditures must furthermore be continuously reapproved by democratically elected representatives. Developing budgetary legislation, therefore, requires the setting up of certain principles, principles that must be followed by all forms of government conducting budgetary activities. These principles are related to several stages of budgetary operations: the preparing of budget projects, approval by national and local representatives, the improving of the transparency of the budget execution process and the reporting of the final result of budget expenditures to the public. The budgetary principles that have been developed by multiple nations share a set of common denominators (e.g. Murray 1970; Florina 2013). In my view, the fundamental principles adopted by the Japanese government can be summarized as: (i) the strict control principle, enforced by democratically elected representatives, i.e. the Japanese Diet, over the budgetary process; (ii) the publicity principle; (iii) the unity principle, which implies the principle of non-diversion between different revenues sources and expenditures; and (iv) the universality principle, which includes the systematic specification principle, implying thereby the specification of all revenue and expenditure items. The strict control principle is stipulated by Article 83 of the Constitution of Japan. ‘The power to administer national finances shall be exercised as the Diet shall determine.’ Indeed, the democratically elected representatives, the Diet, make the final approval of national finances. Therefore, the strict control principle implies the Diet’s monitoring and supervising of all stages of the budgetary process, e.g. including the investigation on the administrative body of the government and the inspection request by the Board of Audit of Japan. This strict control principle has a supreme position over the other principles mentioned. In fact, the publicity principle is a direct consequence of the strict control principle, enforced by the Diet. The publicity principle is clearly stated by Article 91 of the Constitution of Japan and states that ‘at regular intervals and at least annually

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the Cabinet shall report to the Diet and the people on the state of national finances’. Another important point of the publicity principle is that it implies that Japanese citizens should be well informed on the state of national budgetary procedures. In this way, fiscal democracy is substantiated and transparency of the entire budgetary process is promoted. The unity principle implies that public revenues and expenditures are recorded in a single document in order to ensure the effective use of public expenditures and monitor the public finance. Although the budgetary unit presents a number of advantages, more and more states have abandoned full compliance with this principle, instead preferring plurality budget processes. This has happened due to various needs imposed by changes in the socioeconomic conditions of various countries, needs that include the need for a speedier budgetary process. The unity principle requires that the government’ revenues shall be presented in gross and be used for the covering of all expenditure in the budget. The unity principle thus prohibits the earmarking of revenues. This principle has, in all countries, long been regarded as a norm for public budgeting. Nonetheless, it has often been ignored, probably because it is easier for a government to show cause for a new tax or a new duty if that tax or duty can be imposed for an urgent specially stated purpose. The modern state, however, must engage to an increasing extent in different forms of commercial activity. The object of those commercial activities is to provide for public requirements. In particular, public utilities, as well as other activities, need be provided for, the services produced by which are in whole or in part financed by taxes and duties. According to the universality principle, the budget of the Japanese government should be a complete budget. The revenue side of the budget should include all the receipts from the state, and the expenditure side of the budget should include all expenditures. Thus, a prerequisite for the strict application of this principle is that revenues and expenditures should be separated in the presentation of a gross account.

8.3 Budget Deficit Problems of Japan: Expanding Special Account Budgets As already stated, according to the unity principle, a government budget should be recorded in a single document. The unity principle implies the prohibiting of the earmarking of revenue for a particular expenditure. The rationale behind the unity principle is that, if there are simultaneously several different budgetary units with complicated and obscure interrelations, it is very difficult to control the proper functioning of the budgetary process and efficient use of budgets. However, in the process of increasing the number of different activities, the giving of more discriminatory powers to governmental administration bodies becomes a norm. In this way, several different budgetary forms have come to co-exist in Japan.

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In this context of expanding commercial activities, Article 13 of Public Finance Act of Japan stipulates that three are there cases that, an addition to general account budget, can establish a special account budget: (i) if the state undertakes a particular project, such as management of the national pension system; (ii) if the state attempts a management of special funds, such as foreign exchange management; and (iii) if the state is required to manage a special account budget where revenues and expenditure are earmarked, thereby distinguishing it from general account budget items such as the National Debt Consolidation Fund. When the Mint Office of the Meiji Government was established in 1867, a sort of special account budget was created under the name of ‘separate account’. The original form of the special account budget, consisting of 33 different accounts, was introduced in 1890, following the Meiji Government’s enacting of legislation called the ‘Meiji Account Act’ in 1889. The number of special account budgets reached 60 in 1904, the majority of which, 34 budgets, were related to higher education systems such as the former imperial university budget (Ministry of Finance 2018). After World War II, as the budget size of the government expanded rapidly and a variety of new economic activities administered by different bodies were established, the total number of special account budgets steadily increased up until 1966. However, after two series of special laws were enacted in 2006 and 2013, in order to reorganize the total system of special accounts, the number of special account budgets steadily decreased. Currently, as of September 2019, there are 13 special account budgets. This count includes the special account budget for recovery from the Great East Japan Earthquake. While the number of special account budgets has decreased, what has actually happened is simply a masquerading of excluded account budgets as non-special account budgets. The account names of excluded budgets were changed to names such as the Fiscal Loan Fund Account and the Account for Allowances for Children. Those accounts are so-called ‘Kanjyo’ in Japanese. Currently, as of September 2019, there are 50 Kanjyos. Furthermore, there are many additional forms of accounts that are managed by a variety of administrative bodies and private forms of management. To itemize a few of them: (i) 33 statutory corporations, such as the Japan Broadcasting Corporation (NHK) and the Japan Pension Service; (ii) 10 government-authorized corporations, such as the Japanese Red Cross Society and the Nuclear Damage Compensation and Decommissioning Facilitation Corporation; and (iii) 87 incorporated administrative agencies, such as the national university corporation, to which, for example, Tokyo University belongs. With a more detailed analysis of the joint amount of the general account budgets and special account budgets, the reader can immediately understand that special account budgets still survive, albeit tacitly, and thereby the overall structure of public expenditures in Japan has not changed. One most noticeable budget transfer is the huge amount of funds routinely transferred from the general account budget and destined for the special account budget. Such routine transfers of public funds, without the Diet’s direct control, actually represent a serious violation of each of the budgetary principles mentioned previously. In 2017, the general account was treated as if it were JP¥98.1 trillion. Yet, JP¥53.8 trillion, 55% of that amount, was transferred to the special account. In 2018, in a

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similar manner, the general account was treated as if it were JP¥97.7 trillion. Yet, JP¥54.5 trillion, 56% of that amount, was transferred into the special account. In fact, every year more than 50% of the general account budget is transferred to the special account budget. In order to shed some light on the topic, four types of special account budget are examined for the year 2018 and for the purpose of recognizing the fundamental problems of the current budgetary practice in relation to the budgetary principles: (i) the Grants of Allocation Tax and Transferred Tax; (ii) the National Debt Consolidation Fund; (iii) the Pension; and (iv) the Revenue of the National Forest and Field Service. The special account budget of the Grants of Allocation Tax and Transferred Tax is aimed at transferring a certain part of taxes, such as income tax, corporation tax, liquor tax and consumption tax, onto local governments. It is difficult to understand the reason why aircraft fuel tax, such as petroleum gas tax, is included in this special account budget. Additionally, a Kanjyo for special grants to traffic safety measures is framed into the special account budget of the Grants of Allocation Tax and Transferred Tax. On the revenue side, JP¥16.3 trillion was transferred from the general account budget and two special account budgets, i.e. the budget of fiscal investment and loan and recovery from the Great East Japan Earthquake, into the special account budget of the Grants of Allocation Tax and Transferred Tax. However, more intriguingly, JP¥32.5 trillion, some 63% of the total expenditure of this special account budget, is again transferred into another special account budget of the National Debt Consolidation Fund. The special account budget of the National Debt Consolidation Fund is aimed at clarifying the situation of national debt and paving the way towards the ultimate clearance of national debts. This special account budget expenditure derives from many government account budgets. Not only does it derive from the general account budget, but more importantly, it derives from nine special account budgets, i.e. the budgets for foreign exchange funds, measures for energy, a stable supply of food, motor vehicle safety, the National Forest and Field Service, recovery from the Great East Japan Earthquake, the Pension, fiscal investment and loan, the Grants of Allocation Tax and Transferred Tax. The first four special account budgets seem to have nothing at all to do with the National Debt Consolidation Fund, which is mainly involved with issuing national bonds associated with these special account budgets. The total revenue of the National Debt Consolidation Fund was JP¥191.2 trillion. The transfer from the general account budget was JP¥23.3 trillion and that from the other special account budgets specified above was JP¥62.6 trillion. So, about 50% of the National Debt Consolidation Fund consists of transfers from the mentioned account budgets. The special account budget of the Pension includes a strange sort of Kanjyo. Specifically, it includes, accounts for children and child care support. Accounts for children and child care support are to be completely transferred to local governments as a source of expenditures. They fund, for example, child allowance. This is indeed a mysterious budget account within the special account budget of the Pension.

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Special account budget revenue of the National Forest and Field Service was originally established in 2013 in order to clear a total debt of JP¥1.3 trillion by the year 2048. This accumulated debt was incurred within the former special account budget of the National Forest and Field Service. The sources of issuance of refinancing bonds and their interest payments derive from the general account budget. If there are insufficient funds for refinancing bonds, an additional fund is supplied by commercial banks. In 2018, the total revenue of this special account was JP¥350.2 billion, 94.2% of which derives from the issuance of refinancing bonds. The process of refunding in this way can be properly termed as a running solvency scheme. Of course, all expenditure of this special account budget was automatically transferred into the National Debt Consolidation Fund. However, it is a great mystery why this special account budget was not built into the National Debt Consolidation Fund from the beginning. The unity principle can be easily rescued by just such a consolidation. A brief discussion has been made concerning certain important aspects of four special budgets, i.e. the Grants of Allocation Tax and Transferred Tax, the National Debt Consolidation Fund, the Pension, and the Revenue of National Forest and Field Service. The discussion also extended to, how revenues and expenditures are secured in terms of arbitrary transfers among the general account budget and a set of other special account budgets. There is no systematic thinking made on the whole budgetary structure and its relations with other components of different budgetary units. The situation of Japan’s budget is nothing but a haphazard system—a maze of sorts. This problem with the Japanese bureaucratic system is to be reexamined in the conclusion of this chapter. While, thus far, my argumentative line has only been concerned with the disproportionate expansion of the special account budget, an integrated consideration must be given to four public expenditure budgets, i.e. the general account budget (GAB), the special account budget (SAB), the government-affiliated agencies budget (GAAG) and the fiscal plan of local governments budget (FPLGB). Net expenditures on GAB plus SAB (shown as GAB&SAB in Fig. 8.2), GAAB, and FPLGB are shown in Fig. 8.2. The expenditure spent as part of the government-affiliated agencies budget is not substantial enough to merit discussion here. Perhaps because of the serious influence of the economic downturn precipitated by the Lehman Brothers bankruptcy in 2008, net expenditure of GAB&SAB decreased, in 2010, by 13% in comparison with from that of 2005. The net joint expenditure of the GAB and the SAB in 2010 amounted to JP¥238.9 trillion, 80% of the total net public expenditure of Japan. Net expenditure of the FPLG was JP¥55.2 trillion, 19% of the total net expenditure. Those three account budgets jointly amounted to 99% of the total net public expenditure of Japan. According to ‘A Guidebook for the special account budget of Japan in the year 2018’ (Ministry of Finance 2018), an official document in preparation by the Ministry of Finance in Japan, the percentage of total net public expenditure compared with nominal GDP in 2015 was only 37.8%. The ministry claimed that this percentage value was smaller than that of the United Kingdom (42.9%), Germany (44%) and France (56.7%). However, based on the data given by Japan’s Ministry of Finance (2018), my own calculation resulted in the finding that the total expenditure in 2015

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net expenditure (JP¥ trillion)

350 300 250 GAB&SAB

200

GAAB

150

FPLGB

100

Total

50 0 1990 1995 2000 2005 2010 2015 2018

year Fig. 8.2 Net expenditures (JP¥ trillion) on general account budget (GAB), special account budget (SAB), government-affiliated agencies budget (GAAB) and fiscal plan of local governments budget (FPLGB) in 1990–2018

total net public expenditure/GDP (%)

was in fact 54.8%, as shown in Fig. 8.3. Beginning in the year 2000, total net public expenditure in Japan remained higher than 50% of nominal GDP. I believe that the size of public expenditure finance in Japan has already approached a critical point of running insolvency. Of course, it must be acknowledged that many other materially advanced societies are trapped in a similar situation, as already shown in Fig. 8.1. Running insolvency is commonly experienced by materially advanced nations.

