Report From the Conference — The Gund Institute for Ecological Economics, University of Vermont
This conference was started by Charlie Hall in 2008 at SUNY-ESF (State University of New York, Environmental Sciences and Forestry) in Syracuse NY. I attended after some e-mail exchanges between myself and Charlie regarding the analysis of energy return on energy invested (EROI or ERoEI, depending on your insistence on the second acronym reference to energy), a concept he had developed from his systems ecology studies under Howard Odum. Charlie had recognized that the same energetics that dominates the dynamics of ecosystems was relevant to the human economic system as well. Of course many others, including Odum, saw this relationship and began trying to apply the concepts of systems ecology to economics. Herman Daly and Robert Constanza were two of the founders of Ecological Economics, the branch of economics that advanced the notion of taking the environment into account when considering so-called external costs of resource depletion and damage due to pollution.
The conference was cosponsored by SUNY-ESF and The Gund Institute at the University of Vermont, where the meeting was held. This could be an historical event in bringing researchers from EcoEcon and Biophysical Econ together to explore overlaps and common interests. We will have to see how it unfolds over the long run. But my impressions from many off-line conversations is that it could be very fruitful — at least from a scientific point of view.
As long-term readers probably realize I don't have much hope that the science, which, in my opinion, is maturing and quite solid, will ever have much impact on policies that would make a difference in what is coming our way. Even so I am excited about being here and interacting with some really bright minds who are able to see past the BS that the neoclassical economics people (along with their acolyte politicians) put out. This is a crowd of intellects that I really feel comfortable being with.
A sampling of the program (I will post the link to the conference site as soon as it is available):
Friday morning, after the general greeting comments, the first plenary panel session was an overview of EROI, the State of the Field. Charlie Hall and two of his grad students presented a number developments in the analysis of EROI and interpretations of what these mean for our understanding of the phenomena. EROI is essentially a version of the law of diminishing returns applied to energy systems. It is the physical analog of the law in capital investments or production scale expansion. At a deep level the law versions are all related and just another manifestation of the Second Law of Thermodynamics.
My own impression of the developments is that the science is improving and the breadth of evidence for the basic phenomenon having an increasing impact on economics is gaining. In a sense there is nothing radically new here. It does, however, importantly strengthen the veracity of the theory. It truly looks like we cannot expect any countervailing evidence that would relieve us of the worry about the ultimate effect.
The second Friday morning session was another plenary panel consisting of Dennis Meadows, Joshua Farley, and myself, moderated by Matthew Burke (Josh and Matthew are of the Gund Institute), on the subject of Energy, Money, and Debt. Each of us gave a 15 minute presentation and then we had about 45 minutes of Q&A. This format was somewhat constraining so we each simply touched on some high points rather than get into anything deeply substantive. I'll save for later regarding what I had to present.
Dennis Meadows kicked it off with a deep yet simple insight into the major disconnect between the financial system and the real asset economy. The biophysical economy, is dominated by negative feedback loops that tend to keep the system stable (or would) whereas the financial system is dominated by positive feedback (e.g. speculation) that is based on exponential growth, inherently impossible. In the current paradigm (debt financing and speculation) and sheer size of the financial sector, these two systems are incompatible. The financial system will explode at some point. Point made.
Dennis made his extraordinarily important contribution to understanding the dynamics of the global economic system back in 1972 with the publication of The Limits to Growth. That work did not explicitly deal with energy as separate from other resources and peak oil/EROI were not on the radar screen except as implicit to the way all non-renewable resources deplete. Nevertheless the dynamics revealed in LTG, the modeling that produced a series of graphs that told a scary story were still right on with respect to how the world worked, up to that point and how it would work in the (then) future. Meadows, et al., did a “30-Year Update” in which the authors pointed out that what had changed was not the dynamics projections, but that because much of what those projections anticipated has been realized and the main agenda now should be learning how to adapt to the decline phase.
On a personal level this was an incredible honor for me to be on the same bill with such a famous luminary as Dennis. We stayed in the same hotel and I had an opportunity to have breakfast with him before the meeting started. It turns out we have a mutual interest in permaculture! I was able to ask him several questions that I have had about systems. I was also crass enough to ask him to sign my copy of the 30-Year Update book. I also got to tell him about my systems courses at The Institute of Technology. What a thrill. Then to be introduced as, essentially, a colleague of this great man was deeply humbling. I would still consider myself his student since I still have much to learn about systems dynamics.
