Question Everything

Economic dynamics - and the real danger

This is a summary paper that I have written to explain the findings from my computer model of an abstract economy's dynamics when it is run mostly on fixed, finite fuel sources such as fossil fuels. This paper is a little more formal than my previous blog on "It's the net energy stupid!" and I will be submitting it for publications at one of the energy-related web sites for wider dissemination. But I thought I'd give my readers a first peek.

The Dynamics of an Abstract Economic System

George Mobus

Associate Professor, Computing & Software Systems, University of Washington Tacoma, Institute of Technology

This is a preview of some of the ideas being developed in a paper by Mobus & Charles Hall being prepared for publication. This version only gives the background and main conclusions to be found in that paper, oriented toward general readers. The author wishes to thank Professor Charles Hall and his students for a very enlightening sabbatical at SUNY-ESF where the ideas for this model effort emerged. Any defects in this version are the fault of the author alone.

The purpose of this contribution is to introduce the concept of an abstract economy in order to explore the general dynamics of economic systems without concern for distracting details that do not alter those dynamics in general, but can cause confusion in trying to understand a more general theory of economics grounded in biophysical science.

An economy is a system that takes energy and raw materials as inputs, involves internal work processes that create and maintain physical structures, and expels degraded materials while losing waste heat to the environmental energy sinks surrounding it. This abstract description needs some more detail but should remain sufficiently general so as to cover a wide range of dynamic systems from living organisms to ecosystems to the societal economies of the world.

The structures that are produced by the work processes include biomass (reproduction and growth) and many kinds of artifacts. Collectively I call these structures — assets —, meaning that the structures are considered to be of some kind of worth to the agents participating in the economy. Assets are further divided into long-, intermediate-, and short-term. These temporal categories correspond with examples such as:

• infrastructure, housing, capital buildings and equipment, mass transportation [ten year or greater life spans]
• artifacts such as clothing, personal transportation, furniture, process designs [less than ten years but more than one year]
• food, fuels in stock, supplies [less than one year]

Biomass of humans and pets constitute a separate category of assets. The time scale of human life and reproduction determine the number of individuals within the population (how the biomass is divided into units). As crass as that may sound, the reality is that human beings are generally considered assets by most prevailing value systems. Of course, under the right conditions, all asset types may become liabilities, as when they become obsolete.

Artifact assets also include informational and knowledge recordings such as computer programs used to control work processes (as well as the very real knowledge encoded physically in brains of people). These artifacts are as much physical assets as any other, but they have somewhat unique properties, e.g. being essentially infinitely reproducible at very low energy/material costs. Their value, however, lies in how they affect the movement and interactions of physical structures in the accomplishment of useful work. Notice that missing from this list of assets is the financial instruments typically given asset status in our current economic models. I will address this later after describing debt financing below.

Figure 1, below, shows a diagrammatic representation of an abstract economy with a net accumulation of assets over time as long as there are energy and material inflows. In theory the materials could be recycled if there were enough energy available to recover wastes, refine and reshape them, etc. In practice there is never enough energy available as reflected in the cost limits for recycling operations in the real world. Also, the issue of economic growth (asset accumulation) requires new material resources continually being input into the system.

Figure 1. An abstract economy. Work processes use energy and raw materials to produce assets, some of which are consumed by processes that constitute the major body of the system, some of which will be reinvested in the work processes. Information (thin arrows) flows between the three subsystems.

The dynamics of asset production and decay are governed by the laws of thermodynamics. The general conservation law applies to both matter and energy. But the second law, in particular, has ultimate influence over the efficiency and effectiveness of work processes as well as the entropic decay of all forms of assets. Each asset type can be characterized by its own production and decay constants, but each follows a similar formulation.

A_(t) = A_(t-1) + k_pNE_(t) - k_dA_(t-1)

where:
A is the level of asset accumulation
NE is the net energy available for economic work (e.g. gasoline refined from oil)
k_p is the constant of asset production
k_d is the constant of asset consumption + entropic decay
both constants are << 1.0 and k_p > k_d
and t is the discrete time index

As it happens, since all asset types follow the same dynamics, it is possible to aggregate all assets using a weighting method to aggregate constants so that A_t represents the sum of all assets at time t. Here the dimensions of assets are given in embodied energy units, or emergy. The constant k_d represents both consumption processing and natural decay due to wear and entropy.

A key question that needs to be addressed is: given our current heavy reliance on fossil fuels for more than 80% of our energy inputs, what happens in an economy that is growing when the resources are depleting? As most readers of The Oil Drum and other energy related sites are aware, the focus of analysis has been on the dynamics of peak oil, as per M. King Hubbert, and concern has been for the impacts of declining oil supplies after the peak on the economy. The model that I have been working on, and am in the process of refining with Dr. Charles Hall at SUNY-ESF, suggests that this is actually not the relevant focus in terms of economic capacity.

Many people have realized, either intuitively or logically, that what matters insofar as economic activity is concerned is the net energy — the energy available after extraction of the gross energy (in this case crude oil) and refinement or conversion to a form useful in doing work. Energy must be reinvested in energy extraction, transportation, and refinement in order to gain net energy that can be available for asset production (other than assets needed for energy extraction). Thus there is an energy return on energy invested (EROI or EROEI) that must be taken into account in determining if an economy is viable, stable, or growing. Essentially, when the energy costs of extraction and refinement are subtracted from the gross energy extracted, the net is all that society can use for its work processes. Energy costs are similar to monetary costs of doing business. There are actually energy investments, as for example the embodied energy in off-shore drilling rigs, and there are energy operating costs, e.g., pumping oil. In addition there are also on-going maintenance costs to keep the infrastructure in working order.

The "Best-First" principle states that we human agents will always attempt to extract the easiest-to-get resources first. For oil and other fossil fuels this boils down to geophysical facts about the depth and quality, and geographical facts about distribution of field sizes and locations. We have tended to exploit the largest, easiest to get to fields, most of which are now in declining production. What this translates into is increasing amounts of energy must be used to find and extract the oil (read all fossil fuels), hence net energy is less per unit of energy extracted. The increases in energy costs as a result of the Best-First principle are shown in Graph 1, along with gross and net energies. This model is based on an increase in extraction difficulty as a result of depletion. It does not depend on an explicit logistic function and can be seen to not be symmetrical about the peak of gross energy extraction.

Graph 1. The net energy available to the economy is the gross extracted energy less the energy cost of reinvestment in extracting the next units of energy. This graph assumes exponential pressure in the growth of extraction. The reality of a finite resource turns this into a logistic-like curve.

The mathematical basis for this model will be covered in the paper by Mobus and Hall, in development. Sensitivity analysis, using various rate constants, shows that the model has a very stable form in terms of relations between the three curves. Lower rates of cost growth increase the values of net energy, of course, but do not change the overall dynamics of the system.

Of particular note is the fact that the net energy curve peaks before the gross energy curve. In this model the time is about thirty years, but note that energy units and time units are somewhat arbitrary as this is an attempt to ferret out the dynamical behavior of an energy system based on a fixed, finite resource. Why this is important is that for many years now, we have been focusing on peak oil or peak gross production as the most important inflection point. But the economy runs on the net energy. If peak oil has already occurred, then the peak of net energy production has long since passed. I think this is the most cogent point of this exercise.

Secondly, note that the curves for gross and net are not symmetrical about their respective peaks. This is a result of modeling the physics of resource extraction based on the Best-First principle. The pre-peak scenario aligns well with Hubbert’s theory. But the post-peak scenario shows a much faster decline rate. Since this model does not assume anything about peaking behavior and is based entirely on physical relations between extraction work and production rates, it might behoove us to think more carefully about the consequences of post-peak behavior such as this. It is true that under a profit motive for extraction, there would not likely be a continued all-out effort to extract the resources, thus possibly leading to a more extended post-peak scenario. We already appear to be in a bumpy plateau owing to the feedback from an unstable economic system. It is possible that such a plateau and other feedbacks from the financial system might extend the period of post-peak and modify the decline rates as a result. However, this will certainly come with a heavy price in terms of jobs and wealth production as it implies a greatly diminished economy.

Let us then see what the model predicts about wealth or asset production. Graph 2 shows a basic scenario for the production and accumulation of assets (in emergy units) given the above energetics.

Graph 2. Assets are produced as a function of net energy according to the equation above. This graph is for the aggregate of all asset types as described above. Assets decay or are consumed at a rate less than production as long as net energy is in its pre-peak phase. Assets continue to accumulate and the peak of asset accumulation comes after net and gross have both peaked.

The three colored regions between net energy and assets represent three distinct phases in economic activities. The green region, labeled ‘debt payback feasible’ represents a phase in which net energy is growing faster than production can add to the asset base by the above equation. During this time it is easy to imagine how expectations that future periods will always have a capacity for growth in asset production arise and lead to the institutionalization of debt financing. From the perspective of agents making decisions about how and when to create new asset wealth, the fact that there will be more such wealth in the future can be taken for granted. Debts can presumably be paid back with interest. The form of modern capitalism relies on such an assumption.

Though money is not explicitly modeled it can be thought of as convenient tokenization of energy units that facilitates trade and represents a claim on future work. In that sense, debt instruments can be denominated in such tokens in order to represent future amounts of work that will be done to service the debt and pay some presumed future profit in the form of interest on the loan. Money is the main form of information flows (thin arrows) shown in Fig. 1. It circulates between the processes and the asset stores to regulate what gets built and when. Financial instruments such as bonds, stocks, and other forms of future obligations are superimposed on this information stream as a way to push promises of future work further out in time. So far as agents creating these instruments without foreknowledge of the limits to growth, this seemed perfectly reasonable in the green region.

The yellow region represents a phase in which net energy is decelerating and converging with still growing asset accumulation. This convergence and ultimate cross-over is a period in which the potential to pay back loans, based on future work, is coming to an end. Once net energy is no longer in exponential growth, the expansion of assets also goes into deceleration. Agents within this phase may or may not recognize the problems associated with decelerating work capacity. One might speculate that such agents, having been so successful at using debt-based financing for wealth production in the past (green phase) would be tempted to elaborate more abstract debt instruments in an attempt to continue at least the appearance of wealth production growth. Various forms of financial bubbles might appear followed by collapse since it would become progressively harder to create real physical wealth (assets) due to decreasing available net energy. For agents that sensed a change in the general milieu there was incentive to change the organization of work processes in order to reduce costs — ultimately energy costs of production — such as moving manufacturing to regions of cheaper labor. The yellow region represents a period of adaptation, where possible, to decelerating net energy flow.