60 50 40 30 20 10 0 1985

1990

1995

2000

2005

2010

2015

2018

year Fig. 8.3 Percentage of total net public expenditures of Japan as a percentage of GDP 1985–2018

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8.4 Outstanding National Bond Problems of Japan Japan did not issue national bonds between 1947 and 1964. 1965 was the year in which Japan started to issue national bonds. The newly issued national bonds were about JP¥1 trillion in 1971 and reached JP¥10 trillion in 1978. The trend of increase has continued in more recent years: JP¥130 trillion in 2001 and JP¥149 trillion in 2019. A natural consequence of debt in public finance is an alarming frequency of issuance of refinancing bonds! There are three types of national bond in Japan. The first type is a construction bond. Article of 4 of the Public Finance Act states that government expenditure should, in principle, be provided from all revenues excluding bond issuing and borrowing. However, allowances are made for the following three exceptions: (i) to construct public works; (ii) to provide financial resources as public investment funds; and (iii) to provide financial resources as public loans. Construction bonds are originally issued according to the first exception rule. In Chap. 4, the cash credit system of 18th century Scotland was introduced. That system explains the way in which Scotland in the 18th century created an enormous mass of public works, works based on the principle that the limits of credit, i.e. debt in the form of accommodation papers, was the present value of the estimated future product in Scotland. In the case of construction bonds in Japan, national bonds were occasionally issued simply for the providing of financial resources for public investment funds and loans, without increasing public works. Furthermore, these bonds, if issued for the providing of financial resources, do not necessarily represent the present value of estimated future products, as was the case in the cash credit system of 18th century Scotland. The name ‘construction bonds’ does not, therefore, appear to be suitable. The name ‘construction bonds’ should only have been kept in the case of public works were constructed. Therefore, the two exceptions, i.e. providing financial resources for public investment funds and loans for issuing construction bonds in Japan, must be eliminated. Unfortunately, the institutional and legal setting of authorizing the issuing of national bonds in Japan is incredibly spoiled. In fact, in Japan, if construction bonds are not sufficient to provide necessary public expenditures, then deficit covering bonds are allowed to be issued by way of enacting a special law associated with deficit covering bonds. Furthermore, there are two additional types of bonds: refunding bonds and reconstruction bonds. Reconstruction bonds were, for example, issued after the Tohoku Earthquake in 2011. Because of loose control over the issuing of new bonds in Japan, the balance of outstanding bonds (BOB) is in a constant state of accumulation. Figure 8.4 shows the time series data on BOBs. It consists of construction bonds (CBs) and deficitcovering bonds (DCBs). Up to the year 1998, the outstanding DCBs represented less than JP¥100 trillion. After 1998, that value began rapidly increasing. In 2004, outstanding DCBs exceeded outstanding CBs. In 2019, DCBs represents more than 68% of the total of outstanding bonds. Nowadays, national bonds are issued simply to compensate for the incessant accumulation of debt. This exact situation of Japan

8 Budget Deficit Problems and Reexamining Soddy’s Schemes …

bonds outstanding (JP¥ trillion)

178 1000 900 800 700 600 500

BOB

400

DCB

300

CB

200 100 0

year Fig. 8.4 Balance of outstanding bonds (BOB), construction bonds (CB) and deficit-covering bonds (DCB) 1977–2019 (JP¥ trillion)

can be properly referred to as running insolvency. Alternatively, it can be referred to as eternal debt financing. There is yet another devastating problem associated with the interpretation of Article 5 of Japan’s Public Finance Act. A proper interpretation of Article 5 is crucial in order to make an authentic assessment of fund provision operations by each country’s or region’s central bank. The crux of this devastating problem is that, whereas Article 5 of the Public Finance Act bans the Bank of Japan’s underwriting of public bonds, whenever new bonds are to be issued. However, Article 5 does not ban the underwriting of national bonds by the Bank of Japan, after national bonds are issued. This practice of underwriting national bonds is often misused by the Bank of Japan. A notorious example may be found in the present status of the Bank of Japan’s quantitative easing policy, which started in 2013. Recall that quantitative easing policy was examined in Chap. 5 in relation to the financial divisions of Toyota and Sony. Figure 8.5 depicts the government bond holdings of the Bank of Japan and domestic commercial banks in Japan between 2014 and 2019. It must be remembered that the quantitative easing policy of the Bank of Japan began April 2013 via a fund providing operation that worked to purchase bonds from commercial banks. At the start of 2014, the Bank of Japan held national bonds amounting to JP¥187 trillion. Commercial banks, on the other hand, held national bonds amounting to JP¥652 trillion. Since 2014, a reversal trend may be seen to occur. In 2019, the Bank of Japan held national bonds of JP¥463 trillion (a nearly 150% increase compared to the 2014 value), while commercial banks held national bonds of JP¥395 trillion (60% the quantity of national bonds in 2014). What the Bank of Japan is actually doing stands in violation of Article 5 of the Public Finance Act. However, similar operations have

8.4 Outstanding National Bond Problems of Japan

179

bond holdings (JP¥ trillion)

700 600 500 400

Bank of Japan

300

commercial banks

200 100 0 2014 2015 2016 2017 2018 2019

year Fig. 8.5 Government bond holdings (JP¥ trillion) of the Bank of Japan versus of commercial banks 2014–2019

been made by other central and regional banks in order to cope with Japan’s quantitative easing policy. These operations have been made in an attempt to depreciate the yen against foreign currencies and, by way of which, to increase export.

8.5 Reexamining Soddy’s Scheme of Virtual Capital Redemption Ongoing budget deficit problems created a situation where the issuance of additional national bonds and the reissuance of refinance bonds repeatedly defray increasing governmental expenditures as well as increasing interest payments. The vicious circle of budget deficit expansion and issuance of new bonds and refinance bonds should, based on the noble spirit of Article of 4 in the Public Finance Act, be terminated. In fact, Article 4 of the Public Finance Act states that government expenditure should be provided from all revenues excluding bond issuing and borrowing. Budget deficit is deeply related to another serious problem associated with an aging population— a population that is requiring increasing levels of expenditure on social security systems. This problem is more systematically examined in Chap. 9. Here, the attention is paid on how to redeem national debt. As explained in Chap. 5, capital in this book is considered purchasing power to be employed in either reproductive activities or in expanding productive capacity. Capital provides entrepreneurs, producers and merchants with the command of purchasing power useful for the buying of goods and services. According to this definition, financial assets used solely for increasing money and money substitutes cannot be referred to as capital in this book.

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In Chap. 4, general liquidity is defined as all monetary items. General liquidity includes, for example, coins, bank-notes, credit cards, derivatives and national bonds. Put differently, general liquidity is all forms of money, and money substitutes, i.e. financial assets. In order to deal with Soddy’s redemption scheme, it is then necessary to define a new term, virtual capital. Virtual capital is defined as general liquidity, excluding coins and bank-notes. Virtual capital includes all forms of financial assets that can generate unearned income. Coins and bank-notes, could generate unearned income, but only other forms of financial assets that can generate returns, e.g. credit cards, are regarded as virtual capital. People living in the modern world are very spoiled in the sense that unearned income coming from interest payments and the growth of the principal value of financial assets, assets such as national bonds, is regarded as a natural consequence of the operations associated with the monetary system. However, it must be remembered that return on money is due to the existence of the supernatural power given to money, power given by artificial legal and institutional arrangements. No natural objects or other human-made products can enjoy such supernatural power—unlike money, natural objects obey the law of entropy. Ultimately, goods and services are provided to the owners of virtual capital if that owner presents his or her virtual capital. As Georgescu-Roegen properly indicated, the production of goods and services entails a deficit in biophysical terms. So, an excessive increase in virtual capital is a burden on the whole community, due to the fact that certain amounts of exhaustible energy and materials are required to produce goods and services in exchange for virtual capital. Unfortunately, the issuing of a great number of national bonds and the creating of other forms of financial assets are happening all over the world, a tremendous increase in debt for future generations is being realized. The vast majority of people do not at all understand the dual nature of money: money can be seen as a form of wealth from an individual perspective but can be seen as a debt from a communal perspective. An individual perspective drives demand for more and more virtual capital and demands more and more interest payments. In fact, as the Macleod-Soddy-Allais relation, introduced in Chap. 5, tells us, the present value of interest payments over time can be reached at the present value of the principal. That means that in the modern world, every owner having a principal of US$1 expects to ultimately have US$2, irrespective of the form of the interest rate function, a function of time. As Mark (1934) properly commented in his The Modern Idolatry being an Analysis of Usury and the Pathology of Debt, ‘it is important to realize that we are all usurers’ (p. 3). On the other hand, it is also imperative to look for a proper method to reduce virtual capital as much as possible, thereby eliminating monetary debt for future generations. In this respect, Soddy’s brilliant ideas deserve a close reexamination. The fundamental idea behind Soddy’s scheme consists of two objectives: (i) reducing virtual capital as a source of unearned income; and (ii) imposing tax on unearned income derived from virtual capital. As conceived by Soddy, there are two different redemption strategies: compound redemption and simple redemption. A compound redemption strategy is to impose tax on unearned income from the part of financial assets that is not redeemed and to use interest on the redeemed part of financial assets to buy the part of financial

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assets that has not yet been redeemed. These tax and interest payments are to be extinguished by the government, not to be used to defray government expenditures. A compound redemption strategy is applied to all forms of virtual capital that are not related to capital for producing goods and services and not related to capital for constructing public works. So, a compound redemption scheme is applied to financial assets used for obtaining more and more money without a corresponding increase in real wealth or public works. Of course, it is sometimes difficult to distinguish capital (real wealth and public works) from other purely monetary assets of virtual capital. However, a certain body, represented by the Diet members in Japan must involve suitable procedures for making proper judgements on the nature of different capitals: a wise selection of virtual capital to which a compound redemption scheme must be applied. In contrast to a compound redemption scheme, a simple redemption scheme is a scheme where taxes are imposed only on unearned income from the part of financial assets that is not redeemed. It is clear that a complete redemption is not possible in a simple redemption scheme as there will always remain a part of the asset that exists forever—remainder part that asymptotes to zero. A compound redemption scheme is presented in a mathematical way in Eq. 8.1 and introduced by the following: (i) i is the fractional rate of interest, such as i = 0.05 (5%, compounded annually); (ii) p is the income tax rate, such as p = 0.2 (20%); and (iii) G is the part of virtual capital that is already redeemed, such as G = 0.9 (90% is already redeemed). The following relation, representing compound redemption, can be obtained: Gidt + p(1 − G)idt = dG

(8.1)

Gidt represents interest earned on the redeemed part G during the time period of dt. Gidt can be used to reduce the part that is not yet redeemed. p(1−G)idt represents tax on unearned income, (1−G)i, with a tax rate of p, for the time period of dt and applied to the part of financial assets that is not yet redeemed. The solution of Eq. 8.1, given i an p, is then, G=

 p  i(1− p)t e −1 1− p

(8.2)

Using the relation i−1 = T, T is the period of years in which the principal is redeemed by accumulated interest payment. Equation 8.2 can then be rearranged in the form,   1 1 t = ln (8.3) T 1− p p where ln abbreviates natural logarithm. Figure 8.6 shows the relation between tT −1 and p, the tax rate. Given a tax rate, p, the vertical axis, tT −1 , represents how much time, in terms of T, is required to make

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8 Budget Deficit Problems and Reexamining Soddy’s Schemes …

Fig. 8.6 The relation between complete redemption time and tax rate

(6%, 3.0)

(20%, 2.0) (42%, 1.5)

(100%, 1.0)

a complete redemption. As readers might easily suspect, the higher the tax rate is, the shorter the time needed for the making of a complete redemption. Splitting G into G1 and G2 , where G1 represents the interest earned on the redeemed part G, and G2 represents the tax on unearned income from the part of financial assets that are yet not redeemed, the following relation may be obtained. G = G1 + G2

(8.4)

Using Eq. 8.1, the following two relations may then be obtained, dG 1 = iG dt

(8.5)

dG 2 = i p(1 − G) dt

(8.6)

and

If G = 1, a complete redemption, can be easily obtained. The final forms of G1 and G2 would be as follows.    p 1 1 G1 = 1− ln (8.7) 1− p 1− p p and G2 =

    p 1 1 ln −1 1− p 1− p p

(8.8)

The important factor to be noticed is that both G1 and G2 are independent of i, the fractional rate of interest, and are dependent only on the tax rate, p. The graphical representation of G1 and G2 as they vary depending on the income tax rate, is shown in Fig. 8.7. As the tax rate increases, the interest earned on the redeemed part G1 , decreases.

