Step 2 - Follow the Science
Let's assume for a minute that by some miracle the population wakes up to the fact that we, as a species, have terrible intuitions about energy matters and agree that we should let science lead the way in explicating the problem and guide policy formulation. What would that look like?
It isn't for a lack of science of energy that things have gotten really screwed up in Washington. It is for lack of actually using it in a meaningful way to grapple with the nation's problems. I have written many pieces in this blog and commented frequently on sites like The Oil Drum, Gristmill and Huffington Post about the relationship between energy and economics. See my compendium (here or from the sidebar) of articles on biophysical economics. I and many others have been arguing that economics should be viewed as a subsystem within the earth Ecos and that all economic work, in the end, is really just physical work and requires energy at high potential. The science on energy sources and flows, work, efficiency, etc. is rock solid but counter intuitive for most humans. It should be applied to economic problems the same way it is to engineering problems in other domains.
If I were in Obama's shoes (and thankful that I am not!) I would convene an international meeting of world leaders and their top scientists in energy matters and ask people like Herman Daly, Robert Costanza, and Charles Hall to provide a synopsis of the ecological/biophysical economic perspective. I would also invite me(!) since I can actually explain why the current economic crunch is a matter of energy. Although I think the people named and a number of other biophysical economists could do the job.
The first key to understanding the economy in terms of energy (aside from recognizing that all work requires energy) is grasping the concept of 'energy available to do useful work'. That requires some unpacking. The first part of the phrase refers to the energy that can be coupled with what are called 'prime movers and heaters'. These are the machines that take various high-grade forms of produced energy, like natural gas, gasoline, diesel fuel, jet fuel, and electricity, and through converting these energies into high-grade mechanical and chemical work are the basis of all other work processes in the economy. Even the machines and heaters in your home are there to convert some of these energy forms into useful work.
Which brings up the meaning of the second part of that phrase. Useful work is a bit trickier than most people realize. To be useful, work has to accomplish a single goal. It has to increase the 'energy available to do useful work!' In other words, energy must beget energy.
It turns out that there are actually several ways in which this can be done. The work accomplished can either produce more net energy (that is produce more usable energy than it consumed) directly, as when we pump oil out of a well, or it can reduce the amount of energy needed by other work processes so that given the same amount of initial energy available, less is used up over time. This latter trick is pulled off in one of two ways. You can do work to build a tool that makes other work more efficient, like building faster computers that use less energy per unit of information processed, or you can take steps to lower wastage through conservation methods like insulating homes properly. The same principle of increasing efficiency applies to work procedures done by humans. Any time you improve a process or method you improve productivity.
These principles have been applied to farming (food fuel), industry, home, and transportation to some degree or another, usually in response to an energy price signal. Monetary prices have been the basic mechanism for measuring costs. Whenever a value-adder sums up his or her costs (prices paid for components and labor) and decides the market won't bear an increase in their own price for the value added, they look for cost savings by improving productivity or finding less expensive inputs from vendors who have already improved their own productivity and lowered prices. Good game as far as it goes.
Which leads to the second key to understanding economic science based on energy. Money is nothing more than a token representation of energy available to do useful work! We use money as a convenient method of exchanging work already done for a promise of work to be done in the future. When you give a vendor a cash payment, you are, in essence, sending a message that the work product/service you accepted in the transaction is of value and the vendor should produce more in the future. Fundamentally, every vendor in the supply chain will pay the vendors before for work (energy expended from the pool of that available to do useful work) until the last vendors in the chain pay the energy source for more energy to keep the whole chain going. It looks like a big inverted tree-like network (or pyramid) where energy flows in at the broad base and at each node and intermediate products and services flow upward toward a final product (or service).
Energy is used to extract more energy and materials at the base. This includes providing fertilizer and tractor fuels to agriculture so that labor has food (energy) to work on. Not shown in this diagram is the heat leaving every node representing the waste heat from work processes and transformations (Second Law, remember?) But this is a basic energy and material flow diagram of the economy. Note that it takes energy to extract and produce materials as well as to transport them to the next stage. Hence, energy applies to every single thing that goes on in the economy.
Money flows in the opposite directions of every arrow in the diagram except, usually, the bottom ones. Leases on land that contain the raw materials might be considered a money flow but we can essentially ignore it for now (I have more to say on rents in a later post). The money that goes to pay the energy bill is obvious as far as being connected to an amount of energy used. But not so obvious is the money used to purchase components also represents the energy needed to do the value adding work at each intermediate stage. The skinny arrows represent material or labor inputs but money has to flow counter to them in order to pay for them. What this money actually represents is the amount of energy that had to go into producing the intermediate components (or the labor — muscle and brain are intermediate components in this sense!)
If one properly understands this aspect of money, then economic transactions, even monetary and fiscal policies that are based on the First and Second Laws of Thermodynamics could be designed to provide total transparency. Such an understanding would go a long way to eliminate confusion about what is happening in the economy.