Eventually, however, once net energy production falls below the asset accumulation curve, the capacity for paying back debt-based obligations is no longer. Indeed, in the red region it is not even possible to create legitimate debt instruments since all net energy production should be now going strictly to maintenance work. No new assets can be created without ignoring the maintenance of current assets (and the concentration of wealth in the hands of the most powerful agents) and all work is geared toward fighting entropy and struggles to supply consumption processes (one imagines this to be chiefly oriented toward maintaining food production).

The vertical line marked ‘today’ is an arbitrarily placed marker for peak oil, presumed to have already happened (reports on various energy web sites strongly suggest this). If this is the case, then we are already into the red region where it is impossible to create debt-based financing (legitimately) since there is absolutely no possibility of paying off that debt with future work resulting in greater asset accumulation. Is it possible that this is exactly the problem we are seeing in our heavily debt reliant economy today? Our financial systems have clearly gotten out of sync with our real asset producing economy. We are in the throes of debt-unwind and very possibly massive defaults as nations, corporations, and individuals (who have no jobs) are incapable of promising to work more in the future to pay back their obligations. Those who would loan money (claims on assets) to those who propose to create new wealth would do well to reconsider since the model suggests that it will be impossible to even get back the principal, let alone the interest.

Of course, the real global economy is not 100% reliant on fossil fuels; though the mix of other sources makes it difficult to incorporate into this model except possibly by actual data (e.g. nuclear power production started after the mid fifties and has not grown, globally, in proportion to fossil fuel use). Conceivably, where the real economy is hobbling along and not seeming to crash as expected from this model, it is due to more stable energy production from, for example, hydroelectric, sources. Also much growth, especially in electricity generation, has been due to coal rather than oil. But a necessary caveat here is that the extraction of coal is fully dependent on the availability of diesel fuel for transportation and excavation (as in mountain top removal). So I would expect the peak of net energy from oil is already having a deceleration pressure on net energy from coal. It may be too early to say what the dynamics will look like if natural gas proves to be a viable alternative to either coal (electricity) or oil (transportation and heating). If the current claims about recoverable resources (at least in the US) pan out, it could both extend the energy curves and delay the overall aggregate fossil fuel peaks for some time. Nevertheless, the basic shape of these curves will be the same. If we do end up buying more time with natural gas we would do well to use it wisely.

It takes energy to do work. And work, constructing real assets (vs. paper assets), is necessary to create real wealth in order to retire debt obligations. If this model of an abstract economy, fueled as in this case by a fixed, finite supply of energy, truly captures the essence of the dynamics of a real economy then we should consider carefully the meaning of the earlier peaking of net energy flow as well as the potentially dangerous rapid decline in post-peak production. And we should certainly consider the implications of the three phases of economic growth, deceleration, and final decline as shown in this model. Peak oil may only signal that we are already past the point at which our economic systems can function as wealth accumulators instead of signaling that the trouble is about to start.

Parsing the economy

In my never ending quest to ferret out the meaning of economics and how energy flow plays a role, I came up with this brilliant way to look at things. OK, you can decide just how brilliant, if at all. But it helps me!

My recent efforts to model the economy in terms of energy flows has really got me to thinking about different ways to parse the whole system so as to see what is going on from different perspectives. Ideally, all of these views will reconcile to the whole and what we will have is a more comprehensive vision of how the economy works, and how we fit into the picture.

The figure below is one such parsing. Readers who have been exposed to my many prior versions of biophysical economics will recognize much of this. The idea here is to just disaggregate the various subsystems in such a way that we can approach an accounting method for keeping track of energy flows. This is a version of input-output modeling. This is my first pass at this approach so I am sure there is plenty that I have left out (or too much put in).

The arrows represent energy flows. Even the material flows, say from resources to the extraction subsystem, are powered by energy flow. And there is an equivalence of energy required to do the transportation work needed, so in this sense all we need to do is pay attention to the energy flows themselves.

Notice the dashed arrow in the lower right hand quadrant marked '? recycle'? I am trying to indicate that there needs to be such an arrow representing the amount of work needed to recapture and recycle materials back into the resource category. We do some of that, say with paper, glass, and metals. But not nearly enough, and not as rapidly as we produce the stuff. Land fills and watery dumping grounds are still growing with trash at a rate that natural processes cannot keep up with. If we ever fix the rest of this energy flow system that is one of the first things that needs to get rectified.

The main objective is to recognize the energy economy as a separate functioning unit from what I've called here the living economy. The left side of the diagram shows the energy input into society from two subsystem economies, the agricultural or food inputs and the exergy or external energy inputs. This relates to my energy cocoon idea. Agriculture includes fisheries even though these are natural resources. The idea is that anything that we eat will depend ultimately on photosynthesis. This includes phytoplankton at the base of the fisheries food chain. Other biological resources, such as fibers and wood products I've put in the lower right hand quadrant.

This model differs from traditional energy economy or input-output models in that those others invariably treat energy sources as just another commodity, like iron ore or phosphates. This is wrong on many counts, but specifically because energy flows in a one-way direction from high concentration to low concentration (heat). At least in principle minerals, etc. are recyclable or renewable. Energy is not (save for hydro and other forms based on solar input).

Notice that I have included the human population as part of the human assets! Our collective biomass is, indeed, part of our physical assets just as much as our houses, cars, TVs, etc. We're not exactly 'soft' assets since we are longer lived. I guess we should think of ourselves as 'squishy' assets!

What is missing from this diagram? Money. there is no monetary or financial subsystem indicated. That is because money SHOULD only be the message flows counter to the energy flows that regulate the rate and timing of those flows. Instead, in our modern, abstract thoughts about money we have completely forgotten its role as a communications medium for regulating and coordinating the flow of energy.

My hope is that through biophysical economics work we will be able to explicate that role and restore the concept of money to its original form. Anyway, food for thought.

The big problem still remains where does the energy come from in the first place? The fossil fuel box is finite and non-renewable yet it accounts for over 80% of energy input to the exergy production quadrant. Solar, nuclear, and tidal/wave alternatives are the only other viable sources of exergy. Yet, as I have written before, the feasibility of building out the needed infrastructure to capture that energy is nil. My only excuse for building models like this is that maybe we can make it clear what will need to be done to minimize the pain and MAYBE somebody in authority will get it. OK, OK, back to reality.

Its the net energy, stupid!

Recall Bill Clinton's famous rejoinder to George Bush the Elder? "It's the economy, stupid". Well, it is the economy, but the economy is based on net energy flow for the production of all things important to human existence*.

A few blogs back I wrote about the computer model I've been developing with Charlie Hall, here at SUNY-ESF. In it, I mentioned the fact that net energy is the stuff that drives our economy, not the gross energy such as barrels of oil. Except for heating oil, which isn't actually the stuff out of the ground, we refine oil to usable forms like diesel and gasoline. It is those products that we use and it still takes some energy to transport them to the points of use. So it is the net of the gross energy (e.g. barrels of oil, or tons of coal) minus the energy invested in extraction, refinement, and transportation that really counts as usable in the economy.

As I worked more on the paper that Hall and I will co-produce, I began realizing that this is much more significant than anybody seems to have realized. As I outlined in that prior blog, if gross energy is near or at peak (and some say it may be past a theoretical peak; that we are in a bumpy plateau due to the fluctuations in the financial markets) then this means that we are already passed peak net energy. Moreover we long ago passed the point of inflection where net energy ceased to be rising exponentially fast and started to decelerate (the curve transitions from always going up faster in each time increment to going up more slowly in each time increment). It was that point of onset of deceleration that was the beginning of the end of the party, the energy consumption binge. That point appears to have been about 40 to 50 years ago in my model. Even accounting for some increases in energy efficiency due to improved technology, that probably translates into more than 30 years since the onset of the decline in net energy.

If this proves to be the case we are in very serious trouble (unless someone discovers some new magical source of energy like cold fusion). The problem is compounded by the fact that we haven't actually been paying attention to net energy available per unit time. We count barrels of oil and tons of coal and cubic feet of natural gas, all measures of gross energy, and have obsessed on the peaks of production of these, since they are finite resources. It should be obvious to all that peaks of production of raw (gross) energy are extremely worrisome since over 80% of global energy use comes from fossil fuels. As I have noted many times, the build-out and scale up of alternative energy capital equipment and supporting infrastructure, to replace fossil fuels in the time remaining before the law of diminishing returns catches up to us, is, for all practical purposes, infeasible (I note that I see more similar sentiments being expressed in the press these days as more scientists are coming to similar conclusions). 

But focusing on gross energy fails to recognize and detect the impact of what is happening with net energy flow. That is what really impacts the economy. And if my model is even a little bit right on this, then my suppositions about reduced energy flow being the root cause of all the economic shifts we've been witness to for the last several decades is greatly strengthened. Globalization, for example, was more about finding cheap labor to replace expensive energy for machines and expensive American labor that needed to be supported in energy-hungry lifestyles than finding new markets. The current housing bubble fiasco and Wall Street excesses, as well as so many corporate frauds being foisted on the American and world's working class are nothing more than attempts to hide the fact that it is increasingly hard to produce real assets because the net energy is diminishing! The growing disparity between the richest 1% and everybody else is not just due to greed. It is also a result of the pie shrinking.

So-called "green jobs" can't be counted on to actually reverse this situation even if implemented in a new jobs stimulus program. No one is going to get rich or make a great living doing green work or producing green products unless they magically figure out how to beat the 2nd Law of Thermodynamics. Going green will, at best, partially stanch the blood loss. But with net energy going into decline (if we have already passed peak net energy) there is no physical way to make more wealth tomorrow than we made today. We cannot grow the asset base any more. Period.

The point of this research is that we had better, start to focus on measuring net energy flow to the economy as a function of time to see if we are approaching, at, or passed the peak of production. We need to know and we need to know now. The policies we adopt are critically dependent on knowing the situation.

But, you say, George, don't be naive. Our leaders don't do anything right now even knowing that peak oil is upon us. Why would you expect them to do the right things knowing peak net is passed? And of course this is the real fly in the ointment. Political will is weak. Political wisdom is absent without leave. Political hope trumps science even while the head politico of the country promises us science will lead policy (evidence against him is the continued hope that 'clean coal' will save the day). Even so, I will pursue understanding. Who knows, maybe when the SHTF for real (look for the next even deeper recession coming soon to an economy near you), then TPTB will realize the errors in their ways and start listening to us scientist in earnest. Right. And monkeys will start to fly out of my behind (thanks to Mike Meyers for that disturbing vision).