8.5 Reexamining Soddy’s Scheme of Virtual Capital Redemption Fig. 8.7 The relation between the part redeemed by interest (G1 ) and the part redeemed by taxation (G2 ) in the case of complete redemption

183

(5%, 0.88) (10%, 0.83)

G2

(25%, 0.72) G1

(42%, 0.64)

Next, a simple redemption scheme is introduced. A simple redemption scheme can be applied to certain types of financial assets that are issued in order to construct real capital, i.e. to produce goods and services or public works that can be widely used by citizens. Perhaps surprisingly to the readers of this book, precisely the same result already discussed in Chap. 4, can again be obtained using the logic of a simple redemption scheme. In Chap. 4, Soddy’s proposal that, the principle of a loan of money be decreased according to the interest rate was introduced, e.g. that: a value of the US$100 during the first year should be discounted to its present value, US$95, so that the second year’s interest ought to be five percent of US$95 and so on. The same symbols are then used in the representation of a simple redemption scheme: (i) i is the fractional rate of interest; (ii) p is the income tax rate; and (iii) G is the part of virtual capital that is already redeemed. The following relation, in differential form, is then obtained, dG = i p(1 − G)dt

(8.9)

and the solution for Eq. 8.9 is then G = 1 − e−i pt

(8.10)

Figure 8.8 shows the relation between the redeemed part G and the time, t, required to redeem G under the condition i = 0.05 and p = 0.2. As can be surmised, it would take an infinite length of time to realize a complete redemption. The time required to redeem G, which is less than 1, is indeed much longer than that required by a compound redemption scheme. For example, realizing a redeemed part, G, of 0.99 in a simple redemption scheme would take more than 460 years. On the other hand, it takes less than 41 years to make a complete redemption in a compound redemption scheme. The two schemes exemplified above are nothing but a simple, easy to accomplish, framework. The formidable problem of implementing the two schemes comes from

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8 Budget Deficit Problems and Reexamining Soddy’s Schemes …

Fig. 8.8 The relation between the redeemed part G and t, the time required to redeem G

a different direction since all of us are ‘usurers’ who take it for granted that unearned income is a very natural thing to justify. This justification is irresistible to anyone who lives in the modern world in which there are a variety of ways to acquire unearned income without properly realizing the dual nature of virtual capital. Therefore, it is absolutely necessary to enlighten those people who are so very much interested in opportunities of obtaining more and more virtual capital. It is not well recognized that Keynes, in his paper ‘National Self-Sufficiency’, published in The Yale Review (Keynes 1933), endorsed the way towards not only reducing international trade but, more importantly, towards constraining financial activities within the respective territories of each nation. His own words deserve direct citation: ‘I sympathize, therefore, with those who would minimize, rather than with those who would maximize, economic entanglement among nations. Ideas, knowledge, science, hospitality, travel–these are the things which should of their nature be international. But let goods be homespun whenever it is reasonably and conveniently possible, and, above all, let finance be primarily national.’ (p. 758). Reading Keynes’ paper, I am personally very happy to know that both Soddy and Keynes share senses of the essence of what is wrong with the modern monetary system. The essence of the matter is concerned with a tendency towards overcapitalization, namely, the excessive expansion of virtual capital caused mainly by a separation between monetary ownership of capital and the real responsibility of capital management. Because of this separation, ownership is divided among innumerable individuals who behave based on their own monetary interest without recognizing the deep meaning of the dual nature of money and virtual capital. Excessive virtual capital would create potentially excessive capacity of real capital, capital which is difficult to use to its full capacity. The excess of real capital, unfortunately, induces nations and related individuals to constantly try to find a niche for their unused real capital. So, excessive virtual capital, as well as real capital, causes a stir in incentives toward militarism and aggression in international politics. The great concentration of the effort of nations and individual person’s on expanding virtual capital can neither be a safeguard nor an assurance of international peace (Keynes 1933). Soddy essentially states the same thing: ‘An excess of capital unwanted in peace production,

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in time of war would find an outlet for its unused capacity. So arises the incentive towards militarism and aggression in international politics, in order to secure markets, or alternatively, as serving the same object, to fight about them’ (Soddy 1926, p. 267). If we can appreciate the messages of both Keynes and Soddy, we must try to establish a world where financial activities are primarily national, so that unnecessary fluctuations cause by monetary repercussions can be minimized at the international level.

8.6 Conclusion Perpetual budget deficit is the result of the expansion of public expenditures in support of an aging population, something which has been accompanied by a stagnation of GDP growth. In fact, in the 40 years between 1980 and 2019 in Japan, there are only two years, 1985 (5.2%) and 1988 (6.8%), that achieved a GDP growth of more than 5%. Indeed, issuing national bonds at a large-scale was inevitable under the socioeconomic conditions of an aging society. In this chapter, budget deficit problems and increasing outstanding national bonds were discussed. Subsequently, Soddy’s two schemes of capital redemption were presented. Keynes’ recommendation to let finance primarily remain a national matter was seen to be endorsed by Soddy’s views on financial matters. Aging population and staggering GDP growth are two crucial factors that induce perpetual budget deficit and outstanding national bonds on a large-scale. If population structure is changing and high GDP growth cannot be maintained, public expenditures should be gradually cut to cope with shrinking revenues from GDP. Social security systems are collapsing because much of the expenditures for maintaining those systems are supported by public expenditure and a premium burden from insured persons is left untaken. The fundamental problems of social security systems are discussed more in detail in Chap. 9. There are two sources of the crucial factors that are preventing the deteriorating situation of the public expenditure system from reorienting toward more sustainable budget accounts: the nature of the general public’s mindset within modern democratic society and the expansion power of bureaucracy. As already touched upon, we must grasp the true meaning of the statement that ‘we are all usurers’. Our modern economic calculation is based upon maximization of present value. The principle of maximization of the present value of a particular project is the essence of cost-benefit analysis. It is customary to calculate present monetary value without considering the origin of discounting or the justification for discounting. Discounting is justified only when considering monetary evaluation made by individuals. However, considering monetary evaluation according to an individual perspective is not suitable for a decision concerned with the welfare of all citizens, including future generations. In fact, Jevons (1965), a founder of conventional economics, explicitly states that discounting should not take place. Concerning the time horizon to be considered in conventional economic analysis,

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Stiglitz (1997) honestly declares that economic analysis is concerned with merely ‘the next 50–60 years’. It must be emphasized, however, that the power of discounting in monetary value is remarkable. In 50 years, US$1 decreases to US$0.61 at 1%, US$0.087 at 5%, and US$0.0085 at 10%. Discounting monetary value implies discounting the welfare of future generations in economic terms. So, even defraying the current level of public expenditure is difficult due to insufficient tax revenues. The government defrays the current level of public expenditure by issuing national bonds in order to gain popularity in the eyes of the vast majority of citizens, those who do not accept to reduce public budget. The mindset of modern society forces the government to refrain from accepting a reduction in public expenditures, even when less public expenditure is necessary in order to reduce budget deficit. The situation of continuous budget deficit is, unfortunately, the natural consequence of the mindset currently held by the vast majority of individuals. There is another source of the problems associated with an eternal budget deficit. When discussion was previously made on the subject of excessive expansion of public expenditures, in particular on the special account budget, many names of budgets, originally included as a variety of special account budgets, were seen to have merely been given different names such as Kanjyo, without at all decreasing total public expenditures. A trick was made by the entire bureaucratic organization, a trick of vertical-segmentation and over-compartmentalization of the bureaucratic system whereby ministerial independence may be seen as the most important object of each ministry. Whenever there is a niche for expansion of bureaucratic power, that niche will immediately be occupied as new territory of new bureaucratic bodies. An article in Sh¯ukan Post of Japan, a weekly magazine, titled ‘Misappropriation of Surtax for Reconstruction Fund to Irrelevant Bureaucratic Activities’ deserves special attention in order to appreciate the shameful greedy bureaucracy of the Japanese administration. Greedy actions were taken even while the implementation of reconstruction assistance from the Great Tohoku-Kanto Earthquake in 2011 was urgently needed for the reconstitution of citizens towards their normal lives (Sh¯ukan Post 2019). A surtax for reconstruction funding was created for reconstruction purposes of the people who have been damaged by that Great Earthquake, the amount of which was set at JP¥10.5 trillion. It must be remembered that the amount of such fund is far from satisfactory compared with actual damages to the concerned citizens. Yet, several ministries tried to misappropriate certain portion of that fund to irrelevant activities that have nothing to do with damages made by the Great Earthquake. Japan’s Ministry of Education, Culture, Sports, Science and Technology spent JP¥38.9 billion on construction of gymnasiums and libraries of certain universities that were found to be excessively far away from the areas damaged. The Ministry of Land, Infrastructure, Transport and Tourism spent another JP¥10 billion on national highways in Okinawa and Hokkaido, highways that were not at all damaged by the Great Earthquake. In total, the Board of Audit of Japan identified 326 projects out of 1,401 projects as inappropriate (in fact, illegal!), JP¥1.3 trillion, more than 12% of Surtax for Reconstruction Fund, was spent on projects that have nothing to do with the damage associated with the Great Earthquake. Surprisingly, the Japanese Diet members closely working with groups of bureaucratic administration enacted

8.6 Conclusion

187

the bill by which the Surtax for Reconstruction Fund is maintained as The Forest Environmental Tax. The new total tax is exactly equivalent to the Surtax for Reconstruction Fund. The Forest Environmental Tax has become a permanent source of revenue. This type of strategy is a typical example of the power of expansion of the bureaucratic organization of Japan. This expansion power of the bureaucratic organization of Japan must be drastically reduced in the future.

References Florina B (2013) The applicability of the principles that govern the budgetary activity. Stud Bus Econ 8(1):5–10 IMF (2019) World Economic and Financial Surveys. World Economic Outlook Database. April 2019. https://www.imf.org/external/pubs/ft/weo/2019/01/weodata/index.aspx Jevons WS (1965) The theory of political economy, 5th edn. Augustus M. Kelley, New York Keynes JM (1933) National self-sufficiency. Yale Rev 22(4):755–769 Mark J (1934) The modern idolatry being an analysis of usury and the pathology of debt. Chatto & Windus, London Ministry of Finance (2018) A Guidebook for the special account budget of Japan in the year 2018. https://www.mof.go.jp/budget/topics/special_account/fy2018/index.html Murray CA (1970) Classical principles in modern government budgeting. Int Rev Admin Sci 36(2):109–114 Sh¯ukan Post (2019) Misappropriation of surtax for reconstruction fund to irrelevant bureaucratic activities (in Japanese). Sh¯ukan Post 50(31):56–58, 13 September 2019 Soddy F (1926) Wealth virtual wealth and debt. George Allen & Unwin Ltd, London Stiglitz JE (1997) Reply: Georgescu-Roegen versus Solow/Stiglitz. Ecol Econ 22:269–270

Chapter 9

Collapsing Social Security Systems in Japan: Pensions, Medical Care and Elderly Nursing Care

9.1 Introduction Running solvency of a commercial organization describes a situation in which the assessment of an organization’s total capital assets at current market value (not book value) does not cover total liability. Running solvency does not necessarily precipitate immediate insolvency (Mark 1934). The situation of Japan’s social security systems is, in the long-run, perhaps worse than that of the running solvency of a commercial organization. Rather, the situation of Japan’s social security systems can be properly referred to as running insolvency. It is a situation due to an inverted population pyramid and an associated increasing economically inactive population, decreasing population size, low birthrate and sluggish GDP growth. In light of the topics identified in earlier chapters, a critical assessment of Japan’s pension, medical care and elderly nursing care social security systems is made in this chapter. How collapsing social security systems relate to serious income inequality, reflected in the increasing number of welfare recipients, is also given consideration. Figure 9.1 shows the percentage of population over 65 years old in Japan, Sweden and Norway between 1970 and 2100 (compiled from Statistics Norway https://www. ssb.no/; Statistics Sweden https://www.scb.se/en/; National Institute of Population and Social Security Research www.ipss.go.jp). After the year 2020, the projected percentage rate is shown instead of the observed percentage rate. Roughly after the year 2000, the speed of Japan’s aging situation appears to have dramatically accelerated, reaching 43.9% in 2100. Japan’s rate is, much higher than the rates predicted for Sweden (26.4%) and Norway (28.9%). Unless the Japanese population structure is reverted back to its normal bell-shaped curve, as was previously depicted in Fig. 6.1 of Chap. 6, it seems that the sustaining of Japan’s future social security systems will prove impossibility. Of course, this observation does not mean there will not also be serious social security problems for other industrial nations, nations such as Sweden and Norway, in the future. Sooner or later, aging society and collapsing social security systems will spread among advanced industrial society—it is a fate that that cannot easily be escaped. © Springer Nature Switzerland AG 2020 K. T. Mayumi, Sustainable Energy and Economics in an Aging Population, Lecture Notes in Energy 76, https://doi.org/10.1007/978-3-030-43225-6_9

189

190

9 Collapsing Social Security Systems in Japan: Pensions, Medical Care … 50

population over 65 (%)

45 40 35 30 25

Japan (low)

20

Norway

15

Sweden

10 5 0

every ten years Fig. 9.1 Percentage of population equal to or over 65 years old in Japan, Sweden and Norway 1970–2100

In this chapter, the situation of social security systems in Japan is discussed and projected. In particular, attention is given to the Japanese pension system. A social security system is a set of government-funded services and payments that provide basic needs to citizens who are physically handicapped, retired, or unemployed. Furthermore, public medical care, elderly care, maternal and childcare as well as other services and expenditures are included in the basic provisions of the Japanese social security system. Such provisions can also be supplied by private agencies. Nonetheless, government programs must be provided to the general public. In particular, based only on their income and assets, government assistance must be provided to people who cannot afford to make necessary expenditures. The fundamental problem at hand is shown to be intergenerational inequity due to an aging population: the Japanese workforce will rapidly decrease, in relative terms, due to Japan’s aging population. Unless Japan’s inverted population pyramid is rectified, the miracle of supporting the present social security systems will never be realized. The reason is simple enough. The prospectus for available fossil energy is not so rosy, so Japan’s biophysical support base is shrinking. In other words, it will be difficult to maintain the historical trend of a reduction in labor hours by increasing the supply of fossil fuels. Furthermore, the rapid growth of capabilities of money and money substitutes has increased the number of people looking for unearned income in the international asset market. The attitude of that endeavor, is a general addiction to ever higher monetary returns. On the other hand, because of an ever-increasing stock of money and money substitutes, the average interest level (asset returns in general) tends to lower in the long-run. Unfortunately, the maintenance of pension funds is presupposed by a sufficiently high interest rate. So, the trend of general decrease in monetary returns will cause the pension system of Japan to plunge into trouble. Section 9.2 deals with the Japanese pension system. It also provides a short history of that system. Section 9.2 discusses a few issues associated with how to promote the employment of both female workers, and senior citizens who are willing to work

9.1 Introduction

191

after retirement. Section 9.2 also discusses whether the Japanese pension system is sustainable in terms of its replacement ratio. Replacement ratio refers to the ratio of an individual pension benefit entitlement to average pre-retirement earnings. Section 9.3 examines three Japanese public healthcare insurance systems, i.e. workplace insurance, national health insurance and medical care for senior citizens over 75 years old. Section 9.3 also touches upon the history of medical care systems in Japan. It is shown that, in particular because of an extremely low premium burden, both the national health insurance scheme and the medical care scheme for senior citizens over 75 years old, are already with a status of bankruptcy. Unless the already enormous amount of public expenditures poured into these two systems increases in the future, those schemes will cease to function. Section 9.4 examines the elderly nursing care system. The structure of premium burdens in that system is revised every three years. The newest revised version, in effect since August 2018, is reoriented toward placing more financial burden on higher-income earners for both of two categories of the insured persons, i.e. a primary insured person (greater than or equal to 65 years old) and a secondary insured person (greater or equal to 40 years old but less than 65 years old). Section 9.4, the conclusion, discusses the fundamental factors that accelerate the worsening trend of Japan’s social security systems.

