The Witless Economy
With Christmas coming up time to hit the beach with a book (Southern hemisphere here).
We have been through a precarious business year where our faith in the vagaries of the “free market” should have been very considerably challenged although I personally don’t see too many people taking real notes and they should be.
This is more witless economy than weightless since for all the technology – business growth is still inextricably linked to energy usage patterns and efficiencies.
It seems like the global financial systems are much more unstable than previously acknowledged.
When there is a market meltdown it makes sense to check out the models to see if we missed the equivalent of a fractal thunderstorm. Somewhere there must be an economist who has a much clearer view of the rolling trainwreck we have been witnessing.
Robert Ayres is one economist who might have some clues based on his previous work. I’d be keen to hear from anyone who has read and thought about “The Economic Growth Engine: How Energy and Work Drive Material Prosperity” which seems incredibly apposite to this time.
Since 1956 the Solow Residual has been an albatross around the neck of economics because it made a mockery of the very arguments it was trying to support.
Ayres worked out the correlation between energy and economic growth is 14 times larger than that assumed by Solow. In doing so by implication the impacts of a new oil shock are much, much higher than any economists had assumed before then.
Economics has often been dismissed as a dismal science because of many of the classical economic theories have been less than convincing, putting it generously. As Robert Frenay surmises in this piece when talking about the oil shocks of the 70’s.
“Mainstream economics not only didn’t foresee what happened in the seventies, it couldn’t explain it. To those focused on bioeconomics, the cause was less mysterious. The economic models that held the field then, and in modified form still do, were not connected to the real world.”
Now that is an understatement with far reaching implications.
“There is a potential for confusion here between technological progress and “progress” in the more general, even more undefined sense. Along with many others, I have long tended carelessly to equate economic growth with that kind of undefined progress. Though aware of the difference, I nevertheless assumed for convenience that the one is virtually a surrogate for the other. The time has come to try to sort out this confusion.
In a certain simplistic sense the difference between growth and progress is all too obvious: It is the difference between “more” and “better”. In challenging the growth paradigm itself I am not assuming that growth necessarily means “more” physical goods. Far from it, I insist that the true measure of economic output is not the quantity of goods produced, but the quality and value of final services provided to the consumer. What is most wrong about the “growth syndrome” is not its tendency to consume material resources (as Barry Commoner, for instance, assumed). What is wrong with it is that growth of the kind now occurring in the US and Europe is no longer making people happier or improving their real standard of living.
It is possible to have economic growth – in the sense of providing better and more valuable services to ultimate consumers – without necessarily consuming more physical resources. This follows from the fact that consumers are ultimately not interested in goods per se but in the services those goods can provide. The possibility of de-linking economic activity from energy and materials (“dematerialization”) has been one of the major themes of my professional career.”
Abstract from ACCOUNTING FOR GROWTH: THE ROLE OF PHYSICAL WORK
Robert U Ayres & Benjamin Warr
Center for the Management of Environmental Resources
Fontainebleau, France – 2004
This paper tests several related hypothesis for explaining US economic growth since 1900. It begins from the belief that consumption of natural resources – especially energy (or, more precisely, exergy) — has been, and still is, an important factor of production and driver of economic growth.
However the major result of the paper is that it is not `raw’ energy (exergy) as an input, but exergy converted to useful (physical) work that – along with capital and (human) labor – really explains output and drives long-term economic growth. We develop a formal model (Resource-EXergy Service or REXS) based on these ideas.
Using this model we demonstrate first that, if raw energy inputs are included with capital and labor in a Cobb-Douglas or any other production function satisfying the Euler (constant returns) condition, the 100-year growth history of the US cannot be explained without introducing an exogenous `technical progress’ multiplier (the Solow residual) to explain most of the growth.
However, if we replace raw energy as an input by `useful work’ (the sum total of all types of physical work by animals, prime movers and heat transfer systems) as a factor of production, the historical growth path of the US is reproduced with high accuracy from 1900 until the mid 1970s, without any residual except during brief periods of economic dislocation, and with fairly high accuracy since then.
(There are indications that an additional factor, possibly information technology, needs to be taken into account as a fourth input factor since the 1970s.) Various hypotheses for explaining the latest period are discussed briefly, along with future implications.
Here is more detail on the latest book.
The authors of this unique book explore the fundamental relationship between thermodynamics (physical work) and economics.
They take a realistic approach to explaining the relationship between technological progress, thermodynamic efficiency and economic growth, the findings of which conclude with a fundamental explanation of endogenous growth that is both quantifiable and consistent with the laws of thermodynamics.
A major implication of this is that future economic growth is not guaranteedinasmuch as efficiency gains that have driven past growth may not continue in the future.
Ayres explains: “According to the standard theory, energy is an intermediate good that can be ‘produced’ by some combination of capital investment and labour (plus technology). This means that economic growth is essentially independent of energy use, which suggests – in turn – that growth can continue indefinitely at historical rates. And when people talk about recovery, implicitly that’s what they’re saying – that right now the world economy has a hiccup or is perhaps suffering from a case of the swine flu, and that we can expect to get back sooner or later to a trajectory of growth that’s based on the last 100 years.”
“But if we’re right – and I think there’s much more than a small chance that we are – you can’t make that assumption. It’s a very dangerous assumption and it’s leading to potentially very risky advice to political leaders. For example, we’re immediately faced with a possible inconsistency between the idea of taxing energy use, or putting a cap on carbon emissions – either of which will raise the price – while, at the same time, hoping that growth will not be affected.”
Sounds like the perfect Christmas /summer reading to me. Have a good break everyone.
Ironically despite this excellent research getting anyone to read the book is very difficult. Tip:You can watch the video or view below