[*Edit note: In my haste I forgot to tie the title into the text! So the first paragraph attempts to rectify that oversight. Apologies to all readers who have already visited here.]

Acid Test Results - A Post Mortem

What happened to change and hope?

When Obama was inaugurated I posted my thoughts about the likelihood of the Obama administration doing the right things: This is the acid test. In it I said "If Obama can't pull it off, no one can I suspect."

Obama was clearly a different kind of politician, or at least seemed so in contrast to the other candidates and the previous administration. I think a large majority of us looked upon his election as a real relief. My own thoughts were that now we might have someone who would dare to tell the truth about climate change and energy depletion and would use the bully pulpit to promote real action. Of course I realized that the vast majority of people who supported Obama had something a little different in mind. For them the issue was getting the economy going again, ending the wars, and basically returning to that seemingly prosperous time of the late 1990s. The majority wanted and believed in business as usual (BAU) only colored green somehow. I just wanted him to address the fact that we would never go back to BAU, even green. The days of cheap energy were over and the sooner this was acknowledged the sooner we start to take actions that might spare us the worst possible outcomes. I reserved the right to be skeptical, of course. That is why I called it the 'acid test'.

In Feb. I revisited the situation in The acid test revisited. There I gave the President good marks for choosing the right problems to tackle, but had to slam him for his objectives. My greatest fears were being rekindled by his appointments to key economic positions. As is now all too apparent the positions taken by, Treasury Secretary Geithner, National Economic Council Director Lawrence Summers, and the other White House minions, along with keeping Federal Reserve Chairman Ben Bernanke in place have led to a crises in the real American economy — not the bankers and Wall Street jockeys mind you — with real unemployment at something close to 17% (the government statistics ignore those who have given up looking for jobs).

Actually I reported the final results of the acid test back in August: Is Obama passing the acid test? I pretty much wrote him off since the stimulus package was clearly designed to help the fat cats and not very geared toward the would-be working stiffs who were losing their homes. Now some thoughts on the post mortem of American politics and governance

Broken political process, broken governance process

The skill set needed to win elections isn't the same skill set needed to govern. That is the great flaw in the American political framework. Whereas partisan politics are useful for sorting out the issues and debating the qualities of candidates during primaries, bringing the same partisanship (based on pure ideology) to the Senate floor is completely wrong. Governors need to be more like scientists, look at and use the best evidence available to debate legislation. Then there is the situation with lobbyists. Once upon a time, lobbyists sort of did provide legislators with information. Unfortunately as TV campaigning became more expensive and lobbyists started providing more than information the whole process broke down. Getting elected meant collecting lots of money. And it was the monied interests who could field the best promoters/lobbyists. Now the game the politicians have to play is completely different from what it should have been.

One of Obama's campaign promises was to do something about K Street. He could certainly ban the lobbyists from the White House. That would be a start. But it never happened. Indeed what we've witnessed in the on-going saga of health care reform is an elevated role for lobbyists in the process. Sure Obama may argue that looking for a compromise on multiple issues, like the public option, will require all parties cooperation and he would, perhaps, assert that he has to invite the various business interests to the table to hash things out. But is that really true, or is it just convenient?

Obama promised change; change we could believe in. Today there are quite a few dissatisfied folks who have yet to see any results of change. Right now it still looks like the fat cats rule and are going to increase the disparity in incomes between the rich and everybody else.

I suspect it is all part of an intentional illusion, designed to lull the public into waiting just a few more years until the real shit hits the fan. We have been fed the story that if we can just get the economy going again, all will be well. But it is crap.

Trying to restore to a growth-oriented, consumer-based economy is impossible. Growth and consumption depend on cheap energy flowing through. And we have long passed the point at which net energy flow is growing faster than we can produce assets. Indeed, for all we know net energy flow could now be in decline. We don't measure it in any meaningful way. Everyone in the energy business has focused on gross oil production and oil prices. But it is the net flow that powers the economy, that drives the production of wealth. And with the peaking of net energy from all sources without a substantial and expensive crash build-out of an alternative energy infrastructure, we will never be able to recover the flowthroughs needed. Ever.

The old economy is never coming back. We might restore some segments of the old economy, as now the bankers and Wall Streeters seem to be doing OK. But it will be very spotty and short-lived. The financial system is ultimately based on the real asset economy even if it has become over abstracted from its basis. So even if the banks are reporting profits now, even if the stock market is up, it won't be for long. You can't create wealth without increasing energy flow. It is just that simple.

And Obama seems oblivious to this. All of his financial advisors are oblivious. The majority of citizens are oblivious. The corporate giants are oblivious. Or maybe instead of going to regular school and learning some basic science all of these people went to Hogwarts and learned magic. Maybe I and my colleagues are the only ones who don't know that you really can have a free lunch; that you really can make something out of nothing.

An alternative hypothesis, one that keeps the illusion of hope alive, is that Obama IS aware and is blocked by potent forces that prevent him from telling the people the truth. It is easy to imagine the power brokers (Bilderberg conspiracy anyone?) using Obama as a perfect puppet, keeping the people filled with hope while all of the remaining wealth is confiscated by the rich and powerful. Because some of these power brokers must know the truth. It is just high school physics for god's sake. What would you do if you were a master of the universe and if you knew the world as we've known it was coming to an end; that all the wealth that would ever be created would soon be all there was? If word got out there would be a concerted attempt to hoard. There would be violent competition for the spoils. The only way to prevent that would be to keep everybody hoping for a better outcome by telling them that such an outcome was still feasible. Then by the time it became clear to all that it wasn't, it would be too late.

These ideas are floating around even now. It is pretty damn hard to explain the failures of governance and the disappointment in Obama without invoking some kind of conspiracy theory. Most people already succumb to the feeling that their lives are fated (ill in this case).

Personally I don't know. I don't have an explanation. I just know that we are still headed at pellmell speed toward a gigantic cliff and there is no attempt to even test the brakes let alone push the brake peddle to the floor. We are either in the hands of conspirators or the hands of idiots (or as I fear, idiotic conspirators!) But then, I'm the one who has been claiming all along that humans are just not very sapient after all.

Abstracting labor

Let me introduce Steve^* the worker. Steve is a typical human being who will take a role in the center of all of our abstractions. This is a person-centric view in accord with our Energy Cocoon. Here we see Steve as having a job for which he is paid a wage, some means of turning around and purchasing things he needs and wants for himself and his family. That is, he is paid if he does a good job.

Steve's job entails operating a machine that transforms inputs of energy and raw materials into a finished product with embodied energy value. Steve is skilled in that he needs to observe how the machine is performing and issuing commands to the machine to make sure it is producing an optimal product. This is important because the Boss is monitoring the product quality in order to make sure the customer is getting a good product. The customer will pay for a good product, which is income to the company (as represented by the Boss). In turn, the Boss pays Steve a wage that he, in turn, can use to purchase necessaries like food. Steve needs food to be able to perform his duties (which entails living at home and supporting a family). Both machine and Steve give off waste heat and waste materials. We won't pursue that notion any further.

Note Steve's boss. Don't make too much out of the fact that the boss is frowning. Bosses always seem to frown. His job is to monitor the quality of Steve's work, sell the product to a customer, and receive an income (payment) from the customer. He keeps some for running the rest of the operation, some for himself, and pays Steve a wage along with giving him 'directions' or commands regarding any quality or rate of work issues. Like Steve the worker, the boss needs to eat and eliminate wastes too.

This diagram represents a more modern view of labor. The machine could be anything from a mill, a press, to a computer. It could even be a whole department of a more complex company. The central issues are:

• the machine accounts for a larger percentage of energy/material throughput than does Steve
• even so, Steve has an energy/matter flow through his subsystem
• Steve's role is to manage the machine according to some preordained quality attributes
• the machine acts as a work amplifier with Steve providing the control current

In olden times, before machines that took significant external energy flows to operate, a worker in Steve's place supplied the majority of energy and his efforts went to applying one or more hand tools (machine) to the production process. And he still needed skill to make sure it was done correctly. The situation is captured very well by the story of the weaving loom (see: Wikipedia article). Before water mills were employed to provide the working power to looms, women (generally) had to operate a foot peddle to move the arms of the loom separating the threads. I suspect it was hard work. Later, water wheels provided motive power and the machine age using external energy was being born (same story for windmills in Holland, and even earlier uses of animals to walk around a central hub creating radial force to mill grains, etc.) Things really got going when Frenchman Basile Bouchon invented a paper roll control device that was used to manipulate the threads without human intervention, which led eventually to the Jaccard loom, controlled by punched cards using essentially the same principle but with more reliability. Incidentally, the Jaccard cards were the predecessors of the IBM punch cards used in the earliest computers!

If you read my blog post, "What is value?" you may recall the labor theory of value, which supposes the value added to a product comes from the efforts of the laborer. In olden times that was the case. Now, what are we to make of Steve's situation when the means of production are more largely represented by the machine and its ability to use external energy, like electricity, to do the heavy lifting? [Note the similarity to of the above figure to Figure 1 in the prior post. One of these days I will consolidate the different views!]

Suppose, for a moment, that the product being produced by Steve (with machine) is essentially what it was when Steve's long-ago predecessor made it by hand. Then it is clear that the addition of the machine and its energy input is what we mean by improvement in technology and productivity. Basically Steve can make many more widgets per unit of time than even a small army of workers could have done in the olden days. Steve needs a different set of skills to control the machine than was needed to pound the hammer to form the widget. But it is possible that the skill level and complexity is about comparable to what his predecessor needed. What we have done is to substitute a machine and new skills in operating it for that small army of workers producing by hand. If we hold the volume of production constant, i.e.., same number of widgets per unit of time as in olden times, have we merely substituted one form of input energy (external to the machine) for an equivalent amount of input to the workers in the form of food? It is an interesting question. [Another interesting question is what happens when the skills needed to operate a machine are significantly less than in olden times? Bosses still lay claim to the worker's time, but the effects on workers can be demoralizing and sometimes dehumanizing. I'm reminded of Charlie Chaplin in Modern Times.]