9.2 Japan’s Pension System Article 25 of the Constitution of Japan stipulates that all people shall have the right to maintain the minimum standards of a wholesome and cultured living. Article 25 also states that, in all spheres of life, the Japanese state shall use its endeavors for the promotion and extension of social welfare, security, and public health. Therefore, the state of Japan must provide a pension system that is compatible with Article 25. The management of the pensions of blue-collar workers was historically based on a fully-funded pension scheme where contributions are invested to fully pay for future pension payments. The historical pension system described is completely different from the current pension system in Japan, which is a pay-as-you-go pension system in which state pension benefits are financed by contributions levied from the working generation. The pension system of blue-collar workers was expanded to cover male whitecollar workers and female workers in 1944. It has developed into a system similar to the current employee pension insurance system. A few years after its expansion, a pension system called “Onkyu” was introduced. ‘Onkyu’ was the first form of pension for injured military personnel and bereaved families. Onkyu did not require any advance payment in the form of insurance fees. After a series of updates to the system, starting in 1948, Onkyu was gradually transformed into a mutual aid pension system where all public servants receive retirement pension. On the other hand, there did not exist a pension system for self-employed persons or workers in the agriculture and fishery sectors until 1961, the year when the national pension was created. With its introduction, all workforces were a part of one of the

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9 Collapsing Social Security Systems in Japan: Pensions, Medical Care …

various pension systems mentioned, excepting dependent spouses of a person insured in the employee pension system, basic disability pension system or basic survivor pension system. Compared with the national pension system, benefits received from employee pension are usually much higher, so it was generally accepted that the spouse of a person insured within the employee pension was not required to be covered by any pension system. Upon an insured person’s decease, however, the otherwise protected spouse of the deceased becomes pensionless. A new category for dependent spouses, Category III insured persons, was therefore introduced in 1985 to cover otherwise uninsured persons. Currently, there are three categories of insured person under the Japanese national pension system: (i) Category I insured persons, aged between 20 years and 59 years and, including non-Japanese residents who have paid at least a certain amount in monthly contributions; (ii) Category II insured persons who work at a company, factory or such workplaces, and are covered by an employee pension insurance system, including the employee pension insurance system (N.B., the current employee pension insurance system was merged with the mutual-aid pension insurance system in 2015); and (iii) Category III insured persons, who are in the role of a dependent spouse of a Category II insured persons and are aged between 20 years and 59 years. It should be lastly noted that the amount of pension benefits for Category II insured persons depends on how much money that person has paid into the government pension system up until their time of retirement. There are three types of national basic pension benefits amount, i.e. a basic oldage pension, a basic disability pension, and a basic survivor pension. For basic oldage pension, an insured person must have paid national pension contributions for 40 years. This condition is being considerably revised to induce younger generations to pay national pension contributions. The maximum amount to be paid, starting at 65 years of age, in 2019, is JP¥780,100. Basic disability pensions, on the other hand, are received by persons who become sick or injured while they were covered by the national pension system and in the case that that sickness or injury eventually causes disability substantial enough to be classified as either a Grade 1 (JP¥975,125) or Grade 2 (JP¥780,100) disability (financial payments as of 2019). Basic survivor pension is received, when a person insured by the national pension system dies, whereupon JP¥1,004,600 is paid out to their bereaved dependent spouse taking care of at least one child. There are several problems facing the promotion of female employment in Japan. Favorable reduction treatment is given to a household with a full-time housewife: (i) whether or not the present tax deduction treatment for Category II insured persons in relation to Category III insured persons is justifiable; and (ii) whether or not the present spouse allowance treatment is acceptable within the Japanese tax system. A drastic revision of the Japanese tax system is required before female workers can be effectively encouraged to enter into the job market and in order to cope with the problems associated with an aging population. The age of eligibility for receiving pension payments should be planned to be gradually raised to 75 years old for the people willing to work until that age. So

9.2 Japan’s Pension System

193

the government, as well as employers, should consider how to promote employment opportunities for the elderly up until, at least, 75 years of age. Retirement ages should be rearranged up to 75 years of age or continued employment systems serving elderly people should be implemented. Depending on the working skills of elderly people, diversification of employment patterns should also be introduced step-by-step. In other words, employment contract types, other than regular employment, should be increased for elderly people. As already mentioned, Japan’s employee pension system and the mutual-aid pension system were finally merged in 2015. Two basic changes were effectuated as a result. The first basic change is represented by the fact that the insurance fee for people under a mutual-aid pension increased to coincide with that of the level of employee pension. The second basic change has to do with an additional payment that used to be paid for mutual-aid pensions, a payment besides the basic old-age pension and the regular mutual-aid pension benefits. The amount of additional payment was historically set to roughly 20% of the benefits of the mutual-aid pension for a person who has worked in the public sector for more than 20 years. This additional payment used to be paid without paying insurance premiums. After the merging of the two pension systems, in order to compensate insured persons of the mutualaid pension system for decreased payments, which are equivalent to that additional payment historically made, a new system was introduced. Within the new system, insurance fees began to be collected as an investment fund that is used for the compensation of such decreased payments. The maximum level of such insurance fees is set at 1.5% of each public worker’s standard monthly remuneration. The merging of the two different pension systems—the employee pension system and the mutual-aid pension system—was said to be able to achieve fairness and a sustainable management of the national pension system. The true reason behind the merging may, however, be different. In fact, before the system merge, the mutual-aid pension system was collapsing due to the continuous decrease in the pension support ratio. The pension support ratio is defined as the ratio of the number of pension subscribers to the number of pensioners, i.e. how many pension subscribers financially support one pensioner. Pension support ratios for the employee pension system and mutual-aid pension system between 1970 and 2010 are provided in Fig. 9.2. In 1970, the pension support ratio for the employee pension system was over 42. For the mutual-aid pension system, the support ratio was slightly less than 10. Even in 1970, the pension support ratio for the mutual-aid pension system was rather small in comparison with that of the employee pension system. In 2010, the pension support ratio for the mutual-aid pension system decreased to 1.53. On the other hand, the pension support ratio for the employee pension maintained a value slightly greater than 2. Perhaps the trend of a decreasing pension support ratio is the true reason why the pension system merge policy previously described was adopted—perhaps the merging policy was adopted in order to save the mutual-aid pension system from collapsing. The Japanese Ministry of Health, Labor and Welfare conducts a financial verification every five years. The latest version of that verification was officially publicized

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9 Collapsing Social Security Systems in Japan: Pensions, Medical Care … 45

pension support ratio

40 35 30 25

employee’s pension

20

mutual aid pension

15 10 5 0

year Fig. 9.2 Pension support ratio for the employees’ pension system and the mutual-aid pension system in Japan 1970–2010

August 2019. It contains predictions up until the year 2115 (shown in Fig. 9.3). The financial verification, i.e. ‘Zaisei-Kenshou’, is aimed at examining the long-term sustainability of the Japanese pension system and is based on a quantitative method of analysis, that anticipates changes in socioeconomic conditions: (https://www.mhlw. go.jp/stf/seisakunitsuite/bunya/nenkin/nenkin/zaisei-kensyo/index.html). The financial verification is a crucial document for Japanese citizens, enabling them to see whether or not their pension system is managed well enough for a sustainable aging society. The most important quantitative indicator in the financial verification documents is the replacement ratio, i.e. ‘Shotokudaitairitsu’. If a person were to check the website of OECD’s data portal (https://data.oecd.org), where this ratio is defined, 2 1.8

supporting ratio

1.6 1.4 1.2 1 0.8 0.6 0.4 0.2 0

every ten years Fig. 9.3 Projected old-age supporting ratio for Japan 2020–2115

9.2 Japan’s Pension System

195

however, that person would likely be intrigued by the difference in meaning between the replacement ratio adopted by the Japanese Ministry of Health, Labor and Welfare and the definition of replacement ratio given at the OECD data portal. OECD defines the replacement ratio in two ways, i.e. nominal and net. Both definitions refer to an individual pensioner’s perspective of the future status of pension benefits, benefits which are supposed to be given to the pensioner. The net replacement ratio is defined as the individual net pension entitlement divided by net preretirement earnings. Personal income taxes and social security contributions paid by workers and pensioners are taken into account. On the other hand, the gross replacement ratio is defined as gross pension entitlement divided by gross pre-retirement earnings. The gross replacement ratio measures how effective a pension system is at providing a retirement income to replace earnings, the main source of income before retirement. Both OECD indicators are measured in terms of percentage of pre-retirement earnings by gender. In comparison, the replacement ratio, Shotokudaitairitsu, is, in fact, an irrelevant indicator that does not tell the Japanese citizens anything about the soundness of the management of the long-term pension system. Shotokudaitairitsu is the percentage relation between two numbers that belong to different categories. The numerator of Shotokudaitairitsu is gross pension benefits for a husband and a wife when their pension life starts. The numerator represents a prototypical couple where the husband has worked for the 40 years and the wife is a housewife who has not worked for the 40 years up until the pension starts to be paid out. The numerator does include tax payments and a variety of health care or elderly care premiums. The denominator is net disposable average income for a male worker at the point in time in which Shotokudaitairitsu is calculated. First, the numerator of Shotokudaitairitsu represents pension benefits for two persons. The numerator represents income for one worker. In contrast, before 1985, both the numerator and the denominator of Shotokudaitairitsu referred to an individual person. Second, the prototype of a couple having a wife with no income does not properly allow for an evaluation of replacement ratio. In fact, unless the number of female workers increases, the pension system cannot be sustained. A new set of different types of worker must be examined in order to check the real sustainability of the pension system. Third, though the numerator represents nominal benefits, and the denominator represents net income—tax and insurance payments are not included in the denominator. So, Shotokudaitairitsu is systematically overestimated due to a sort of double effect: including taxes and fees in the numerator and excluding these elements in the denominator. Furthermore, due to the aging population, the persons accounted for in the numerator must increase as the aging process continues. This causes an additional factor leading to an overestimation of Shotokudaitairitsu. Fourth, the numerator represents the most advantageous pensioner—a pensioner who has worked as a full-time worker for 40 years, which is to say the maximum number of working years for a worker in Japan. The choice to represent the most advantageous pensioner also causes an overestimation of Shotokudaitairitsu.

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9 Collapsing Social Security Systems in Japan: Pensions, Medical Care …

Fifth, pension benefits represented in the numerator of Shotokudaitairitsu indicate the first-year of pension benefits after starting pension life. The pension benefits actually received by pensioners must decrease according to the nominal inflation rate. Unfortunately, as far as the present author can see, there is no serious discussion of the crucial difference between these two pension benefits over time. To keep Shotokudaitairitsu at a certain level, a certain amount of wage increase is taken into consideration. In fact, within the financial verification documents prepared by the Ministry of Health, Labor and Welfare, it is assumed in every scenario analysis that the growth rate of nominal wage increase always exceeds the nominal inflation rate. So, the gap between the two pension benefits, i.e. the numerator of Shotokudaitairitsu and the pension benefits that are actually paid, must widen over time. Concerning the basic assumptions adopted by the Ministry of Health, Labor and Welfare, there is an additional element that should be paid due attention: the investment return on pension fund. There are six different basic scenarios, one of which deals with two cases. In every case, it is assumed that the growth rate of real investment return on a pension fund is larger than both the growth rate of real wage and the growth rate of GDP. This is indeed an overly optimistic assumption. After all, Shotokudaitairitsu is a misleading indicator used in the financial verification of the national pension system. An alternative set of indicators must be sought. Anyway, is there any meaning to Shotokudaitairitsu when the percentage of elderly persons over 65 years old receiving welfare assistance payment is more than 40%, as shown in Fig. 9.4? After all, Shotikudaitairits itself represents the relation between a pensioner couple and an average individual worker. This indicator does not say anything about the structural change of an aging population over time. At this moment, it is preferable to examine general social assistance in relation to the basis old-age pension. General social assistance is a system that provides welfare services. It is instituted by the state and the federal government. In the general 50

welfare recipients (%)

45 40 35 30 25 20 15 10 5 0

year Fig. 9.4 Percentage share for welfare recipients of elderly people over 65 years old 1990–2015

9.2 Japan’s Pension System

197

social assistance system, services are provided to the elderly, disabled people, and low-income families. The number of general social welfare recipients increased from 1 million capita in 1990 to 2.2 million capita in 2015. The number of recipients in Japan doubled during that 25 year period, perhaps due to stagnating GDP growth and the expansion of income inequality. From 1990 to 2015, the number of social welfare recipients over 65 years old also increased, from 0.27 million capita to 0.97 million capita. In other words, the number of elderly social welfare recipients, more than tripled. The trend of an increasing number of social assistance recipients among elderly over 65 years old is indeed blatantly evident. A large number of elderly persons in Japan do not receive a sufficient amount of basic old-age pension. In this way, elderly do not have any option other than to resorting to general social assistance. In fact, in 2019, for example, Minato-ku of Tokyo, an elderly of 70 years of age received a monthly general social assistance of JP¥128,330. The maximum monthly basic old-age pension was JP¥780,100 (There is a Japanese site where an amount of social assistant is automatically calculated. See https://seikatsu-hogo.net/area.php?pref=%E6%9D%B1%E4%BA%AC% E9%83%BD). Adjustments to the compatibility between the benefits paid to pensioners in terms of basic old-age pension and the benefits paid to general social assistance recipients must be made. In fact, in other countries, such as in Sweden, an explicit statement is made in this respect. In Sweden, the basic pension benefit called the guarantee pension, is set higher than welfare benefits (European Commission 2018): ‘The guarantee pension, together with the means-tested housing supplement for pensioners (BTP), is higher than the minimum income standard in the system for general social assistance’.