Josh Farley gave us an amazing summary of how money comes into existence and how it is destroyed. Money in the US (and most everywhere) is a fiat currency. The role of the Fed, banks, etc. and the operations of these entities is extremely complex so it was amazing how well Josh was able to explain the “system” in a short presentation. I learned some new things regarding the transactions that take place between the government (Treasury), the Fed (quasi-government), big banks (Wall Street), and others and how it impacts the money supply and interest rates. He also covered some of the recent Fed actions in their attempt to boot the economy growth. What I came away with was an amazement at how complex these transactions are. It is becoming clear to me why most people, even in the financial sector, cannot grasp how this system works (or perhaps I should say works in theory).
After lunch Chris Martenson, of The Crash Course, gave a talk about the issue of how ordinary people can be educated about peak oil, climate change, and other devastating news. He related the process that people go through when they start to understand what is happening to our world and what will be happening to our civilization to Kubler-Ross's stages of grief (on learning that one is about to die). As I understood him, his approach to educating people is to recognize what stage they are in (if in one) and shape the message accordingly (as counselors would work with those approaching death). Also he spoke to the problems bringing the original message to those who have not yet heard it and have counter beliefs that have to be overcome.
Chris is a masterful presenter, very persuasive and, I think, has a very sound approach for the most part. I recommend him to anyone who wants to have a guest speaker on the subjects. I am, of course, less and less convinced that books and presentations are really going to do much good in moving the discourse away from Kim Kardasian and Justin Bieber to peak oil and a contracting economy. Thus my own meanderings here on QE are just that. I write mostly for me, to capture my own thoughts in a way that is public enough for others (like you) to critique and comment. My hope is that others who see the ideas as useful will take whatever actions they choose to get through what is coming. I have no illusions that anything I can come up with or suggest is going to &lquo;fix” anything. I don't really have any suggestions about what you should do. I just want to explore the problems, using systems thinking, to understand those and their relation with evolution. So while Chris does a good job of explaining difficult stuff in a way that most people can understand, I suspect that there will never be a sufficient number (critical mass) who will really get it and act on it such that it will make a difference. Still I applaud his efforts and hope he will soldier on.
The first afternoon session offered two break-out sessions, “Energy Taxes in a Fiscally Challenged Politics”, and “Great Economic Thinkers & Biophysical Economics”. Thinking that taxes or any other mechanism is going to have much effect on the outcomes of fossil fuel depletion or carbon loading on the atmosphere, I skipped that session. OTOH, I always like to understand history better so as to see how things developed to what we have today.
The later afternoon breakouts were devoted to “Connecting our Normative Disciplines to Science: Helping the Orphan Disciplines Find a Biophysical Home” and “Economic Implications of EROI”. I have to admit that the title of the first session was intimidating! So I stuck with the second where I had hope of understanding what they were talking about.
The first plenary session focused on “Biophysical Economics and the Financial System and Industry” moderated by Sam Hopkins of Hopkins & Associates. Sam had gotten an honest to good Wall Street investment management guy to speak about his impressions of the financial system as it relates to peak oil and declining EROI. I had a chance to talk to the fellow, Peter Tcherepine, President of Loeb Partners Management, Inc. at diner and again the next day. He didn't seem to be getting this whole EROI business until I mentioned the law of diminishing returns and how it works in all such economic systems as the scale increases exponentially. That he got and then he started paying attention to the idea that one day, not only will the oil deplete to a non-recoverable state but that it would do so largely because the costs (in both energy and money) would be too great relative to the profit return on the effort. I think he went away with something to think about. We'll see.
Sam also got Steven Kopits of Douglas Westwood, Inc, a guy who definitely gets PO and EROI very well and gave a riveting talk on the financial implications. He gets it. I wonder why other Wall Street types are failing to do so?
The second plenary session, “Energy, Democracy, and the Political Economy of Change: Strategies for the Change We Know is Needed”, was right to the heart of the issues. Eric Zencey, author of The Other Road to Serfdom and the Path to Sustainable Democracy, moderated (and was the after lunch plenary speaker). Tom Prugh from Worldwatch Institute gave an update that was revealing. Worldwatch and all other such institutes exist for the purpose of affecting change in society in order to save the human race from decimating itself and the world they live in. By definition such organizations have to be optimistic and though the folks at Worldwatch are fighting to the end for that purpose, privately they are beginning to get pretty pessimistic. Given that it has been since 1975 that Lester Brown has been developing the warning message and starting to provide policy makers with vital information and still today the public discourse remains “growth of a consumer economy” you can easily imagine the discouragement they must be feeling.