One of the things that has motivated bosses to invest in machines that effect this kind of substitution is the perception, right or wrong, that the productivity of a machine is preferable to having a small army of workers. According to financial analysis, it is cheaper and therefore better for profits (I'll ignore some other very valid arguments such as the fact that an automatic machine often improves quality while increasing the rate of production). Investment in a machine can be shown to payback at a better rate than if the boss continued paying out wages to the displaced workers. Yet I wonder if this analysis only works in the case of a growing business and economy. Isn't it the case that the best justification for automating processes is that you can produce more per unit time and thereby increase your sales? Buying another machine is certainly preferable to hiring many more workers who might or might not be adequately trained. It seems the whole growth orientation is a stronger incentive for bosses to lay out the investment in capital equipment of this sort.

Back to Steve. What should the Boss pay Steve? Surely he cannot earn the same wage as was earned by the small army of his predecessors even though he is producing the same number of units per unit of time. There would be no incentive for the Boss to invest in the machine if he ended up paying out that much money still. So Steve will make something considerably less than the sum of what his predecessors made, the difference being accounted for in the investment in (and maintenance of) the machine plus, more than likely, a nice increase in profits, a point that has always stuck in the craw of Marxists.

What Steve makes is largely a function of what Steve needs to earn for himself and his family. But, obviously, there will be a lot of room for interpretation of need here. This is actually one of the areas where market mechanisms have worked rather well historically, except when Bosses, or employees like Steve, get greedy! Steve may have had to invest some of his time and energy in learning the skills needed to run the machine. He will tend to put a, perhaps, higher premium on the value of that investment in his salary calculus. At the same time he will be competing with many other potential workers who could try to under bid him to get his job. But if he is highly skilled the Boss is going to think twice about firing Steve and hiring someone else whose skills are unproven. Uninterrupted quality production is generally worth more than the differential between what Steve is making and what someone else would make. Generally, through the jostlings of the labor market a 'fair' wage is struck between Steve and the Boss and both are satisfied with the arrangement.

Unless, of course, one or the other, or both do get greedy, which is not uncommon. Human nature, being what it is, is easily tempted to try to eek out that little extra. The Boss may want to replace Steve with cheaper labor or Steve might demand more wages regardless of any actual increase in his contribution to value added (there is always the cost of living/inflation argument; but what most people don't give much thought to is the fact that when workers get raises, to supposedly cover the cost of living increase, they are simply contributing to inflation!) We can think of all kinds of fly's that get into the ointment here. The system is already sufficiently complex that information might not be available to all parties. And there is that human nature element to contend with. The only worker not causing trouble is the machine. That is another reason Bosses like them.

Somehow, through the magic of accounting (both financial and managerial) these issues get sorted out. The Boss won't stay in business if his wage costs exceed their fair proportion of total costs. Unfortunately, cutting costs by eliminating workers is the easiest way to get control of costs. If the company goes out of business, no one wins. The accountants keep careful track of costs and income to make sure the arrangements all work out. Unless they get creative like the guys at Enron and Arthur Anderson!

But let's, for the moment, say that generally everything tends to work and Steve gets paid something reasonable, the Boss makes a reasonable profit, and the customer is happy with the widget. A remaining, very important question is: "What is the value added by this whole arrangement?" In other words, how shall we establish the price of the product? This is where the market isn't always our friend. In a barter system, in days of yore, everyone had a pretty good idea of what things were worth to them relative to the value of what they produced for trade. One cow should equal two goats. The value of the products were transparent and while it was still human nature to dicker over details and try to fudge a bit of profit, in general both parties came away relatively happy with the trade. Even when comparing apples with oranges, or rather arrow heads with beaver skins, people could gauge their own efforts, and their need for the other product and come to a sufficiently equitable agreement.

But the situation gets more clouded when external energy, machine work, and machine operation skills come into play. Machine skills necessitate specialization and thereby preclude a general understanding of effort expended by the laborer in making a product. On top of that, as soon as bosses came into the picture, ostensibly to organize the company and coordinate the activities, the value added to create more complicated products became increasingly hard to judge. [Incidentally a very similar argument can be made about modern public education. Teachers aren't exactly using ordinary machines so much as new complex organizations (schools) to produce their 'products'. It is even more complicated to determine what the quality of the product is (standardized tests, in spite of everything people want to believe, tell you nothing about the value of the education received) and what is fair compensation to teachers for their efforts. I, of course, have my biased opinion on the matter!]

Today, how do you know how much you should pay for an iPod^TM? All you really know is that you perceive that you have some discretionary income to throw at entertainment valued products and services. And there is the market. Somehow, magically-seeming, a price is set and people flock to buy at that price. The bosses attempt to keep prices reasonable so as to optimize sales volume and profits. If competitors come into the market that is supposed to drive prices down (but what about quality issues? Bosses still like the same profit margins, so something has to give.) But the reality is that no one has a real clue what anything is worth any more. Its all a big game we play and there are some real winners (windfall profiteers) and many losers (also known as consumers).

Where is Steve in all of this? Well the boss has to figure out how to fight off competition and lowering prices is a handy tool. Unfortunately that means margins are going to be cut. One solution is to grow the capacity by adding another machine and one additional laborer (of course it isn't at all that simple, but this is an abstraction after all). The increased volume at a slightly lower margin can compensate for the profit losses per unit. This is the growth strategy. Another strategy is to convince Steve that he is paid too much for the current market conditions and for the good of the company as a whole (these days meaning the bosses bonuses) he needs to take a pay cut. More often than not that is a crock. And Steve generally knows it.

Where does all this leave us? What I have tried to do is give a small demonstration of how our modern complex, machine-based production of goods and services has blurred the image of value, costs, and trade. Economists recognize this blur and seem to be satisfied with letting markets tell us what things are worth — a very lazy approach in my view. We need a tool to help us do the hard work of understanding. If we harken back to a simpler time and construct an abstraction of workers and bosses that captures the relevant relations between energy, work, skills, materials, tools, wastes, and products, and then use that abstraction to study modern work processes, especially incomes in terms of needs, wants, and fairness, we might stand a chance of grasping our current situation much better.

That's the idea anyway. We are not much different beings than we were thousands of years ago, before the agricultural and industrial revolutions. Our needs are the same even if our opportunities for enjoying the benefits of the machine age have grown immensely. So our psychological proclivities today are about what they were then, but with, perhaps, some new temptations and certainly new challenges for understanding. But in the end, the energy and material flow budgets have to balance out. What someone gets from the pool of assets our economy creates probably should be based on their contribution to the work processes they control. The boss probably does have a more complicated job than does Steve. So it doesn't seem untoward that he make some more income than Steve. But it is unlikely that the bosses value added to the whole operation is hundreds of times greater than is Steve's. What the abstract Worker Steve (and his boss) can do is show us what we need to look at in analyzing work flow and compensation flow. It also gives us a handle on valuing products from the standpoint of external energy inputs through machine labor. In a future post I will take a closer look at the role of worker skills and investment in training a bit more closely as we try to figure out what it means to be paid fairly for one's work.

Our current economic views have over abstracted to the point where we have no clear insights into costs, prices, values, and what information flows would provide those insights. And that over abstraction has gotten us into a lot of trouble, both socially and ecologically. This simple abstraction takes us back to fundamental relations that have never changed over history. It is another example of a systems approach to understanding our world.

Next, I will examine Steve using some of his income for purchases, finding out he doesn't have enough saved from prior earnings, and goes to a banker because he really wants a boat.

---

^* No particular significance to the name Steve. It just popped into my head and sounded good. Of course who knows what devious thoughts are going on subconsiously?

Over abstraction redux

From a colleague's e-mail:

George,
In your blog about over abstraction you made a big deal about consistency, at least in the realm of math. The whole point, I thought, was to warn against abstractions that were more wishful thinking than real. But your last blog on your abstract economy model, isn't that in danger of over abstraction? In other words, are you failing your own consistency test?

Let's see if he is right.

My colleague is more of a mathematician than am I, so he naturally focused on that part of the blog. But my real point was more about how over abstraction leads to an inability to ground an abstraction (eventually) in reality. I claim that my abstract economy model is grounded in that it starts with physical principles regarding work and energy flows. That part of the model is only abstract in that I did not attempt to parameterize the flows with any real time scales since there is much we don't know about actual peaking of the fossil fuels. As far as the depletion dynamics and the increasing difficulty encountered in obtaining the next unit of gross energy, that part is real and has been demonstrated for oil in several countries, including the United States.

The real abstraction starts with the idea of assets and their production. In a sense my colleague is correct. I have substituted a wholly abstract relation for the real one and there is no guarantee that I did it correctly. However, and this is the beauty of science, the abstraction is testable in the real world. We can collect data and see if the relation holds in the real world. In fact, one of Charlie Hall's grad students is doing just that. He is going to look at global steel and concrete production as surrogates for the broader base of assets and compare them with net energy production based on declining EROI for the last fifty years. Our hypothesis is that during the last twenty years, or so, the gap between net energy and steel/concrete accumulation (measured in emergy units) has narrowed or actually crossed over as per the model dynamics. If so, we will have made a beginning case for the reality pointed to by the model. It will not have been over abstracted. If not, then we go back to the drawing board. What we don't do is build an elaborate theory of economics out of a simple model without ever knowing if it corresponds to reality.

Of course, some will argue that economists followed the same path. They are forever testing their hypothesis by collecting data and plotting it to see if their projections match the regressions they come up with. And that is partially true. But it points to a subtle error in doing science that I hope we can avoid. It will be hard because scientists can do it unconsciously. And that is picking data that confirm the hypothesis a priori. It takes a lot of caution, skepticism, and eye balls to avoid the pitfalls of such errors. My main take on practitioners within many mainstream schools of economics is that they so thoroughly believed their school's dogma that they were more like religious zealots than scientists in pursuing the truth. Once again, witness Alan Greespan's confession before Congress that he was in shock that markets didn't work the way he had always believed. [Note: such zealotry pertains particularly to Randian market fundamentalists who are so convinced of the ability of free markets that they never question anything about the premise. The parallel with having a religious belief is stronger still. Since there never has been anything approximating a truly free market, just as there has never been convincing evidence of knowledge of God's will, there is nothing to refute or disprove.]

Time will tell if my abstract model of the economy is too abstract. One hopes we will know sooner than later.

What this has gotten me to thinking about, however, is a further explication of some other abstractions that can be used to build more detailed models of the economy. I've already written about the abstraction called money, for example, and this is along the lines I have in mind. I want to further explore debt as a set of layered abstractions on top of money. The simplest statement of this is that debt represents a promise to pay back a monetized value at some specified point in the future. In my next blog, assuming real world events don't intervene, I will start looking at debt and jobs/income as abstract models in the hopes that we can see a way to better understand our current predicaments in the financial and jobs markets.