9.3 Japan’s Medical Care System The Japanese public healthcare insurance system consists of three different schemes: (i) the workplace insurance scheme; (ii) the national health insurance scheme; and (iii) the medical care scheme for senior citizens over 75 years old. Salaried workers are subjects of the workplace insurance scheme. Individuals such as self-employed workers, farmers and elderly persons are subjects of the national health insurance system. These three public healthcare insurance schemes cover medical expenditure for Japanese citizens as well as for long-term foreign residents. The total number of insured persons is greater than 127 million. Before the 1920s, the subscription of Japanese citizens to healthcare insurance and life insurance was not obligatory. Insurance benefits, as well as insurance fees, were dependent on these two types of insurance scheme. In 1927, following the enactment of the National Health Insurance Act of Japan in 1922, healthcare insurance and life insurance merged into the old format of the workplace insurance scheme. In 1934,

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9 Collapsing Social Security Systems in Japan: Pensions, Medical Care …

employers with more than four employees were obliged to subscribe to the workplace insurance scheme. Between then and now, the workplace insurance scheme has developed three distinct types. In total, there are more than 3,000 providers of workplace insurance scheme in Japan. The three distinct types of the current workplace insurance scheme are: (i) employment-based health insurance for employees working for major enterprises (totaling more than 1,400) where, if the insurers experience financial trouble, the Japanese government will cover some of the medical care expenditures; (ii) mutualaid insurance for public servants, not eligible for government assistance and (iii) the Japan Health Insurance Association for Small-and Medium-Sized Enterprises. The source of revenue for this last association comes from insurance premiums as well as subsidies from the Japanese government. It took many years for the Japanese public healthcare insurance scheme to cover all Japanese people and long-term foreign residents, even following the creation of the former Ministry of Health, Labour and Welfare in 1938. In fact, it took 16 years, following the enactment of the National Health Insurance Act in 1922, to create the former Ministry of Health, Labour and Welfare. As late as 1956, one-third of Japanese citizens were not covered by the public healthcare insurance system. In response to this situation, an amendment to the National Health Insurance Act was adopted in 1958, stipulating that every municipality was obliged to introduce a national health insurance scheme. Finally, in 1961, a universal health insurance was established to cover all Japanese citizens. At that time, 50% of medical care expenditures were supported by tax payments, a percentage that increased to 70% by 1968. There are several important characteristics of Japan’s national health insurance: (i) regardless of nationality, a person who lives in Japan for more than three months is obliged to subscribe to the public health insurance scheme, choice of public insurance scheme is authorized according to each individual’s job, age and residential location; (ii) the level of medical health service provided to subscribers (service such as hospital care and corresponding charges and prescription medication) is, in principle, the same for all insured individuals; and (iii) the percentage ratio of the insured person’s copayment is fixed among various medical care systems, while the absolute level of insurance fee varies with each health care scheme insured persons subscribe to. The insured are only obliged to pay a pre-fixed monthly ceiling amount. If the insured has already paid the full amount, without showing an eligibility certificate, the insured can claim a refund from their insurance provider. So, the ceiling amount for the average employee is generally JP¥90,000 per month. This ceiling amount is determined based on the insured person’s income and age and, plays an important role in protecting people from financial risk. Japan’s national health insurance covers people who are self-employed, people who are unemployed and retired people under 75 years of age. While the insured do of course pay insurance fees, about 50% of medical care expenditures are covered by public money. The rapid increase in retired people under 75 years of age, the increasing number of part-time workers and the decreasing number of employees in primary sector industries, are the main causes of the unstable financial status of Japan’s national health insurance. In 2012, 819 municipalities responsible for the

9.3 Japan’s Medical Care System

199

management of national health insurance—47.7% of all municipalities—operated at a loss. In 1972, elderly over 70 years old were exempt from 30% of their medical care copayments. As might be expected, in the context of an aging population, the medical care expenditures for elderly quadrupled between 1973 and 1980. Under this circumstance, the Prefectural Health Plan for Elderly was enacted in 1983. It marked a major turning point for the elderly medical care system. The medical care system for senior citizens over 75 years of age was introduced in 2008. The medical care system also covers elderly people between 65 and 75 years of age who suffer from disability and are bedridden at the point in time in which the corresponding municipality authorizes their eligibility for the system. The copayment for subscribers generally represents only 10% of elderly care expenses, excepting in the case of elderly households whose annual income exceeds JP¥3,930 thousand (for individuals) or JP¥5,200 thousand (for couples). The copayment for relatively richer individuals is set to 30%. Depending on the income level of an elderly, a maximum payment amount is determined. For example, the maximum payment for an outpatient whose annual income is between JP¥1,300 thousand and JP¥2,670 thousand, is JP¥8 thousand. Insurance fees are paid individually by elderly over 75 years old. Said insurance fees consist of two parts: a part paid individually, which depends on income level, and a separate part, also paid individually, but independent of income level. Furthermore, due attention to the poor is paid in terms of copayment. For example, if the total annual income of an individual is less than JP¥330 thousand, that individual’s copayment is just 3%. This scheme is managed by municipalities. The main purpose behind the separation payment was to make the medical care scheme for senior citizens over 75 years old financially separate from national health insurance since national health insurance was in a state of near-collapse in 2008 and the number of elderly over 75 years old was (and still is) predicted to increase disproportionately in the near future. Within the medical care scheme for senior citizens over 75 years of age, all people over 75 are to be insured. Insurance fees are automatically deducted from the pension benefits of insurance fee recipients. In fact, about 40% of insurance fees are financed by national health insurance and workplace insurance. Another roughly 50% is paid out from the budget of corresponding municipalities.

9.4 Japan’s Nursing Care System The Japanese nursing care system dates to the year 1932—the year when welfare facility for the poor elderly, called ‘Yoroin’, was set up to protect those people. Three decades later, in 1963, that same system was rebranded as the nursing home system for the elderly. Simultaneously, a special type of nursing home was also set up to help elderly who, while not poor, were nevertheless in need of intensive elderly care.

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9 Collapsing Social Security Systems in Japan: Pensions, Medical Care …

Thanks to the continued economic development in Japan, following World War II, free medical care services were introduced in 1973 for people over 70 years old. However, as the check-up rate by elderly increased over time, and as Japan’s population continued to age, increasing medical expenses began placing a financial burden on the government. Consequently, in 1982, a system of partial charge of medical expenses began and free medical care services were terminated. Starting in the 1990s, the Japanese government set to care for the increasing numbers of elderly by attempting to establish a new specific system, in addition to the medical care scheme, for senior citizens over 75 years old. The Japanese government finally established its new insurance system in 2000, the target of which was and still is to provide nursing care to elderly while sharing insurance premium burdens with all Japanese citizens equal to or greater than 40 years old. Both the nursing care of the elderly system and the medical care system for senior citizens over 75 years old, introduced in 2008, are two important components of medical health care serving the aging population of Japan. In the elderly nursing care system, there are two categories of insured persons, primary and secondary. All persons with at least 40 years of age must be registered and must pay a monthly insurance premium in the elderly nursing care system. A primary insured person (greater than or equal to 65 years old) is eligible for both longterm care, e.g. in the event they are bedridden or have a dementia, and support for daily activities. In the case of primary insured persons, insurance premium burdens are collected by the municipality where the primary insured person is registered. A secondary insured person (greater than or equal to 40 years old but less than 65 years old) is eligible for nursing care in the event that person needs long-term care that satisfies a set of 16 pre-specified conditions, e.g. existence of terminal cancer or rheumatoid arthritis. Eligibility for treatment in the elderly nursing care system is, in fact, very limited for secondary insured persons. At the foundation of the elderly nursing care system, medical insurers collect medical insurance premium as well as nursing premium burdens. Medical insurers then pay medical insurance premiums and nursing premium burdens to the Social Insurance Medical Fee Payment Fund of Japan. The elderly nursing care system is revised every three years. The most recent version was launched in August 2018, wherein several crucial changes were realized. First, the maximum co-payment in the most recent version is increased to 30% for those insured whose annual total income is greater than JP¥3.4 million. The maximum amount of monthly nursing care payment is set JP¥44 thousand. According to the estimation of the Ministry of Health, Labour and Welfare, the number of people who are expected to pay a 30% copayment is roughly 120 thousand capita, or, 3% of the service users of the elderly nursing care system (Kaigo Robot-Online 2019). Second, the total premium burden of secondary insured persons is set to 29% of the total nursing care expenditure. Each secondary insured person’s premium burden is obtained by dividing 29% of each insurance system’s total premium burdens collected by the number of secondary insured persons belonging to that particular insurance system. That implies that secondary insured persons with higher income pay a more premium burden. So, not only primary insured persons with higher income but also

9.4 Japan’s Nursing Care System

201

secondary insured persons with higher income pay higher premium burdens. Third, the nursing care equipment used may be selected from a variety of options which reflect market-based rental pricing and personal preferences. The monthly nursing premium burden paid by insured persons is classified into 9 different levels. Determination of a premium burden level depends on the income level of an insured individual and varies between 45% and 117% with respect to the base payment. The average base amount in Japan in 2018 was JP¥5,869. So, the monthly nursing premium in 2018 was between JP¥2,641 and JP¥6,866. The number of primary insured persons has steadily increased from 21.7 million capita in 2000, to 25.2 million capita in 2005, 28.9 million capita in 2010 and 33.1 million capita in 2015. In summary, a 53% increase was realized between 2000 and 2015. However, during that same period, the number of secondary insured persons remained stable at around 43.5 million capita between 2000 and 2010, slightly decreasing to 42.8 million capita in 2015. The burden on secondary insured persons is expected to increase further. The total number of persons requiring long-term care (two support levels and five care levels, as of the end of each April) increased from 21.8 million capita in 2000 to 62.2 million capita in 2015, an increase of 185%. Long-term care service consists of in-home services, community-based services and facility services. The total number of long-term care service users, where services are provided each April, increased from 14.9 million capita in 2000 to 55.4 million capita in 2015, an increase of 270%. Therefore, the total of long-term care benefit expenses (in terms of JP¥1 billion per month per service type) increased from 202 in 2000 to 708 in 2015, a 250% increase over a time span of just 15 years. In addition to this characterization, there is an additional serious problem associated with Japan’s elderly nursing care system. In Japan, a strong trend of an increasing number of households with only elderly people, individual households or couple households, is observed. The percentage of households consisting of people over 65 years old compared with households that have at least one person over 65 years old is shown in Fig. 9.5. The percentage of those households increased from 28.2% in 1989 to 54.8% in 2016. Figure 9.5 implies that a considerable number of elderly are taking care of the other elderly in the same family. This situation is termed ‘rou-rou kaigo’ in Japan. Even worse than rou-rou kaigo is the case of ‘nin-nin kaigo’, which literally means a situation where an elderly with dementia provides nursing care for another elderly with dementia. In Japan, these two types of elderly nursing care will surely increase in the coming years. According to the Comprehensive Survey of Living Conditions, provided by the Ministry of Health, Labour and Welfare in 2016 (https://www.mhlw.go.jp), 26.5% of the total number of households in Japan consist of households exclusively inhabited by elderly over 65 years old. 54.7% of households that require nursing care are given nursing care by an elderly over 65 years old, i.e. a situation of rou-rou kaigo. More than 30% of households that require nursing care consist of an elderly couple over 75 years old who represents both a caregiver and a care-recipient.