Right now there is massive confusion and misunderstanding. The roles of banking, lending, debt, stocks and a huge variety of financial practices that are at the base of the global financial meltdown could be seen to have a relatively simple explanation — if we are willing to accept the fact that we have basically gotten it all wrong before now. When we thought energy was just another commodity and money was something that could create itself out of trust we were bound for destruction. Energy is not just another commodity. And money is representative of energy. Energy cannot be created from whole cloth as the current financial industry seems to think about money. You cannot loan out energy and expect it to be paid back unless the loan goes to producing more usable energy in the first place, enough to replace the original energy plus some extra as profit. You cannot really create wealth by second-order circulation of money meant to be saved against a rainy day (fractional reserve banking). You cannot create money by betting on stock prices and driving them up when the underlying asset hasn't really changed physically. Same for house prices. I have trouble conceiving what sort of complete ignorance of physical reality lets otherwise smart people believe in this kind of magic.
Everything else that has been targeted as the 'cause' of the meltdown, including human greed, have their roots in energy matters. Even the form of the modern global corporation is a consequence of energy issues. Economies of scale, chasing the cheap labor, you name it, the modern corporation is desperate for energy as much as any animal would be. It organizes itself, splits, merges, acquires, and pollutes all in the name of efficiency which is supposed to translate into profits, shareholder value, and big bonuses. This singular fact is now becoming a lot clearer to economists and politicians, who nevertheless cannot purge the old failed belief in infinite growth out of their confused thinking. When energy prices skyrocketed last spring and summer, everyone took note. And, indeed, now everyone is wondering what that pulse of high prices really meant, now that the global economy is in the tank and looking to go lower. In fact the price of oil is an artifact of an out-of-control positive feedback loop. Oil scarcity drove prices upward, followed by speculators seeing the oil market as a good bet and driving the price bubble further. Then demand started dropping and lo and behold less work was getting done. The debt markets, particularly associated with housing and sub-prime mortgages started to teeter because prices of food and other consumer goods started to follow oil's climb and continued to do so even as oil started to fall. Once the debt bubble was exposed to the fact that a huge portion of it was based on expectations of work that would be done in the future and that those expectations were being dashed because there was not enough energy to do the work in the future, that bubble burst with calamitous effect. Actually the financial wizards were not responding to lack of energy so much as lack of seeing their paper assets bear fruit. But that was because people who are either out of work or see their costs of living going up cannot pay back loans. No energy, no work. No work, no pay. No pay, no payment. Etc.
Our debt system has come to be based on borrowing money against the expectation that the energy to back that money will be available in the future. It's easy to create money out of thin air with our financial mechanisms. But you can't create energy in the same way. And unfortunately for everyone having this expectation the energy supply is now dwindling. The advent of peak oil coupled with the accelerating decline in energy return on energy invested (EROEI) means that there is less net energy to do useful work for the economy. Oil is an input to everything else, even mining coal and pumping natural gas to building solar panels and wind turbines to supporting our modern agriculture. Lower the net energy available and you have to lower the work per unit of time. It's simple physics.
Daly and Hall, et al could explain this to Obama and company if they would open their ears. So far that doesn't look like it will happen. He hasn't woken up yet. I suppose it will take Treasury Secretary Geithner and Economic Council Head Lawrence Summers failing miserably in reviving the old growth-oriented economy before Obama will open his eyes and say "Hey this conventional thinking isn't working! What do we do now?" This assumes he has the wherewithal to open his eyes. And my fear is that even if he does it really will be too late. We are on the edge of the cliff and have no ready railing to hold onto. If this stimulus package ends up providing only temporary relief and then the next crash is even worse I don't know if we can then decide to redesign the economy to take into account the laws of thermodynamics. I don't know if we will have the resources to keep everyone alive while we retool.
Suppose, though, that Obama did what I suggested and turned to science for guidance to economic policy. It would actually be energy policy too. Many people recognize the link somewhat already. Some even recognize that it would be carbon emission policy to boot. An integrated, systems approach to understanding all three problems at once would be a definite benefit in many ways. Next time I will explore how that group might proceed to analyze the problem and set about outlining a solution. Only then will we get on the right track. But I must warn you, the nature of the solution(s) will not be what most people expect and want. Obama was right about one thing in his inaugural address; there will be sacrifices and hard work ahead. I'm just not sure he realizes how much.
Aside from exploring the energy/economic situation more, this month is Global Population Speak Out month. I have made a pledge to publish work on this topic. Even if scientific solutions to energy and economics became widely available there is one remaining unfortunate and inconvenient truth that needs to be dealt with if we are to have a realizable solution for future humanity. And that is that there are really already too many of us on this planet. Any strategic plan for humanity must include a logistical plan for reducing our numbers to a level that match our resource and energy generation capabilities. I will be using the energy available argument along with a social justice argument to argue for opening our minds to what may be potentially radical approaches to population reduction.