Energy and the economy

Report on My Activities at SUNY-ESF

As many regular readers know I have been in Syracuse, NY, at the State University of New York, Environmental Sciences and Forestry (SUNY-ESF) working with Dr. Charles Hall on biophysical economics. I've been here since Sept. 15 and it has been an absolutely dream kind of sabbatical leave. I've always thought of myself as a student-for-life and a PhD was my ticket to being able to devote my life to learning everything I could that seemed important to know (see my post: "Subjects of Interest").

I have long had an on-going interest in how energy and the economy related to one another. That is based on a very simple observation: it takes energy to do work, and the economy is nothing if not about doing work to create wealth. Therefore, energy must lie at the heart of how the world's economies function. Realizing that the vast majority of energy used by modern industrial societies, and those wanting to become industrialized, comes from fossil fuels, and fossil fuels are a fixed, finite resource, it long-ago occurred to me that industrial economies could not be sustained. The fuels are going to eventually run out. This was even before greenhouse gasses and global warming had come to the fore.

Over the last several years my interest in energy and the economy has been rekindled by the advent of peak oil. I've been spearheading several efforts to get energy systems curriculum into higher education and started exploring research questions that I might pursue. Several years ago, while reading various articles in The Oil Drum blog, I encountered the concept of energy return on energy invested (EROI or EROEI), which I found comported with my own developing ideas about the possibility that some of the proposed alternative energy methods might not actually be sustainable if it took more energy to build the systems than they would contribute to our energy needs. The concept was the brainchild of Charlie Hall who had developed it after years of studying energy flow in ecosystems. He had learned his trade from Howard T. Odum, the world famous ecologist who pretty much invented systems ecology.

Objective

Originally I had several objectives in coming here to learn about EROI analysis and how I might use it to determine the real sustainability potential for various alternative energy systems. I had built a basic model of what I called a sustainability criterion. What the model was supposed to do was determine if the total energy output from a system, say a photovoltaic (PV) system, would be enough to not only supply the user demand, but also produce enough excess power over its lifetime to feed into replicating itself. Imagine a solar PV manufacturing plant that was run entirely from a PV array. But you would also need to run the parts manufacturing plants from PV arrays, do the shipping using energy derived from PV arrays, and, in fact, run the farms that supplied the food to all the workers using PV arrays. Not so simple.

The motivation for wanting to know if many PV arrays could be generated from a few such arrays is actually essential in knowing whether or not PV is truly sustainable. Of course the above scenario would have to be modified to recognize that PV provides intermittent power, so all of those operations would have to have backup power supplied from the grid. But this would be borrowed power that would be paid back when the sun was shining so that the net effect would be as if everything was powered by PV (e.g., wind and nuclear might also contribute to the grid providing an array of sources to cover each other during down time). Right now, all of the manufacturing of wind turbines, solar collectors, etc. is actually powered by fossil fuels or existing hydroelectric. Fossil fuels are the only way to transport parts and finished products as it stands, and coal or natural gas are burned in most Midwest, southwest, and eastern states to produce electricity. Thus the whole alternative energy industry is currently subsidized by fossil fuels and it is by no means clear — no one has demonstrated with data — that these alternatives could take care of their own power needs while still building out the needed capacity to run the economy.

I came here with the idea that I would learn how to apply EROI methods to the analysis for data to fuel my model. But what I learned is that this is a daunting task. As the above example suggests, the web of interrelations between all the manufacturers, shippers, suppliers, materials extractors, even the food support system for the workers is extremely complex. The strength of the links gets more attenuated the farther from the final manufacturing plant you go. Then there is the installation and maintenance activities to consider. All in all, it is currently a nearly impossible task to collect all of the energy consumption data that would be needed to do a good job of modeling and evaluating the systems. That was the first thing I learned.

But while I was coming to this realization, I was developing another idea that had suggested itself to me in thinking about modeling energy systems in general. There is a concept called the 'boundary limits' which basically tells you something about where you should draw the line around the system of interest to prevent infinite regress. You can see this in the above problem where the tractability of analysis can only be bought by deciding to cut off the analysis effort at some reasonable distance from the center, say we decided to ignore everything beyond the first tier of parts manufacturing and shipping. We could forget about those efforts further out in the web because their total contribution might be negligible in terms of each PV system manufactured. Knowing where to draw the line is as much art as science.

The boundary problem exists for these kinds of complex systems when you are doing a 'bottom-up' kind of analysis. That got me to thinking along the lines of a 'top-down' approach. Sometimes it is easier to model a 'whole' system leaving out a lot of detail, yet capturing the essence of the system's behavior. This is, in fact, the approach I had used in modeling synapses and neurons in my days developing artificial brains for robots. Rather than trying to emulate every little detail of a system, it is sometimes possible to start from first principles and develop a model that captures the overall dynamics of the system and allows you to make predictions about system behavior under different conditions.

So for the last month+ I have been working on a macro-model of what I am calling an 'abstract economy'. It looks strictly at the energy flow dynamics of an economy based on a fixed, finite fuel source — not much different from our own real economy. What makes an economy is that energy is used to make artifacts that users need and or want (no moral judgments here). These are the assets of an economy. Some are long-lived, like buildings and railroads. Others have intermediate life spans, like washing machines and toasters. Others are consumable, like food, entertainment, and socks. But over time, when there is sufficient available energy, the economy will use that energy to convert natural resources (metals, salts, trees, etc.) into assets. With the realistic assumption that consumers are insatiable if the energy is available, then I posit a growth constant used to compute exponential growth in energy extraction and asset accumulation. In other words, it looks a lot like the classical developed world economy. I've now got a computer model running and some early, somewhat expected results. But I also have a result that would have been hidden from view had I not built the model.

My Model

I started with the idea of a reservoir of fixed, finite size (arbitrary in the model). The reservoir contains unrefined fuels of average energy density. Extracting the fuels from the reservoir takes work. You are working to find places to drill, working to do the drilling, working to do the extraction, and working to alter the fuel for consumption at the end uses (e.g. refining oil to gasoline and kerosene, etc.). All of that work requires energy from the stream of energy flow, and it takes more work to accomplish the same energy production as the resource depletes. This is the EROI aspect. So the model computes for each time step the gross energy extracted, the energy cost of extraction, the net energy available to asset production (gross minus costs — a concept any accountant or financial person can appreciate), and the accumulation of assets. Here is a graph from a typical run of the model.

The model correctly behaves with respect to the peaking of gross energy production (e.g. peak oil; top, blue line) and increasing costs (bottom, red line). Net energy available for asset production can also be seen peaking. But curiously, it peaks before gross energy. The time units are about 5 years, so net peaks about 20 - 25 years before gross peaks. This is significant in that it is the net energy that runs the rest of the economy.

If it is true that we are currently at or past (or about to get to) the peak of oil production, and all of the data are consistent with this hypothesis, and since oil is the 'kingpin' energy source, needed to extract and transport every other fuel, then it is conceivable that we are also very near the peak of gross energy as depicted. If that is the case then this supports evidence that we have already passed the peak of net energy and hence we are in the phase of decelerating asset production.

I have written for some time about this possibility, but I have only had anecdotal evidence in the economic crises we have been faced with for the last ten years or so (seeing globalization and offshoring of manufacturing and jobs as a crisis for the US workers, as well as our general neglect of critical infrastructure). Now this model reinforces what I suspected. It isn't peak oil that will get us, so much as peak net has already done some damage.

Note how even after net energy flow peaks asset accumulation continues. This is because there still is some net energy available to build new assets. But after a while the decline in net energy becomes so intense that asset accumulation itself peaks and its all downhill from there.

It is easy to understand why energy from a fixed, finite resource peaks and then declines after a time. What isn't completely obvious is why assets would decline the way they do. The reason is that the 2^nd Law of Thermodynamics is always at work on our assets. Plus, we are constantly consuming some of those assets. Entropic decay eats at our bridges and buildings. Physical things age and fall apart unless there is a constant supply of energy to fix them up, repair damage (from use), or replace a worn out object. The rate of asset decay is probably less than shown in the graph because for this first pass I have lumped all types of asset into one class and set a somewhat arbitrary decay rate for them all. As I improve the model's resolution and details I will subclass at least three types of assets (long-term, well-built; intermediate-term; and consumable over the time steps used) and have them decay or be consumed at more realistic rates. But that will not change the general trend over the very long term. The decline in net energy is not unrealistic given the assumption that it comes from a finite resource.

A next step in model refinement will be to add back in the less-than 20% gross energy supplied by supposed renewable sources, esp. hydroelectric and nuclear, with provisions for a growth rate in alternatives like wind and solar. Then we can test how various rates of build-out of the alternatives may shape the future of gross and net energies. We fully expect that a large growth rate for alternatives will extend the gross line at a higher level (but below peak for the non-renewables) for a longer time. But what we don't yet know is what the effect will be on the net energy. Everything depends on the wide-sense EROI of these sources. If they are high (meaning above 20:1) and the growth rate of build-out is sufficiently high (which is a research question to ask the model) then we may be able to see net energy maintaining a higher level and at least keep our asset base from shrinking. My own speculations lead me to believe that it will take an EROI of more than 50:1 and a build-out growth rate greater than 15% per annum for the first 20 years followed by steadily declining rates over the next decades as we approach 100% replacement. That is what the model might be able to tell us. And it is important to know.

If we determine that our assets can be stabilized at something like the above numbers, then it is crucial to know which alternatives will provide us with adequate sustainability (high, sustained EROI) and direct our remaining net energy investments into building those top performers at a rate that will achieve that stability. Right now we are guessing and hoping, hardly a predicament to be in for a supposedly scientific age and mind set.

But therein lies the real problem. We have scientists like Hall and many others who are earnestly trying to ascertain the numbers so we can make informed decisions. The problem is we are in the minority and often just ignored because we bring potentially bad economic and political news to the only people who can do something about all of this. And our less than sapient leaders, indeed the majority of the citizens, just don't want to hear bad news. Achieving what I have in mind will take extreme sacrifice on the part of everyone to allow diversion of our remaining ability to do useful work toward the build-out of these alternative energy sources (and, BTW, this also includes increased efficiency and conservation efforts). No politician is ready to spread the message of sacrifice. I'm sorely disappointed in Obama in not following through on his inaugural address when he said that we would need to sacrifice. In retrospect I guess this was code for 'all you working class folks are going to have to sacrifice (lose your income) while the bankers prosper'. Too bad.