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9 Collapsing Social Security Systems in Japan: Pensions, Medical Care …

household ratio (%)

60 50 40 30 20 10 0

year Fig. 9.5 Percentage of households consisting of people only over 65 years compared with households that have at least one person over 65 years old 1989–2016

9.5 Conclusion Along with related collapsing social security systems, the aging of the population of Japan was unexpectedly brought on by massive consumption of both fossil fuels and mineral resources as well as the forward-looking character of effective monetary systems based on belief in perpetual growth. Both of those impetuses have existed in force since the Industrial Revolution. The aging population of Japan is perhaps the ultimate form of bioeconomic predicament. The founder of bioeconomics, Georgescu-Roegen perhaps did not imagine a new bioeconomic predicament of its sort when he discussed the basic predicaments of bioeconomics in the 1970s. Mortality is decreasing in nearly all countries. Simultaneously, life expectancy is generally going up. This is a simple fact in almost every industrial nation. Aging population will become ubiquitous among industrial nations in the future. An increasing material standard of living, a lower death rate, late marriage, and a lower birthrate, all jointly work to accelerate the current aging trend. One of the most devastating characteristics of social security systems for aging populations is a steady trend of increasing intergenerational inequality, i.e. the difference between the total monetary benefit given to a representative person who survives for an average lifespan and the total insurance premium that an average person pays is increasing for younger and younger generations. Figure 9.6 shows the difference between the total benefit and the total premium payment for the average person who was born between 1940 and 2005, for the Japanese pension, medical care and elderly nursing systems as well as for the total of the three of them. On the vertical axis, a positive number represents a situation where the benefits received are greater than the premium payments. A negative number represents an opposite situation. The horizontal axis represents the year in which a representative person was born. In Fig. 9.6, the intergenerational inequality

9.5 Conclusion

203

net benefits (JP¥ million)

60 50 40 30 20

pension

10

medical care

0

elderly care

-10

total

-20 -30 -40

year of birth Fig. 9.6 Intergenerational inequality in the Japanese pension, medical care and elderly care systems across 14 generations: data is from (Suzuki 2009)

is, indeed, clearly seen in Suzuki’s calculation (Suzuki 2009). The representative person born in 1940 has, on average, a positive difference of JP¥31 million for pension, of JP¥14.5 million for medical care, and of JP¥3 million for nursing elderly care. The representative person born in 2005 has, on average, a negative difference of JP¥25.1 million, JP¥7.2 million, and JP¥2.5 million, respective for each category of social security insurance. It must be emphasized, however, that the intergenerational inequality shown in Fig. 9.6 does not reflect additional tax revenues that are spent on the medical care and nursing elderly care systems. If those revenues were to be considered, the actual intergenerational inequality gap would be further expanded for the future aging society of Japan. Plausible serious future circumstances can be easily detected in Table 9.1. Table 9.1 Social security benefits in Japan 1970–2019 Year

1970

1980

1990

2000

2010

2019

NNI (JP¥T)

61.0

203.9

346.9

386.0

361.1

423.9

SSB (JP¥T)

3.5

24.8

47.4

78.4

105.4

123.7

SSB/NNI (%)

5.8

12.2

13.7

20.3

29.1

29.3 56.9

Pension (JP¥T & %) Medical Care (JP¥T & %) Others (JP¥T & %) NNI: Nominal National Income SSB: Social Security Benefits

0.9

10.3

23.9

40.5

52.2

24.3

41.7

50.1

51.7

49.6

46.0

2.1

10.8

18.6

26.6

33.6

39.6

58.9

43.4

39.3

33.9

31.9

32.0

0.6

3.7

5.0

11.3

19.5

27.2

16.8

14.9

10.6

14.4

18.5

22.0

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9 Collapsing Social Security Systems in Japan: Pensions, Medical Care … 140

population size

120 100 80 60 40 20 0

year Fig. 9.7 The population of Japan predicted up to the year 2100

Table 9.1 shows net nominal income (NNI), three different categories of social security system benefit and the share percentage derived from total social security benefits (SSB) for every ten years (1970, 1980, 1990, 2010 and 2019). The ‘Others’ category includes payments for welfare recipients and nursing care benefits. SSB/NNI (%) increased to almost 30% in 2010 and 2019, up from 6% in 1970. Already in 1970, the joint percentage share of the ‘Medical Care’ and ‘Others’ categories accounted for more than 75%. At around 1973, a time when Kakuei Tanaka was the Prime Minister of Japan, increased payments for pensions began. The total social security benefits (SSB) skyrocketed from JP¥3.5 trillion in 1970 to JP¥123.7 trillion in 2019. The situation of aging Japan is, in fact, serious in every category of social security benefits payment (the Ministry of Health, Labour and Welfare https:// www.mhlw.go.jp). As shown in Table 6.2 of Chap. 6, the age structure of the Japanese population is predicted not to be changed substantially starting in the 2060s. Furthermore, the population will surely decrease, very rapidly, as shown in Fig. 9.7. It is predicted that the Japanese population will be reduced to less than 60 million capita in 2100, only half of the maximum population that Japan reached in 2012. The trend of decreasing population and changes in population structure imply dramatic consequences for the financial status of Japan’s social security systems. It is high time to reorient Japan’s population structure toward a more traditional bell shape structure and to increase the share of young working population. Otherwise, Japan’s collapsing social security systems will surely collapse.

References

205

References European Commission (2018) The Swedish pension system and pension projections until 2070. https://ec.europa.eu/info/sites/info/files/economy-finance/final_country_fiche_se.pdf Kaigo Robot-Online (2019) Amendments of Long-term care Insurance Act in the year 2018. https:// kaigorobot-online.com/news/14. Accessed 6 December 2019 Mark J (1934) The modern idolatry being an analysis of usury and the pathology of debt. London: Chatto & Windus Suzuki, W. (2009) Introduction to Pension, Medical Care and Elderly Nursing Care: Never Be Deceived (in Japanse), Tokyo: Toyo Keizai Inc

Chapter 10

Conclusion: An Alternative Vision for the Future of Japan and the World

Four formidable predicaments facing the aging society of Japan were presented in Chaps. 6, 7, 8 and 9. I have argued that these four predicaments and their related problems emerged as a consequence of the double-edged nature of fossil fuels and money. Put differently, the superiority of fossil fuels and money gave them an unexpected rise. Unfortunately, these predicaments, happening at this very moment, are bound to worsen. The supply of future fossil fuels is not bright and financial debt in the form of general liquidity is dramatically increasing worldwide. So, where we should go? Sh¯ukan Gendai, a popular weekly magazine in Japan, featured an article imagining how life in Japan in 2028 will be different in terms of, for example, shopping, office work, transport, business transactions and medical care (Sh¯ukan Gendai 2018). Their article is full of rosy pictures, imagery that is endorsed with so-called scientific evidence and provided by select think-tank employees and engineers: 1. Convenience stores without cashiers—In Japan, foreign travelers must be provided with the occasion to buy wares at convenience stores that are open 24 hours a day 7 days a week. In 2028, travelers are to be able to exit stores without passing by a cashier since the commodities travelers wish to buy will supposedly be automatically identified by cameras and other sensors positioned around the store and cashless transactions will be executed. 2. Sophisticated three-dimensional printers at home—In every house, a threedimensional printer will be installed. In this way, clothes, meals and household tools can easily be printed out. In particular, food printing can be realized. As far as food-stuffs and seasoning at home is concerned, people can receive what they wish to eat by using a three-dimensional food printing instrument. Hungry individuals must simply tell their mobile phones what they wish to eat in advance. 3. Advances in robotics and artificial intelligence—People no longer have to go to work-places. People simply dispatch an ‘Avatar’, which is a robot equipped with a personal face and a tablet PC. All office work, including accounting, can be done by such robots and artificial intelligences. Artificial intelligencebased job training is also provided at home. In relation to advances in robotics © Springer Nature Switzerland AG 2020 K. T. Mayumi, Sustainable Energy and Economics in an Aging Population, Lecture Notes in Energy 76, https://doi.org/10.1007/978-3-030-43225-6_10

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and artificial intelligence, white hat hacking becomes a popular occupation. A white hat hacker is a computer security specialist who, with benevolent intention, breaks into protected systems and networks to test and assess their security. White hat hackers use their skills to improve security by identifying vulnerabilities before malicious hackers detect and exploit them. Although the methods used are similar, if not identical, to those employed by malicious hackers, white hat hackers have permission to employ their methods against the organizations that hire them. Besides white hacking, all asset information is stored on individual mobile phones. Credit rating data for every customer is accumulated, so that each customer is evaluated according to their memorized credit rating points. This rating system is used to financially assess each person’s social value. 4. Elderly equipped with an exoskeleton—The most amazing item is a powered exoskeleton, a wearable mobile machine that is powered by a system of electric motors, pneumatics, levers, hydraulics, or a combination of those technologies that allow for limb movement with increased strength and endurance. Exoskeleton can be extensively used by elderly people, whose electric brain signals can be transmitted to control the powered device. The muscle strength of elderly can therefore be artificially improved, and heavy items can be carried. 5. A self-driving car—Known as an autonomous car, or driverless car, a selfdriving car is a vehicle that can sense its environment and move with little or no human input. Self-driving cars are typically, advertised to reduce car accidents. Autonomous cars combine a variety of sensors to perceive their surroundings, sensors such as radar, computer vision and sonar. Such cars are electric or hydrogen-based. A delivery drone is also an autonomous vehicle, used to conveniently transport packages, food or other goods. 6. Circular organic farming at home—All input and output from farming systems at home circulate in harmony with ecosystems. Vegetables and fish are produced at home without the need for large-scale irrigation systems. Skimming over those rosy pictures, there is a common optimistic belief, or perhaps it should be called a myth, among their promoters—there is the belief that it will be possible to generate sufficient electricity to maintain compatibility with the situations the rosy pictures describe. Those promotors of the rosy future described perhaps never realized the fact that more than 65% of electricity used in the world is generated by fossil fuels, a resource which is eventually exhaustible and, in fact, steadily decreasing. This fact was previously investigated in Chaps. 2 and 3. In fact, the optimistic pictures reported in Sh¯ukan Gendai remind the author of this book of the grand plan of breeder reactors proposed by Weinberg and Hammond (1970) almost fifty years ago. By strip-mining and crushing all rocks containing at least 60 grams of natural uranium-235 or thorium per metric ton, it was claimed that it could be possible to obtain enough nuclear fuel to power the electricity generation turbines of some 32,000 breeder reactors distributed across 4,000 offshore parks. In this way, it would be capable of supplying a population of twenty billion for millions of years with twice as much energy per capita as the consumption rate in the United

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States in the 1960s. Weinberg and Hammond’s grand plan of half a century ago has yet to be realized, let alone a nuclear fusion reactor has yet to be realized. The crucial issue at hand is whether it is possible to find alternative primary energy sources that effectively replace fossil fuels and that can generate a sufficient quantity of electricity without inducing serious environmental damage, such as climate change. That issue is concerned with substitutability. Georgescu-Roegen once lamented the absurd statement of Solow which completely ignores the biophysical foundation of the economics process with respect to substitutability: ‘As you would expect, the degree of substitutability is also a key factor. If it is very easy to substitute other factors for natural resources, then there is in principle no “problem.” The world can, in effect, get along without natural resources, so exhaustion is just an event, not a catastrophe. Nordhaus’s notion of a “back-stop technology” is just a dramatic way of putting this case; at some finite cost, production can be freed of dependence on exhaustible resources altogether’ (Solow 1974, p. 11, emphasis added). Discussion of the notion of substitutability by conventional economists in Chap. 2 dismisses, I hope, Solow’s frivolous talk at the prestigious Richard T. Ely Lecture of the American Economic Association. The future is always full of uncertainty and ignorance, a realization investigated in Chap. 5. In Chap. 5, how the capital interest level due to the forward-looking nature of the investment process is contingently formed is discussed. If uncertainty is always with us, the precautionary principle, along with continuous dialogue between policymakers, scientists and the public, must be adopted. This observation justifies looking for a Plan B, an alternative to exclusively endeavoring to envision rosy futures based on limitless wants that are to be supported by limitless electricity generation and yet to be seen alternative primary energy sources. The precautionary principle has been used by policymakers to justify discretionary decisions in situations where extensive scientific knowledge on a matter is lacking and where there is the possibility of causing serious harm by making an otherwise certain decision. The principle implies that there is a social responsibility to protect the public from exposure to unforeseen harm, when scientific investigation has found a plausible risk. Such protections can only be relaxed if further scientific findings emerge and provide sound evidence that no harm will result. We can also learn something quite positive from energetic analyses of modern society: the actual pattern of energy consumption is so extravagant that there is a large margin for readjusting to a lower level of energy expenditure while still providing a more than decent material standard of living. The only requirement for this solution is wisdom. In the Buddhist philosophy, a problem can be defined as a mismatch between what we expect from the external world and what we actually experience from the external world. If the external world cannot be changed to satisfy our wants, we ourselves must adjust to the challenge of sustainability with reflexivity. Even more important is the acknowledgement that we should always consider the option to redefine our path of responsible interaction with the external world by using a different identity for ourselves, the story-tellers. Difficult situations in our life can also help to reduce our levels of arrogance. We develop humility when we acknowledge that we are not in control and accept that life isn’t always going to go our

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way. Humility might be a hard pill to swallow at first, but it helps us to open ourselves and to be flexible in difficult times, rather than rigid, angry and uptight. Enlightenment doesn’t just happen. Enlightenment requires us to constantly let go, purify our mind and create positive karma. By letting go of habitual views, we can transform the narrow perspective with which we currently perceive our sustainability problems. Just because a situation doesn’t feel nice, or doesn’t make us happy, doesn’t mean that the situation is bad. The question of good or bad is a simple question of whether we can tweak our alternative perspective to see if there is something beneficial that can come out of a situation in which something doesn’t feel nice. When a problem arises, we tend to habitually focus on the negative repercussions and unhappiness that problem brings. It might help us to adopt a different future perspective, one that is compatible with the constraints facing us. What we need is a deep reflection on the way how to accept inevitable biophysical constraints, and to throw away excessive baseless optimism without realizing too much despair. I feel substantially sympathetic with the words of Alfred Victor, Comte de Vigny: ‘Above all, we must abolish hope in the heart of man. A calm despair, without angry convulsions, without reproaches to Heaven, is the essence of wisdom’ (AZ Quotes 2020). The words of Alfred Victor Vigny are echoed by the words of a Buddhist priest, Ry¯okan 1758–1831—shikataga nai or, we must accept the calamity. That’s life (the interpretative translation by Kozo Torasan Mayumi). Popper once stated (1994, p. 123): ‘the selection of a mutation will be strongly dependent on the behavior which has been adopted’. However, because humans happened to have adopted an exosomatic evolution which transgressed the somatic evolutionary process of living things, the meaning of a mutation by Popper should be reinterpreted. We should adopt a different mode of exosomatic evolution. This is our choice, a new type of selection beyond the endosomatic evolution of living things. Thus, what we need is a new way of behavioral and institutional changes that will remain compatible with biophysical constraints in terms of energy and material supply conditions facing aging populations. I do not intend to make a comprehensive proposal that can completely solve the conundrum concerned with the four bioeconomic predicaments caused by the doubleedged nature of fossil fuels and money. Instead, several suggestions are made regarding how to mitigate current bioeconomic predicaments if the fossil fuel bonanza of the past two centuries proves exceptional and solar energy cannot effectively replace fossil fuels. A set of modest overlapping visions, useful for the mitigation of Japan’s bioeconomic predicaments, are proposed: 1. An expansion of small-scale hydroelectric generation systems that can modestly complement local and regional energy demand Japan is situated in the Asian monsoon region. Thus, precipitation levels in most regions of Japan are sufficient to create hydroelectric power generation plants that satisfy local electricity demand. In fact, until 1934, more than 80% of electricity generation derived from hydroelectric power stations. Until 1963, the highest share of electricity generation derived from hydroelectric power generation systems.

