When Growth Eats Its Foundation

In recent months, I’ve been exploring how deep structural constraints—on labour, capital, and above all, energy—are reshaping the world economy. What’s become increasingly clear is that we’re moving away from the familiar rhythm of demand-led recoveries and into something more constrained, more structural. Growth isn’t just slow—it’s bumping up against hard supply-side ceilings. Some of those were pandemic-induced. Others were physical. Many, increasingly, are ecological.

Arguably at the heart of that shift is energy. Not as an afterthought or cost input, but as a binding constraint. As I’ve written before, energy isn’t just another factor of production. It’s the factor that makes all other inputs productive. Without energy, capital is idle, and labour is inert. But to understand the full extent of this transformation—and where it’s leading—we need to look beyond energy itself, to the natural systems that support it.

The Production Function Problem (for the wonky economists)

Firstly let’s talk models, energy and AI (and if you’d rather not, skip to the next section!).

Mainstream macroeconomics still rests heavily on the so-called Cobb-Douglas production function: output is a function of capital and labour, with any unexplained growth attributed to a residual—Total Factor Productivity (TFP). That residual has puzzled economists for decades. Why does so much of growth come from something we can’t observe?

One answer is deceptively simple: the model is incomplete.

Insert energy explicitly into the production function—as a third, essential input—and the mystery begins to fade. Empirical work has shown that once energy use is accounted for, the residual shrinks dramatically. Much of what we previously labelled as “productivity” turns out to be the result of more abundant, cheaper, or more efficiently deployed energy.

This insight potentially points to a very different kind of model: the Leontief production function, which assumes fixed proportions. In this formulation, output is limited by the scarcest essential input. There is no smooth substitution. If one input is missing—whether it’s capital, labour, or energy—output drops to zero. You can’t replace electricity with accountants. You can’t 3D-print a tonne of wheat without soil, sunlight, and water.

And this has important implications for the current wave of AI exuberance. However powerful artificial intelligence becomes as a cognitive tool, it cannot substitute for the physical inputs human life requires: food, shelter, warmth, and energy. These are not optional. They’re not digital. They’re material. AI may enhance the productivity of certain knowledge workers, but it doesn’t grow wheat, build housing, or power the grid—at least not without infrastructure and physical systems behind it.

In a Leontief world, bottlenecks in physical systems place hard constraints on total output—no matter how advanced the software layer becomes. AI might improve efficiency at the margin, but it doesn’t decouple the economy from its biophysical foundations. If we ignore that, our models—and our policies—will mislead us once again.

Which brings us back to energy—and to something even more fundamental: the natural systems that underpin it.

Natural Capital Holds the Key

For decades, nature sat quietly in the background of economic analysis—unpriced, unmeasured, largely invisible. Forests were presumed to be infinite, soils inexhaustible, water ever-available, and climate broadly stable. The natural world was treated as a passive backdrop, not a variable.

But the data now tell a different story.

While produced capital—buildings, machines, infrastructure—continues to accumulate, and human capital creeps upward, the two forms of capital we draw directly from the Earth are in retreat. Renewable natural capital—forests, soils, water systems—has steadily declined. Non-renewable capital—minerals and fossil energy reserves—has flatlined after decades of extraction-led expansion (see chart below).

As Christina Caron argued in a landmark 2024 study, this erosion is no longer a background issue. The degradation of nature’s assets—from shrinking aquifers and parched farmland to dying reefs and rising heat—is shifting from a hidden enabler of growth to an active drag on it. The global economy is now eating into the very foundation that once sustained it.

Nature as Constraint

The logic is basic but profound: the economy is embedded in ecology. It cannot function independently of it.

Energy systems rely on rivers and minerals. Agricultural productivity depends on climate and topsoil. Urban infrastructure requires buffers against flooding, fire, and extreme heat. When these systems degrade, the economic consequences ripple outward: volatile food prices, water shortages, grid failures, soaring insurance premiums, rising investment risk.

Political Ramifications

Ecological decline rarely respects borders. As land becomes unviable and water scarcer, people move. Migration, once driven largely by economics or conflict, is increasingly climate-linked. And it doesn’t take catastrophe—just enough disruption to displace rural communities, stress cities, and strain borders.

Already, climate-linked migration is shaping politics in the Sahel, Central America, and South Asia. And destination countries, often dealing with their own social and economic pressures, are responding with populist retrenchment rather than cooperative solutions.

When resources grow scarce, political narratives harden. Climate policy becomes a cultural battleground. Democratic institutions come under pressure. And populism finds fertile ground.

Geopolitical Pressure Points

The geopolitical consequences are no less urgent. Many of the regions facing rapid natural capital loss—North Africa, the Horn of Africa, the Middle East—are already fragile. Water stress is turning into a strategic variable, with river basins like the Nile, Tigris-Euphrates, and Indus becoming increasingly contested.

Meanwhile, the energy transition introduces its own natural capital demands: land for solar and wind farms, water for cooling, critical minerals for batteries. The irony is that escaping fossil dependence will require even more careful stewardship of natural systems—not less.

Conclusion: Beyond the Growth Illusion

The numbers are clear. Human ingenuity and capital accumulation can mask ecological decline—for a while. But eventually, the loss of nature’s productive and buffering capacity makes itself felt: in higher costs, lower resilience, and mounting economic fragility.

Caron’s central point is not that growth is over—but that our assumptions about what enables it must change. Nature is no longer free. It is no longer silent. And increasingly, markets, policymakers and businesses will need to reckon with that. Ecological value will be priced. Resilience will be revalued. Restoration will become investable. And geoecological advantage—access to stable ecosystems and renewable resources—may quietly reshape global power.

References Caron, C. (2024). Eroding Natural Capital: An Alternative Explanation for the Secular Decline in Productivity Growth. International Productivity Monitor, 47, 109–147.