There is one more thing I need to point out that will seem a little untoward, but is essential to grasp. The assets I mentioned include all human biomass! That may sound perverse, but the fact is that our population is supported by the energy flow through the economy. A lot of that energy flow is actually directed to managing the agricultural and food distribution system. More net energy means more and bigger (obese) people are able to exist. Consider, if you will, what the meaning of a crash, as depicted in the graph, means for human life. I'll leave you with that thought. And with a question: What do you think we should do about it?

What is value?

An Energy Theory of Value

Background

Lately I've been spending some thought energy on the whole notion of value and what it must mean in biophysical economics terms. As with other economic notions, especially ones that have failed to actually describe what is going on in a real world economy, it's a good idea to start with what standard economists think about the subject and then see if energy flow concepts can add anything of value, or at least update some primitive notions. This concern stems from my thinking about finding an energy-based backing for money (see: "What is money, really?", and "What counts as real wealth?"). At the First Annual Biophysical Economics Meeting, last year in Syracuse (where I am taking my sabbatical right now!) I presented a talk on this subject. I've posted the slides here.

One of several challenges to this idea involves resolving how money can represent value in transactions for goods and services, including labor. And that means having a good theory of value in terms of energy. In the above linked posts I've toyed with ideas. This post represents some more analysis and some of my current thinking on the subject.

So I'll start with a rough survey of historically important theories of value from several schools of economics and then analyze them in terms of what they might reveal about a more fundamental theory, a unified theory if you will, based on energy considerations. This is crucial to understanding the use of money in transactions in markets. It is especially crucial given the nature of products and services we have today which are extremely complex and the price may or may not reflect any kind of intrinsic worth (much more on that later).

Once again, for purposes of this blog, I will rely on Wikipedia for backup and explication rather than spend a lot of time typing about something that I think has been covered adequately in that source. I've been through many of the articles there that deal with value and the many theories thereof, and I feel comfortable with the encyclopedic summaries you will find there. [Side note: I've actually gotten some complaints via e-mail about my tendency to use Wikipedia extensively (BTW: I do contribute to the Wikipedia foundation, like subscribing to NPR!). Some people are suspicious of Wikipedia articles as far as worthiness of content is concerned. There have been numerous complaints from academics in the social sciences, esp. politics, that there is too much amateurism and special interests among editors making the value of these articles questionable. I try to choose articles with some care, previewing them before providing a link. And most often I am writing about a technical subject rather than a subject subject to opinions (I've always wanted to use the word subject in a sentence three times!) Also, Wikipedia has been getting very good at flagging disputes or style or lack of citations making it easier for readers to read with caution. The other complaint is that I expect people to go off to another site to read what I should have summarized. Well I try to put technical terms into context, but I honestly don't think a summarization will help. If you already know a term, then there is no problem. If you don't, then I think you owe it to yourself to become more educated (sorry if that sounds harsh). So just recognize that I will continue to use Wikipedia and not go out of my way to explain or justify.]

A good overview/review of various theories of value can be found here. There you can find additional links (some of which are below) to more in-depth coverage of the various theories. One of the things that I've been thinking about is what might be the commonalities between these various theories? Could one discover a link between such commonalities and an energy theory of value? I'm still working on this line of thought, but let's see where it might lead.

The word 'value' is a bit problematic in itself. Value is a human subjective attribution that might be informed by some objective basis, such as the amount of skilled labor required, but nevertheless is conceived by what someone thinks is worthwhile. A worker might think more value should be placed on his or her efforts; they are being paid less than they are worth. A producer/owner/seller might see a product or service as being more valued because of its unique features or esthetics. A buyer, on the other hand places value on a product or service with a whole variety of psychological factors playing into the mix. One of the reasons that markets and money exchanges work as well as they do is that they provide a process whereby buyers and sellers can establish an average value via the price and supply/demand mechanisms. If a buyer thinks the seller is charging too much he or she can simply refuse to buy, or better yet, look for a competitor that is selling for less. That mechanism worked really well in days when relative values were transparent (one farmer had a good idea how much effort another farmer put into raising corn vs. his own effort in raising wheat and the quality of each product could be ascertained by looking in the bushel basket). But these days, there is much less transparency in products and services. We say that not all parties have complete information and therefore the markets are less efficient in terms of distributing real intrinsic values across varieties. Two computers could look exactly alike and yet carry different prices. How is the average buyer going to know that the difference is in the care of manufacture, or the quality of parts, etc? They might suspect it; one reason brand names can charge higher prices is that brand recognition carries some implication of higher quality, but that need not be the case.

Traditional Economic Theories

The Labor Theory

Possibly the most influential thinking (Smith, Ricardo, Marx) on value has come to be known as the labor theory, i.e. how physical or mental labor, put into a product or service, affects its value to the producer or to others with whom the producer will trade (for equal valued goods or services).

The relationship between various forms of this theory and an energy theory of value should be apparent. Labor means work and work means energy flow. Thus attributing a value to the amount of work done is equivalent to the amount of energy expended. Unfortunately things get immediately complicated because different levels of skill among workers lead to different efficiencies in the work process (see below, Knowledge Theory) and thus different, sub-optimal uses of energy or wastage. However, in aggregate, and statistically it is possible to posit an average energy expenditure per worker per unit of work accomplished. This is, after all, the way we compute productivity. Too, we are all probably personally familiar with cases of inefficient or sloppy workers who have been let go since their work efforts actually hurt the profitability of the enterprise. Inefficient skill has a way of getting pushed out of the organization (unless, of course, the worker is the bosses' relative).

Another complication involves the fact that so much modern work is actually based on machines, instruments, and other forms of automation. Each of these uses external sources of energy to drive the work process and the only expenditure by a human laborer is in guiding (and fixing) the machine. Or the human may be involved in a complex information process using an instrument to measure some critical parameter (e.g. quality control). Clearly significantly more work is accomplished by the machine/human combination than just by the human alone. Historical accounts of labor theories do not always take the machine use of energy into the picture.

Figure 1. A human worker and a machine combine to produce a product through a work process. The worker receives energy in the form of food, but also energy subsidies at home to support herself and non-working, or income producing, members of her family. The machine is powered by external (to the human) energy, say electricity. The figure shows inputs of finished parts that go into the product, external energy, and raw materials. The machine, under control of the worker, who must expend some of her energy operating the machine (as well as basal metabolism), produces a value-added product, waste heat and material. The value added, represented by the white arrow with a thicker black outline, is a combination of worker knowledge (in the control) and effort and machine power.

In the figure above, the machine could just as easily be a computer and the product an output message which may or may not convey information to a receiver. That is what I conceive of my current efforts at the keyboard. In my case there is raw material input, but there is energy (electricity to run the computer and the Internet that will convey this) and finished parts (the Wikipedia articles I link to). My control is the result of my knowledge (such as it might be), my typing and writing skills, and my internal motivations. I know my computer is producing waste heat because I can feel it being pushed out (by a fan) from the side. Since I rarely, if ever, print these blogs out on paper, there is no waste material produced, but if I did, and threw the paper away after editing, then this would be the case.

What is the 'work' value of this blog? I substitute work here for labor since the latter is augmented, considerably, by the machine. It isn't what you, the reader, pay for it since I give it away for free. Is it's value alone determined by the amount of energy that goes into it? What about the knowledge and skill. I will treat these separately below, but can note here that I expended more energy in the past to acquire the knowledge and skills being exercised now. So to the extent that my knowledge is worth anything to you the reader, I have to count that energy as one of the inputs to the final product. To anticipate what I will suggest below slightly, that energy should be counted in the value added calculus of this product. Of course, one could never account for that energy since it is impossible to say how much I expended acquiring these capabilities. Also, the full expense, if it could be accounted, cannot be added to this one blog, since I have used this knowledge elsewhere and many times. Given that the energy costs for knowledge and skill acquisition are unaccountable in this way, we need some other method of placing value on them. Nevertheless, it is the case that energy expenditures in the past were involved so my main point that energy can provide the basis for a theory of value remains valid, if hard to solidify.

But what about the value of this blog to you the reader? Is it worth anything? I suppose that depends on you. If none of it makes sense, then it is basically noise and you needn't try to consume it. If you already know it (or something like it) then, again, you have no use for it (except possibly to reinforce your current understanding). But if you can follow the trains of thought and you end up thinking differently, acting differently, or just learning something you hadn't considered before, then it seems there has been some value to you as a consumer. Certainly that value is not encoded in a monetary price. How would one price such a thing? And, you actually used up energy in the process of consuming this. Your brain had to do some work to absorb the information and convert it into knowledge in your head. But the real value would be recognized sometime in the future if this knowledge were to help you make a decision that led to a benefit to you. Almost assuredly, that benefit would come in the form of a net energy gain to your life! My labors of the past (in learning) and now (in writing) may save you time and energy in the future.

This transaction is not the usual sort from the standpoint that you didn't pay me anything, or barter with anything of value to me in order to 'enjoy' the product of my labor. That is only because to me what I am doing is the result of surplus and I am not worse off for giving it away. You could, of course, offer me a kind of payment by offering commentary on my work. Even critical commentary is worthy since it could help me improve my thinking.

But in another sense, you actually have paid me. Everyone who earns an income pays taxes to their state. Some of those taxes go to pay my salary. If you are a student of mine, you have paid into that salary via tuition. I receive an income in order to allow me the luxury of thinking about these issues and learning more as part of my job. Hence, I am sustained by income (with which I will buy energy for me and my family) from academia and some of that income goes to support my efforts in producing this blog! Very circuitous, I know, but you see, I'm not such a benevolent giver after all. If it weren't for my work as an academic I couldn't afford to spend time working on these blogs (I might be reduced to writing political blogs instead!)

Marginal Theory

This is one of those subjects that might give you an idea of why neoclassical economists are so enamored with their theories (though note in this subject the use of the word 'law' to indicate that a principle is inviolate!) Nevertheless, the notion of marginal utility and the 'law' of diminishing returns, and other laws, consider the rate at which an input has less and less value to a rational agent as the input is increased. For example the marginal utility of the next hamburger you eat at a single meal diminishes rapidly as you get full. So adding one more hamburger into the meal has diminishing value to the eater (unless you are Wimpy from Popeye world).

The problem I see with applying this seemingly straightforward model to a general theory of value is that it appears not to work at all with money. Ever since we decoupled the monetary system from the real asset base (Nixon's severance of the gold standard in 1971 being the last major assault on a coupling, albeit a poor one) money has become a valued commodity in its own right. People count their wealth in dollars rather than hard assets. Even the latter are assigned market value in dollars as if it was the dollars that mattered rather than the assets.