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A hydroelectric power station with the electricity generation capacity of 4,500 kW can, for example, supply sufficient electricity to satisfy the electricity demand of 1,500 households, each of which with four family members on average and reasonably assuming that each household draws 3 kW. Small or medium-scale plants can provide a locally produced secure supply of electricity. Such plants also pave the way for the development of local industry, something which can provide employment opportunities. This type of development strategy is useful for the realization of a viable and responsible development path for Japan’s regions. There does exist a study on the possible future sites for hydroelectric power generations in Japan, the Study on Basic Zoning Information Concerning Renewable Energies (Ministry of the Environment 2017). According to the study, the maximum quantity of annual electricity generation based on hydroelectric power plants with capacity of less than 1,000 kW would be 1.5 billion kWh, which is equivalent to 2.6% of Japan’s total electricity consumption in the year 2017 in Japan (an energy efficiency of 60% is assumed). While the quantity derived from the study cited seems small in comparison with Japan’s total electricity consumption, 1.5 billion kWh, it would be significantly more than enough to satisfy the electricity demand placed by a majority of agriculture and forestry industry in Japan. 2. A gradual acceptance of Keynes’ view on national self-sufficiency As explained in Chap. 8, Keynes endorsed national self-sufficiency in terms of trade and finance. Rather than make a sudden adjustment, Keynes’ recommendation is to meticulously prepare and plan for such self-sufficiency in the long-run. Concerning wasteful competitions in the context of international trade, ‘more than half of all international trade involves the simultaneous import and export of essentially the same goods’ (Daly 1993). Is there any meaningful biophysical justification to exchange Toyota’s cars for the cars of Mercedes Benz, an exchange which implies the use of scarce energy resources to realize long-distance transport of cars for exchange? Rather, international trade should be directed towards widespread technology and information transfers to nations that desperately require the proper handling of those matters within their territory. Concerning monetary and financial systems, money and money substitutes immediately flow whenever there is an opportunity for owners of those forms of debt to earn unearned income and for people authorized to issue those forms of debt to, unfortunately, distort fundamental market conditions. We should educate ourselves that, unless absolutely necessary, minimizing the international flow of money and money substitutes is prerequisite for the establishment of financial stability not only for each nation but also for the whole world. In each nation, national monetary authorities should educate citizens on the importance of the dual nature of money and money substitutes. Monetary authorities themselves should be educated as well, not only individuals. 3. Decentralization of transportation networks to facilitate local production for local consumption Similar to the case of international trade, mentioned above, domestic production should be oriented towards region-based transactions unless the restriction of local

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transactions elicits serious unfavorable socioeconomic conditions to specific regions. In this way, in the long-run, a more evenly distributed transportation network can be obtained, a considerable energy saving can be realized, and the rehabilitation of local economies can be realized as well. The most important aspect of this proposal is related to change in the mindset of local people towards more positive and constructive views towards their own regional and cultural traditions. 4. Development of economic, institutional and legal support for the encouragement of people to have more children The most devastating aspect of Japan’s aging population is concerned with the fact that there is no systematic consideration by political decision-makers regarding the promotion of socioeconomic conditions favorable for people willing to have more children. Top priority should be given to establishing a more friendly work environment for working ladies in terms of guaranteeing continuous employment in companies after giving birth, facilitating childcare leave for husbands, providing a sufficient number of economically affordable nursery schools, and so forth. The Japanese government should also give sufficient public expenditures for elementary, secondary and tertiary education. It takes a long time to reestablish a bell-shaped population structure. However, unless there is a consistent effort to direct Japan’s aging population structure in that direction, it will prove impossible for the Japanese society to emancipate itself from the four bioeconomic predicaments. 5. Reduction of population concentrations in urban areas A more skewed form of population structure is observed in rural areas since people have, thus far, tended to move out of rural areas to urban areas in order to obtain jobs. Because of how widespread of information network techniques have become, it has become relatively easy for companies to locate their headquarters in rural areas far away from big cities. For example, the Japanese government has begun locating certain bureaucratic administration bodies outside of Tokyo. The Japanese government can use a tax reduction strategy to facilitate the redistribution of company incentives and thereby the moving of operations out of urban areas to rural. This strategy may be enforced alongside the simultaneous decentralization of transportation networks, which facilitate local production for local consumption. 6. Reduction of the number of civil servants At the end of Chap. 8, a discussion was made concerning bureaucratic expansion. If there is a niche where bureaucratic power may potentially expand, that niche will immediately be occupied as new territory for bureaucracy. This is one of the many serious factors that both protracts the status of continued budget deficit and forces the issuing of additional deficit bonds. Due to the structure of the organization of bureaucracy as a whole, the power of expansion is very difficult to stop in the context of an organization which is vertically segmented and horizontally overcompartmentalized. Reduction of the number of civil servants to the point in which the number of civil servants is compatible with population size must be realized.

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An oversized bureaucratic system is very dangerous for the healthy socioeconomic management of any nation. 7. Implementation of national bond redemption schemes. Before implementing the bond redemption scheme suggested in Chap. 8, it is absolutely necessary to confine the transactions of bonds to within each nation. Bond redemption schemes must be coupled to the ideas of Keynes’ view on national selfsufficiency. There must be an international agreement on this issue. Otherwise, there is no hope of realizing a world that does not experience unwelcome and unnecessary economic repercussions, most of which impart serious damage on less materially developed nations. Less materially developed nations typically do not induce unnecessary economic repercussions similar to those that they unexpectedly and unfortunately experience. The seven proposals outlined in the conclusion of this book are not intended to be comprehensive, but rather only suggestive. We should start reconsidering how to establish a more sustainable and equitable world order in order to cope with the four bioeconomic predicaments facing Japan. I do hope that the content of this book is also useful for certain other nations who face similar problems, and for other nations that are going to face similar predicaments in the future.

References AZ Quotes (2020) https://www.azquotes.com/quote/1151626. Accessed 5 January 2020 Daly H (1993) The Perils of free trade. Sci Am 269(5):50–57 Ministry of the Environment (2017) Study on Basic Zoning Information Concerning Renewable Energies (in Japanese) https://www.env.go.jp/earth/report/h28-03/h27_whole.pdf Popper K (1994) Knowledge and the body-mind problem. Routledge, London Sh¯ukan Gendai (2018) ‘Japan in 2028’ (in Japanese), Sh¯ukan Gendai 60 (16):25–32 and 197–204, 12 May 2018 Solow RM (1974) The economics of resources or the resources of economics. Am Econ Rev 64(2):1–14 Weinberg AM, Hammond RP (1970) Limits to the use of energy: the limit to population set by energy is extremely large, provided that the breeder reactor is developed or that controlled fusion becomes feasible. Am Sci 58(4):412–418

Index

A Agriculture agricultural subsidies, 151 Anticipation, 22, 24, 29, 47, 105, 123, 165. See also William Stanley Jevons Aquaculture, 3, 5, 13, 14, 129, 140, 143–148, 160–166, 191. See also Fishery Argentarii, 83 Arithmomorphism, 9, 17. See also Arithmomorphic model; Arithmomorphic concept

B Babies, newborn, 3, 4, 8 Banking, 2, 3, 79–81, 83, 90–92, 100, 109 Barter, 8, 12, 79–82 Bioeconomics, 2, 10, 11, 15, 139, 147, 202, 210, 212, 213. See also Biophysical economics Birthrate, 140, 189, 202 Böhm-Bawerk, Eugen Ritter von, 101, 103, 104, 121. See also Böhm-Bawerk Bonds, 3–5, 10–12, 14–16, 73, 80, 88, 89, 94, 95, 107, 116, 119, 121, 140, 152, 169, 170, 175, 177–180, 185, 212, 213 Brothers, Lehman, 12, 17, 106, 175 Budget, 4, 5, 14, 24, 94, 170, 171, 172–176, 185, 186, 199 general account budget, 14, 169, 170, 173–176 special account budget, 14, 131, 170, 172–176, 186. See also Budgetary activities; Budgetary legislation; Budgetary process; Budgetary operations Building and Manufacturing Sector (BM), 54

Bureaucracy, 15, 171, 175, 185–187, 212, 213. See also Bureaucratic system; Bureaucratic organization; Bureaucratic power

C Capital capital accumulation, 25 capital redemption, 179, 185 overcapitalization, 184 real capital, 30, 96, 100, 103, 120, 121, 170, 183, 184 virtual capital, 170, 179–181, 183, 184 Capitalist capitalist labor theory, 101, 102 capitalist system, 96 Childbirth childcare, 130 newborn babies, 4 Clausius, Rudolf, 80, 83, 84, 96 Climate, change, 1, 5, 14, 18, 41, 46, 71, 144, 161, 166, 209 Coal hard coal, 22, 35 lignite, 35 Commodities, 23, 61, 86, 88, 95, 101, 145, 165, 207 Condominiums, 13, 125, 136, 137 Consumption consumption prospects, 10 fossil fuels consumption, 7, 27, 46, 52, 101, 103, 202 primary energy consumption, 46 Cooperatives, Japanese agricultural, 14, 145, 149, 152–154. See also JA

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216 Credit, 8, 9, 12, 16, 17, 66, 79–83, 89, 91– 96, 101, 102, 105, 107, 115, 145, 153, 154, 169, 177, 180, 208 credit business, 145, 153, 154 credit creation, 12, 80, 91 credit in Babylonian times, 8 credit system, 12, 79–82, 91, 93, 177. See also Creditors Currency, 3, 79, 81, 82, 85, 86, 90, 94, 106, 107, 113, 169, 179

D Debt biophysical debt, 89, 94, 114, 120, 132 debt expansion, 12 debt trap, 13, 79, 99, 100, 113, 169 external debt, 13, 99, 100, 114–118 Decay functional decay, 12, 79, 80, 83, 86, 88, 119 material decay, 12, 80, 83, 85, 86, 103 structural decay, 12, 79, 85, 104 Deficit biophysical deficit, 120 budget deficit, 3, 9, 14, 115, 140, 169, 172, 179, 185, 186, 212 Demand, 2, 3, 10, 11, 22, 28, 29, 35, 40–42, 46, 47, 52, 56, 57, 59–63, 65, 69, 72, 88, 103, 119, 137–139, 149, 150, 154, 157, 161, 162, 180, 210, 211 Development economic development, 3, 4, 8, 14, 22, 99, 102, 118, 128, 144, 165, 200 nuclear reactor development, 24 Diet, Japanese, 90, 171–173, 186 Discount rate, 28, 106 Disgregation, 80, 83–85, 96 Distribution, inter-generational, 26, 28, 30. See also Distributional issues; Distributional fairness Dwellings occupied dwellings, 133 private dwellings, 13, 125, 134–136 rental dwellings, 13, 125, 134, 135 residential dwellings, 133 unoccupied dwellings, 133 vacant dwellings, 13, 125, 132–135, 138

E Earthquake, Great Hanshin-Awaji, 157 Economics

Index biophsyical economics, 2, 5, 10, 11, 65, 74 cartesian economics, 2, 3 conventional economics, 1, 2, 11, 14, 21–24, 26, 28, 85, 95, 143, 165, 185 Economies, low-income, 100, 116, 117, 118, 197. See also LIE Economists Chicago economists, 3 conventional economists, 1, 5, 12, 23, 26, 28, 79, 95, 114, 165, 209 ecological economists, 2 Education expenditure, 131, 132 Efficiency, 23, 28, 42, 47, 55, 60, 64, 72, 73, 112, 123, 211 Elderly, 10, 13–15, 124, 125, 129, 136, 137, 140, 189–191, 193, 195–197, 199–203, 208 Electricity hydroelectricity, 15, 210, 211 Energy geothermal energy, 30 sector, 3, 58, 64 Energy carriers, 11, 21, 30–32, 47, 51–54, 58, 64–68, 72–74, 161. See also EC Entropy, 9, 10, 17, 18, 33, 34, 37, 45, 79, 83–85, 87, 89, 96, 103, 104, 114, 119, 120, 132, 147, 180 Environment, 35, 53, 54, 71, 96, 130, 131, 139, 140, 144, 208, 211, 212 Equity, intra-generational, 26, 29 EROI, 47, 62, 64. See also Energy Return On Investment Ethanol, production, 11, 31, 32, 51, 52, 64–68, 71, 73 Exchange exchange of goods and services, 94 exchange rate, 3, 81, 94, 106–108, 110 Expenditure, 4, 5, 24, 88, 90, 131, 132, 170– 177, 179, 181, 185, 186, 190, 191, 197–200, 209, 212