The effect of this can be most plainly seen in the housing market. How many rooms do you really need? According to marginal theory, having one more room has lower marginal utility. A rational agent ought to disfavor an additional room in lieu of some other asset that has greater utility, a car say. But since houses have been assigned dollar values by markets (and bubbles) all of our not-so-rational agents have tended to want larger houses with more rooms just because they are thinking in terms of dollar valued wealth. Every dollar more that you receive should have equal purchasing power, so the marginal utility of the next dollar is exactly the same as the very first one. And if your net worth is going up by virtue of your assets carrying a higher dollar value, then having that extra room is about equivalent to having a bunch more extra dollars, all of equal utility. This might, in part, help explain the irrational belief on just about everybody's part that taking equity out of your home to buy that car made sense. Of course car salesmen and bankers liked that idea.

Denominating everything in dollars when those dollars have no grounding in reality is bad business. You look at your balance sheet where you have marked your asset worth to market values and suddenly realize how rich you are. And since every dollar has equal value, why not spend some of that wealth on something else nice?

The efficacy of marginal value depends entirely on the existence of rational agents, Homo economus. And we now know that no such agent exists. We don't even come close.

That doesn't mean that marginal utility might not have some marginal utility in terms of understanding some aspects of decision making when it comes to accepting a price. But we can't base our whole arguments about value on this one marginally useful concept.

Objective Theory

Also known as the intrinsic value of a good or service, attempts to identify a value based on the actual worth of that good or service. Unfortunately, too often, people focus on that worth being equated to something like the labor theory of value. That is they want to add up all of the energy and material costs that went into producing a product or service and count that as its intrinsic worth. This approach is fine for doing an accounting for the inputs to product, like a cost accounting method for finding out what you had better price a unit of product at in order to make a profit. If your price is at or below cost then you're screwed.

But cost is only part of the notion of value of a product or service. The other part is what can that product or service do for the buyer/owner? In other words, there is an intrinsic value to the buyer that goes beyond what the sum of the costs were. I have argued in several different places, that this is what we mean by a tool. If the object or service allows the owner to become more efficient, thereby freeing up resources to the buyer, then the value is not only the cost embodied in the tool, but the lifetime return on the investment in buy that tool. The higher the return on investment, the more a buyer ought to value the tool, and thereby be willing to pay for the tool. Most of us don't compute a rational ROI on our investments in goods and services. Unfortunately most of the time we can't even differentiate between the tool value and some incomprehensible psychic or esthetic value. We tend to buy design more than function these days.

But assuming for a moment that you could discern the tool value — how much gain in time and resources, especially energy you would get by using the product or service. Wouldn't you be willing to pay cost plus some premium related to your presumed future return on investment? Even if you couldn't exactly compute what that ROI might be, wouldn't you allow that you will get something worthwhile out of the future use of it, and thereby be willing to pay some additional amount so the seller can have a 'reasonable' profit?

Most of us value convenience. We see saving time as essentially saving energy, our own personal energy. The problem with any form of objective or intrinsic value theory is that too many tools today substitute external energy for our energy. And they don't just substitute equivalent amounts. They usually run on electricity or gasoline and use far more power than we could have ever applied so that we can do a lot more work in a shorter period of time. This is the real meaning of Fig. 1. If you were a craftsman, say a carpenter, and you either used a hand tool, or could buy and use a power tool that allowed you to do ten times the amount of work in a unit of time (work for which you will be paid) wouldn't you do so? Especially if the external energy input was so incredibly cheap.

So the two aspects of objective value, real costs and reasonable profit based on perceived return on buying investment are a quite reasonable basis for ascertaining value, at least as far as tools are concerned and as long as external energy is abundant.

The problem comes from the fact that not all goods and services are actually convenience producing tools. We buy a lot of stuff just because it has a WoW factor, or because it carries a status marker, or we just like novelty. A house is a tool that keeps us warm, allowing us to survive in non-tropical climates (same for clothes). But when you add on the psychological factors that enter our thoughts about what kind of house, and how big it should be, and its location (40% premium for that view to which you will very soon habituate!) very soon, its value as a tool is no longer a factor. It has become a symbol of wealth (as above) and the only real question you end up asking is: can I afford it? And when some clever financier shows you how you can finagle a mortgage by hook or by crook, even that isn't an issue.

It is pretty hard today to actually look at anything as a tool and decipher its intrinsic value from your knowledge of costs and ROI-based profit margin allowable. Tools don't look like tools anymore, at least not in the way they did long ago when the sources of external energy were few and limited. Today an iPod^TM is some kind of tool because it allows you to conveniently download your favorite music to listen to while you plow the field with your air conditioned tractor. If you are a farmer you can certainly view the tractor as a necessary tool that will increase your productivity. It is somewhat questionable about the iPod. But if you are a home owner with a big lot and you have a smaller, but equally outfitted tractor for cutting your lawn, it is not at all clear that this is increasing your productivity, especially since the lawn of that size is a discretionary (luxury) accoutrement to your life style.

The real difference between a farmer of old valuing a pair of capable, strong plow horses and a good plow and today's farmer valuing a GPS guidance system so he won't have to pay attention to plowing the rows is starkly different. The farmer of old had a much clearer sense of the intrinsic value of things. The farmer of today is more often concerned with saving his own time and having an easy life. This isn't a value judgment against the modern farmer. He is actually using the same thinking process that the olden day farmer used. He just doesn't have enough information to make a value decision objectively. Which leads to subjective value theory.

Subjective Theory

I've included the link to the Wikipedia article but must say I think the information given there is unnecessarily narrow. Subjective means 'in the mind of the observer'. Therefore something more than just perceived usefulness and scarcity are at work in forming subjective valuations. It is true that these factors are at work, but we need to understand the psychological basis for why either a seller or a buyer would consider something desirable and scarce and hence worth a given price.

Consider the issue of needs versus wants. In this modern day how do we actually differentiate these? Once, not that long ago, a microwave oven was a luxury item, a convenience for heating foods and liquids, even a novelty. Today, I would not be sitting here writing this blog at 7:00pm if it were not for my handy microwave cooking my meal for me.

Back home in Gig Harbor, I have to admit that the microwave is just a convenience. It saves me some time and allows for last minute meal preparation that would otherwise have required more time and effort on my part (even in fixing things like steamed veggies, which I am chomping on at this moment!) There it really is a want more than a need. My only excuse is that old habits, formed long before I started questioning even my own motivations and actions, die hard. The microwave, as so many conveniences around the house, represents more of a want than a need. Here is something of a necessity as it allows me to make every moment of my sabbatical by not having to race to my house and cook a meal proper. Clean up here at the office is quick and simple and with very little lost time I'm fed and back to typing. Of course the irony is if these writings are worthless, then my justification for categorizing the microwave as a need might evaporate.

How did wants begin to trump needs as a major motivation to buy stuff? What was it that blurred the distinction between something that is a necessity and something that is just discretionary consumption? A microwave would not even be a possibility if it weren't for easily obtained electric energy. I say easily obtained, because the term 'cheap' doesn't sufficiently convey the meaning of the issue. Electricity is easy to obtain because the coal or gas that forms the backbone of the electric power generation system is easy to get and contains so much energy per unit of weight or volume, respectively, that the power companies can nearly give it away and still make a profit.

iPods aren't really scarce, but the company can sell them at a relatively high price, compared with actual costs (not including externalities) because people attach far more psychological significance to owning one than is justified by any kind of need. Do we humans need to listen to music? We absolutely do. But do we need 20,000 tunes available at the push of a button to fulfill that need for rhythm. Absolutely not. It's just nice to have. And so we are willing to pay the sticker price to satisfy that want. What should we pay for it? Unanswerable from the subjective point of view.

From the point of view of economics and valuation of goods and services, encoded in dollar prices, the real value of something is whatever a market of buyers are willing to pay. There is no basis for prices beyond what the dynamics of the market produce. But something gnaws at us about this blasé attitude. Surely, we say, a thing or service has some 'real' value that we could attach a price to. And that is what I want to explore from the perspective of biophysical economics. Starting with the realizations that money is no longer tied to anything real such that it can be a useful measuring stick and that objects and services can no longer be assessed for their tool value (utility in the old sense) because they are so complex and opaque with respect to their production, then we must look for a way to regain some sense of real value and see if it will be useful in bringing clarity back to markets.

Biophysical Economic Theory

A biophysical theory of value has to take into account three fundamental aspects. The first is that costs have to be complete and real. That is, all costs that accrue to a product or service have to be captured and accounted for. They have to be measured in some physical quantity that is universal and invariant across all domains of work. Current practices use money which is not tied to any real physical basis. And not all true costs are accounted for in the bookkeeping system of commerce. The cost category referred to as 'externalities' is generally ignored (although the accounting world has become increasingly aware of the problems associated with not accruing these costs in some fashion; see The Triple Bottom Line).

My recommendation, based on the thoughts of many who proceeded me in this line of thinking, is to develop an accounting system based on energy units consumed in the production of work. Howard T. Odum, a systems ecologist, was one of many deep thinkers who saw that energy was the real currency of any complex, dynamic system such as a living thing or an ecosystem (see my series on Systems Science, last section of the index). He likened money to what he called emergy or embodied energy. This is the energy required to accomplish a unit of work of any kind. It has the same units as energy, joules, but to differentiate it as the historical memory of energy consumed, he called them mjoules. Money, he claimed, was just an informational token that was used to regulate the flow of energy toward desired work. And, indeed, we can see readily enough that money is used in this fashion to buy resources that someone else produced by their work.

But there are two more components to value that need explication. These are the price that a buyer is willing to pay, and the profit that a seller makes as a result.

I've already mentioned the psychological factors involved in a buyer's decision to pay a price based on a perceived desire (want or need) for the object or service. Coupled with at lack of knowledge on the buyers part of what goes into the object or service, the buyer is in a predicament with respect to deciding if the price is fair. And, in any case, what does a 'fair' price mean? Clearly a buyer expects to pay the seller a price which reflects the seller's costs plus some nominal profit which is income to the seller. But what constitutes a fair, nominal profit. If the object were the ONLY item a seller would sell all year, then it is obvious that he would have to make a profit sufficient to support him and his family for the whole year (on the other hand, that one sale means he could relax for the rest of the year!) Since such objects are not common most sellers rely on volume of sales of smaller objects to make a small profit on each item that will aggregate to make up his income.