F Financial financial assets, 8, 10, 11, 80, 96, 105, 119, 121, 169, 170, 179–183 financial commodities, 95, 105 financial instability, 10, 13, 100, 118, 119 financial institutions, 90, 103, 105, 119 financial instruments, 110 financial market, 94, 96, 101, 113, 115, 118, 119

Index financial returns, 96 financial sector, 12, 99, 106, 110, 115, 154 Finiteness, 11, 21, 26, 27, 45 Fishery, 3, 5, 13, 14, 129, 140, 143–148, 160–163, 164–166, 191 quotas, 163, 164. See also Fishery sector; Fishing Forestry, 3, 5, 13, 14, 57, 129, 140, 143–148, 154–160, 165, 166, 174, 175, 187, 211. See also Forestry sector; Forests Fuel, fossil, 2–5, 7–11, 16, 21, 22, 24, 26, 30, 33, 46, 51–53, 57, 58, 65, 67, 68, 72, 99, 101, 123, 140, 143, 147, 165, 166, 190, 207–210 Fund-flow model, 53. See also Flow-fund representation

G Gas, 11, 22, 34, 37, 39, 40, 42, 46, 73, 84, 174 Georgescu-Roegen, Nicholas, 1–3, 5, 10, 17, 23, 27, 28, 30, 32, 33, 45, 47, 51, 53, 62, 73, 84, 85, 89, 114, 139, 147, 166, 180, 202, 209 Goods consumable goods, 95, 96 goods and services, 8–11, 79–81, 94–96, 100–102, 105, 108, 114, 118, 120, 121, 132, 154, 169, 179–181, 183 Granfalloon, 12, 52, 68, 69, 71 Greenhouse gas emissions, 18, 35, 39, 42, 46, 52, 72, 73, 166. See also CO2 ; Carbon dioxide; GHG Gross Domestic Product, 3, 4, 5, 10, 13, 14, 95, 106, 114–116, 128, 129, 131, 132, 140, 143–145, 165, 166, 169, 170, 175, 176, 185, 189, 196, 197. See also GDP Gross National Income, 116–118. See also GNI Growth growth rate, 4, 27, 35, 158, 196

H Household sector, 54. See also HH Hydrogen, 47, 52, 72, 73, 208 Hypercycle, 33, 53

I Income

217 gross national income, 116–118 income tax, 170, 174, 181–183, 195 operating income, 12, 99, 108–110, 153 Indeterminacy, 105 Insolvency, 5, 100, 118, 119, 176, 178, 189 Insurance, 12, 15, 17, 99, 100, 106, 110, 153, 169, 185, 191–193, 195, 197–203 auto insurance, 100, 110 business insurance, 109, 145, 153, 154 finance and insurance sector, 199 life insurance, 100, 109, 153, 197. See also Insured persons Interest capital interest, 12, 99–105, 209 interest payments, 3, 5, 102, 103, 112, 114, 118–121, 175, 179–181 interest rate, 11, 87–89, 93–95, 99, 100, 104–106, 113, 119–121, 138, 170, 180, 183, 190 Intergovernmental Panel on Climate Change, 14, 144, 161, 166. See also IPCC International Finance Cooperation, 100, 112, 113. See also IFC International Monetary Fund, 13, 99, 100, 111–113, 114, 169. See also IMF Investment, 8, 11, 12, 16, 51, 52, 58, 64, 67, 68, 73, 94, 99–105, 111, 112, 120, 138, 164, 165, 169, 174, 177, 193, 196, 209 Issuing issuing of monetary assets, 9 issuing of national bonds, 4, 10, 140, 174, 177, 185, 186

J Japan Railway, 13, 125, 138. See also JR Jevons, William Stanley, 9, 22, 28, 29, 47, 123, 185. See also Jevons’ paradox

K Kaigo, Rou-rou, 201 Keynes, John Maynard, 86, 87, 184, 185, 211, 213 Knight, Frank, 3, 12, 92, 99, 104. See also Uncertainty

L Labor, 3, 6–8, 10, 25, 30, 47, 53, 54, 56, 58, 64–68, 74, 81, 101, 102, 123, 124,

218 130, 139, 147, 157, 165, 190, 193, 195, 196, 198, 200, 201, 204 Land, Ricardian, 27, 30, 53, 54, 147, 165. See also Fund elements Law of Inevitable Dissipation of Useful Concentrated Matter, 27 Lending, 8, 87, 91–94, 99, 101, 103–105, 115, 138, 177, 179. See also Lenders; Borrowing; Borrowers Lifespan average lifespan (of human), 13, 124, 125, 202 Liquidity dual nature of general liquidity, 12, 80 general liquidity, 12, 80, 85, 88–90, 94– 96, 100, 105, 106, 115, 118–120, 180, 207 virtual liquidity, 96 Loan commodatum-type loan, 91 loan interest, 87, 121 Mutuum-type loan, 91, 92

M Macleod-Soddy-Allais Relation, 13, 100, 119, 120, 180. See also MSA relation Manufacturing building and manufacturing Sector (BM), 54 Marriage, 3, 13, 124–128, 202 Marx, Karl, 102 Metabolism metabolic density, 65 metabolic land productivity, 64–66 metabolic pattern, 11, 21, 53 societal metabolism, 21, 51, 53 Mining, 2, 3, 34, 35, 43, 44, 47, 54, 55, 57, 58, 61–64, 74, 208 Monetary monetary base, 94, 100, 107 monetary expansion, 95, 121 monetary factors, 99, 101, 103 monetary forms, 120, 121 monetary policy, 14, 95, 110, 170 Money dual nature of money, 79, 89, 92, 180, 184, 211 Montréal process, 14, 145, 154, 155, 159 MuSIASEM, 11, 51–54, 64. See also MultiScaled Integrated Analysis of Societal and Ecosystem Metabolism

Index N National debt consolidation fund, 173–175 Nation-states, 89, 90, 94, 96 Net Primary Productivity, 3, 5, 6, 14, 27, 28, 143, 146–148, 161, 165, 166. See also NPP Nordhaus, William, 8, 23, 24, 83, 165 Nuclear fast breeder reactor (FBR), 22, 43–45 Fukushima nuclear accident, 69, 71 nuclear fuel cycle, 11, 22, 43–45 nuclear fusion, 209 nuclear reactors, 24, 42–44, 73 nuclear technology, 22, 42, 72 Nursery school, 130, 212

P Pension, 10, 15, 17, 129, 140, 169, 173–175, 189–197, 199, 202–204 mutual-aid pension, 192–194. See also Pensioners Perpetual perpetual economic growth, 22, 165 perpetual motion machines, 94, 120, 123 Population endosomatic population, 210 exosomatic population, 1, 2, 13, 95, 124, 125, 132, 134, 138, 139 Precautionary principle, 163, 209 Predicament, bioeconomic class struggle predicament, 2 energy and mineral resources predicament, 2 international conflict predicament, 2 Primary energy sources, 1, 11, 21, 22, 30, 31–35, 43, 46, 47, 51, 53, 54, 64–67, 72, 166, 209. See also PES Principles publicity principle, 171, 172 strict control principle, 171 unity principle, 171, 172, 175 universality principle, 171, 172 Production, 3, 5–12, 14, 15, 17, 24, 25, 30, 34, 35, 37, 39, 40, 43, 44, 46, 51–58, 60–69, 72, 74, 85, 89, 92, 96, 99, 101– 103, 110, 114, 116, 120, 123, 132, 140, 145–148, 150–153, 155, 157, 161, 162, 165, 166, 180, 184, 209, 211, 212 Productivity, land, 5, 7, 14, 64–66

Index Q Quantitative easing, 13, 15, 95, 100, 107, 108, 110, 111, 157, 170, 178, 179 R Redemption bond redemption, 213 compound redemption, 15, 170, 180, 181, 183 simple redemption, 180, 181, 183 Red pill and blue pill, 73. See also Red pill Refining, 37, 55, 58, 72, 74. See also Refinery Resources copper, 62 crude oil, 22, 38, 42 ethanol, 11, 52 exhaustible resource, 10, 25, 28, 29, 89, 209 gasoline, 11, 22, 37, 39, 73 hard coal (anthracite), 22, 35 hydrocarbons, 26, 37, 39, 165 iron ore, 33 kerosene, 37 lignite, 22, 35 metal, 27, 62 methane (CH4 ), 72 methane hydrates, 42 mineral, 1–3, 25–27, 34, 62, 73, 84, 85, 114, 120, 121, 124, 202 natural gas, 11, 22, 26, 30, 34, 37–40, 42, 72, 73 plutonium, 11, 22, 43, 44 scarcity, 11, 21, 23–27, 29, 34, 36, 62 shale gas, 42 silicon, 51, 57, 58, 62 silver, 51, 54, 62 timber, 34, 145, 155, 156, 159 uranium ore, 22, 43, 44 water, 22, 26, 30, 34, 42, 43, 54, 56, 57, 73, 114, 148, 155, 158, 159, 162, 165 Revenues government revenue, 4, 10, 170–175, 177, 179, 185, 186, 198 operating revenue, 108, 109 public revenue, 172 Revolution, industrial, 22, 33, 34, 37, 47, 101, 123, 202 Rice, 145, 148, 149–152 rice paddies, 150 rice price, 149 rice production, 14, 145, 149, 150. See also paddy field

219 Rio Earth Summit, 144

S Samuelson, Paul, 8, 23, 27, 83 Schumpeter, Joseph, 8 Science, post-normal credibility of scientific analysis, 11, 51 post-normal science, 12, 52, 68, 71, 72, 74 Self-sufficiency, 14, 89, 145, 156, 157, 184, 211, 213 Shotokudaitairitsu, 194–196 Silver, 11, 51, 56, 57, 59–64, 74, 86 Silviculture, 3, 5, 13, 14, 129, 140, 143– 148, 154–159, 165, 166, 211. See also Forestry Smith, Adam, 6, 17, 79–82, 147 Social security, 3–5, 8–10, 15, 124, 127, 129, 139–141, 169, 179, 185, 189–191, 195, 202–204 Soddy, Frederick, 1 Solar concentrated solar power, 63 crystalline silicon wafer-based solar cells, 11, 55, 62 solar photovoltaic (PV), 11, 31, 51, 54 solar radiation, 26, 27, 30, 31, 47, 54, 55, 63, 67 Solow, Robert, 24, 25, 209 Solvency, 3, 5, 96, 99, 100, 114, 116, 118, 119, 175, 189 Sony, 12, 99, 100, 107–110, 153, 178 Special Drawing Rights, 113, 169. See also SDR Substitutability, 3, 4, 8–11, 13, 16, 21– 24, 26, 33, 34, 37, 42, 61, 62, 64, 80, 85, 93, 95, 100, 101, 105, 115, 118–120, 123, 154, 169, 179, 180, 190, 209, 211. See also Substitutable; Substitutes; Substitution Supply, 9–11, 14, 22, 30, 34, 38, 43, 46, 47, 56, 59–61, 63–67, 81, 102, 103, 113, 119, 123, 135, 140, 145, 156, 157, 174, 190, 207, 210, 211 Sustainability, 1, 3, 5, 11, 14, 15, 21–23, 26, 28, 45, 51, 54, 55, 62, 68, 71, 74, 144– 146, 154, 155, 159, 163, 164, 166, 185, 191, 193–195, 209, 210, 213. See also Sustainable System anticipatory system, 9, 47 dissipative system, 33, 53

220 medical care system, 8, 15, 124, 191, 197–200 T Tariff, feed-in, 57 Tax, 80, 88, 90, 91, 94, 111, 136–138, 140, 172, 174, 175, 180–183, 187, 192, 195, 198, 212 tax rate, 138, 170, 181, 182 tax revenue, 4, 5, 10, 186, 203 tax system, 121, 192. See also Taxation Technology backstop technology, 24, 25 parasite technology, 32, 52, 68, 161 promethean technology, 11, 21, 30, 32, 33, 35, 47, 53, 72, 123 Theory abiogenic theory, 26 abstinence theory, 101, 103 free-money theory, 86 fructification theory, 101 hierarchy theory, 53 productivity theory, 101, 103 Thermodynamics first law of thermodynamics, 31, 91, 94, 120, 123

Index fourth law of thermodynamics, 27, 84 second law of thermodynamics, 1, 9, 79, 83, 94, 118–121, 123, 154 Toyota, 12, 73, 99, 100, 107–111, 153, 178, 211 Trade, 14, 15, 35, 54, 69, 81, 83, 107, 108, 112, 113, 145, 149–152, 157, 179, 184, 211. See also Export; Import Transportation, 3, 6, 7, 13, 15, 22, 34, 37– 39, 52, 55, 66, 73, 101, 125, 138, 139, 211, 212

U Uncertainty, 12, 27, 56, 69, 71, 99, 104, 105, 163, 164, 209 Uranium, 11, 21, 22, 24, 26, 42–44, 113 Utility, 23, 24, 121, 172

W Workforce, 4, 10, 13, 14, 58, 67, 129, 140, 143–145, 148, 149, 155, 161, 190, 191 World Bank, 13, 65, 99, 100, 111–113, 116, 118. See also WB