The price a buyer is willing to pay must somehow relate to how the object or service is going to improve the buyer's life. This is the tool value of an object mentioned above in the section on Objective Value theory. Will the purchase allow the buyer to do more work of other kinds by saving energy and time (which has an energy equivalence)? From a societal standpoint, the question would better be put as, does an individual's purchase save that individual energy that he or she no longer needs to consume so that there will be a net savings to society. The tendency for people in the developed world is not to think in terms of not consuming the saved energy, but to find other ways to expend it. It's their energy after all.

A biophysical theory of value has to account for buyer and seller psychology, obfuscation of intrinsic value and generate a model of pricing that relates to fair profit as well as energy savings from tool value. That is what I hope to develop here. But there is another more subtle factor that I need to cover first. Most economic theories have difficulty with the role of knowledge in work. In fact one major criticism of an energy-based theory of value is that it can't take into account the value of a product based on the knowledge that went into producing that product. The standard assumption is that knowledge is somehow ephemeral relative to energy and therefore adds something ineffable, beyond mere energy cost inputs, to the value of a product. The best that economists have been able to come up with is a vague notion of human capital. In this view, it is up to market forces to decide the worth of knowledge and skills because they cannot be determined in any objective way.

There is an element of truth to the idea that a market may indeed be the best mechanism for ascertaining the value of knowledge, as long as we are willing to accept some distortions from time to time (the knowledge of how to make buggy whips was valuable once, and probably will be again). But to conclude that there is no relation between energy investment and knowledge, and therefore investment in human capital, is completely wrong. Here are some thoughts on the matter.

Knowledge Theory

Suppose a naÏve individual sets out to learn to do a certain kind of work so as to earn a living doing that work in the future. The individual necessarily must expend much time and effort in learning the skills and knowledge needed to do the work with efficiency. The latter is needed to minimize the amount of time spent on each unit of the work in order to produce the end result (either product or service).

Knowledge is acquired over time by the receiving of information, for example from a teacher, and incorporating that information into one's brain. It also involves practice on subsets of the work problem to convert the explicit learning to tacit knowledge, whether implicit skills or consciously retrievable facts, such as formulas or procedures. This is often effortful requiring energy flows to support the individual during learning. Also, the brain itself increases its energy requirements during active learning. When someone says that learning something difficult is hard they are simply reflecting the fact that actual work is accomplished in the process and should be accounted for in the final tally of energy applied to future endeavors.

Knowledge, once bought with energy expenditures from an individual, is the basis for doing efficient work in the future. Efficiency here may be interpreted as units of work accomplished per unit of time and per unit of effort expended by the worker. At any given technology level applied to the work process, there will be some upper range of efficiencies which will allow the individual to minimize his/her time and effort while producing a sufficient number of units of product or service. What we mean by sufficient, of course, is that the work product or service will obtain an income adequate to the individual's needs in life.

What is important here is to recognize the crucial role energy flow plays in the acquisition of knowledge with regard to the successful accomplishment of work for income purposes. This presupposes that the 'customers' for this work are willing to trade goods, services, or money to meet the income needs of the laborer for the volume and quality of product or service put out. The individual is assumed to decide to learn the kind of knowledge needed to do this sort of work because he or she perceived the desires of others for this work were such that a fair trade of labor for income would obtain.

Take this one step further. Suppose the individual in question learns additional skills in supervising others who have learned how to do the same work. This learning also has an energy investment cost on top of learning the knowledge needed for the direct work. Moreover, knowledge of accounting will be required for the individual to become a supervisor or owner of a business in which he or she hires workers (who have also invested in learning their trade) to perform the operational work. The owner of the business expends extra energy learning to be a supervisor/coordinator of the work and must also expend real time energy doing the work of a supervisor. Again the investment in learning is predicated on achieving some level of efficiency in managing multiple workers, sales and purchases, and payroll. Many such owners learn these skills on-the-job, but that doesn't mean they haven't expended energy investing in learning. One of the reasons the 'boss' makes a larger salary is the tacit recognition (by society) that people who achieve the capacity for effective supervision add more value to the entire work process and have, themselves, expended more energy getting to the point of being skilled in supervision. Unfortunately, in the modern world, it isn't always clear that the boss has in fact achieved a higher level of skill and earned their higher wages. Indeed, as recent events have made clear, people have long ago learned how to game the system and appear, at least for a while, to have the knowledge and skills needed to guide the success of enterprises. Right Jeff Skilling? Right Rick Wagoner? Along with the scam of qualifications these faux coordinators/strategists have helped themselves to hefty rewards in anything but a free market of talent.

Finally, consider the energy expended in the education enterprise that is needed to make the knowledge acquisition process (by the future workers) as efficient as possible. A whole institutional framework is constructed in order to educate as many minds as possible in the shortest amount of time as possible for the least expenditure of energy as possible. The school system is the result. Teachers must efficiently guide students to learn what they need to know and since this is an energy investment scheme — no thought to humanization as also contributing to future value — only what they need to know. Schools are a tool. It is unfortunate that the mass perception of education is strictly oriented toward the tool value of schools and humans. Only a very few thinkers and educators have realized that there is a distinction to be made between short-run energy efficiency and long-term energy savings. The former is what maximizes profit. The later puts emphasis on our humanity. A more broadly and deeply educated individual ends up better understanding the need to save and relax, to be content with necessities and eschew luxuries. But, oh well, you can't have everything.

Energy Theory

So at last we come to an energy theory of value. In a sense, by pointing out the deficits or problems in the standard economics theories I have already pointed to the energy theory. Put simply it says that a good or service is valuable to the extent that it brings real comfort to a human being and his or her family. The key is in the phrase 'real comfort'. I am more comfortable sleeping on a mattress, in a bed, in a house that keeps me warm in winter and protects me from the glaring sun in summer, than I would be sleeping on a pile of grass in a cave. But the former took considerably more energy to produce than the latter. On the other hand, would I be any more comfortable sleeping on a gigantic mattress on a gigantic bed in a gigantic house that took orders of magnitude more energy to produce? Some people would believe that they would be happier. But no one can claim they would be more comfortable.

All of our tools, which includes everything in our energy cocoon are there to increase the comfort in our lives by reducing the amount of manual/physical labor that we need to do to achieve safety and community. They provide convenience and allow us to do many things more rapidly. It is this trade-off between our personal energy and time and the use of external energy flows that constitutes the basis of value. As biological beings with psychological needs (c.f. Maslow's Hierarchy of Needs) we are compelled to find external sources of energy and use our intelligence to construct tools to achieve these ends. Some of our needs are oriented toward achieving mental health in a complex social context. We need music. We need art. We need to both sense these things and produce them to one degree or another ourselves. The less time we spend making a living, the more time we have available to devote effort to having our higher psychological needs met.

But two conditions have thrown a monkey wrench (a tool) into the social fabric (another, biological, tool). The first is that somewhere along the line we started confusing tool value (needs) with pleasure value (hedonic value). Comfort is pleasurable, but hedonism goes beyond mere comfort to assert that pleasure is the end pursuit in its own right. Modern neuropsychology is bearing out the notion that humans can become fixated on pleasure value and seek those things that provide that even when it goes way beyond providing comfort. The standard explanation is that we evolved in a time of scarcity, in which we needed to seek, for example, fatty, sweet, and salty foods just for survival. Sex is certainly a good example of this pleasure as a marker for comfort and survival. But in modern times, when we are no longer confronted (at least in the developed world) with scarcities of these kinds, we have no way to turn off the drive to seek pleasure. We've even managed to transfer some of our pleasure from the original form, say sex, for a substitute, say a big fancy car or designer clothes. We are no longer motivated just by needs, but by manufactured wants that masquerade as needs. As a result we are willing to attach more value to frivolous energy expenditures than is warranted by the facts.

The other major condition that has created a real problem for us is that the pleasure-based drive behind sex has paid off in spades. We reproduce prodigiously. Moreover, because we have cleverly found ways to meet our basic needs, especially safety, we are no longer subject to ordinary ecological controls on our numbers and have thus managed to overshoot the natural carrying capacity of our planet for our species. We did this by expanding our external energy flows by many orders of magnitude with fossil fuels, thereby creating tools that protect us and help each individual live longer lives.

The problems that are becoming apparent, based on these two conditions, come down to too many people expending too much external energy (from a carbon-based fuel that is depleting rapidly) for too many things that are really about pleasure more so than comfort. And that has led us to what is in reality a negative value being treated as a positive one. We are literally paying for things that make us feel good but that are, collectively and over not too long a time span, going to kill us.

We need to reestablish the biophysical basis of value. We need to comprehend the limits of comfort we can reasonably expect, especially since our energy flows are about to decline at ever increasing rates. We need to parse the value of goods and services into real energy costs (emergy), tool value (how much energy saved, but really saved, and reasonable profit (income energy to the purveyor) in establishing prices. Pure market mechanisms do not provide adequate information on these value elements, so have become very poor ways to establish prices. The solution that has been offered is to establish an energy standard for money. By doing this we can establish a cost accounting system that will provide the basic cost accumulations in producing products and services. Buyers will need to grasp the significant difference between tool value and psychological desires and be able to assess the premium they might be willing to pay for that energy advantage. My guess is that once all of the energy costs, including externalities, are included in the cost basis of price, there will be very little room to pay a price for an object or service that includes a fair profit for the seller, such that most buyers will think many times about purchasing things that fulfill wants primarily.

Therein lies the problem. Humans have already demonstrated a lack of judgment when it comes to deciding on purchases. They are not the rational beings most economists had assumed. Even with more actual or real cost information and given a basic understanding of the role energy plays in production and distribution, they are not likely to, on average, make sound decisions in terms of willingness to pay for things that do not substantially contribute to their comfort (except in the hedonic sense). Could a better education turn this around? And, if it could, could we reorient the educational institutions to provide it in time to matter? Always more questions.

Biophysical Economics in the New York Times

I thought I would share this with readers. I haven't completed my synopsis of the meeting yet but this came out today, so I thought some of you might enjoy it.

New School of Thought Brings Energy to 'the dismal science'

by Nathanial Gronewold

Regular readers will be glad to see the 'cause' is getting some international and high level attention.

Zapata George Redux

I was interviewed again on the Zapata George internet Radio show last week and it is now available. For those who want to hear what I sound like (not especially recommended) or just want to get an update from the Biophysical Econ conference...