Niel Glazer from Foundation Earth is engaged in a similar effort, working on the costs of externalities and getting those incorporated non-voluntarily into corporate cost reporting so that we have a much better understanding of what ecological damage, including global warming are costing society. Corporations need to be held accountable for all those invisible costs that the rest of us bare in terms of health challenges and other expenses. Getting that kind of legislation passed looks like a daunting task to me, but I am all for his and his compatriots' efforts. They will at least advance our knowledge of what is involved and knowledge is always a good thing. You never know when it will have an impact on the system!
The after-lunch plenary speaker was Eric Zencey. The title of his talk was “Energy as Master Resource”, a reference to economist Milton Friedman's recognition of energy as a necessary concern for the economic engine while at the same time promoting the commodification of money, essentially de-linking money from its role as mediating the flow of energy to the work processes desired (see below). Zencey's point, of course, is that energy is the master resource for all economic activity and should be treated as such. As all biophysical economists have come to realize, energy makes a one-way pass through the economy and can never be recycled (unlike material which can, in principle, be recycled if you have enough energy to process scrap) and should therefore be considered the master resource.
There were three breakout sessions after Zencey's talk. One was titled “Transportation and Energy: Challenges and Lessons from a Rural State”. I would have loved to have gone to this one just to see what sort of findings they had. Transportation in rural areas is going to be an increasingly challenging problem as fuels from oil, in particular, get more expensive (or less affordable). Another session was “Energy Use in Food Systems: The Realities of Relocalization”, also one I would have loved to attend. But I felt I had studied the issues of food systems, sustainability (e.g. permaculture), and security to the point that I probably would not have learned anything really new. So I went to the third session, “Communicating Biophysical Economics”. This is an issue that keeps haunting me. On the one hand a biophysical interpretation of economics seems so incredibly obvious that I can't really understand why it is so hard to get the ideas across to the ordinary person in the street. And yet, not even the majority of economists, who should be smart enough and open enough to scientific arguments, seem able to grasp it. Or perhaps they simply do not want to grasp it. The moderator, Jessica Lambert, provided some insights regarding typical approaches to communicating a new idea wherein it is common to challenge belief systems with the “new” ideas, which results in an automatic shutdown. Even smart people have belief systems that are tied to their emotional states. Challenge them and you get an emotional rather than rational reaction. I have certainly seen a lot of that.
My session was to focus on the relation between money, energy, and debt. These were not really the usual kind of conference presentation on new research. Rather they were to be summaries of what is known about these issues more generally. I tried to cover all of these from a theoretical, systems perspective. My slides can be found at: Energy and Money (PDF). The core of my thinking is that money needs to represent useful economic work, which is really just biophysical work. Work is accomplished by energy flowing through a system. Unfortunately not all of the potential energy is used effectively when there are many stages of processing involved. Between low efficiencies and wastage a lot of raw energy is simply dissipated as waste heat long before the final economic work is done. Engineers have a designation for the actual energy used to do useful work. It is called exergy. It is that amount of energy that produces the useful work and can be substantially different from the total energy content in a flow.
My thesis is that a unit of money should be tied to the amount of exergy that is available to society, either in terms of new flows or already accomplished work as in embodied energy. The latter is money that represents existing assets, while the former represents work to be done. The total money supply can only ever represent the amount of work an economy has accomplished or will accomplish in the near term. Thus the value of money is tied to existing assets and to the stocks of fuels that are available. Note that as the latter declines due to the peaking and decline of non-renewable resources like fossil fuels along with the declining energy return on energy invested (or exergy available after doing work to produce that exergy) this would imply a shrinking money supply. There would be less work and thus less stuff so there would be less need for cash to represent it. Obviously this doesn't correspond to anything like the way the monetary systems of the world operate today.
I finished up by showing some of my earlier results having to do with energy production dynamics and the curves showing the relation between gross energy (e.g. barrels of oil in BTUs), energetic costs (e.g. EROI), net energy, and asset accumulation (in embodied energy) and how, as the resource depletes and gets more costly to extract, we go into a steep decline (see: Economic Dynamics and the Real Danger. The graph in this presentation has been updated and shows slightly different values as I was trying some new rate constants in the model run from which the graph was taken. But, as you can see the dynamics do not really change in form.
OK, I assert that pegging the value of a unit of money to a unit of exergy is a necessary condition to make money actually a measure of real wealth. Monetary policy should be simple: print the amount of money that represents our future ability to do useful work. Money already in circulation represents existing wealth (real assets). The only money that can be borrowed is from the stocks of exergy yet to be used. And then that borrowing has to produce work that increases the future stocks of exergy, i.e. it is really an investment. Everything else is stupid!
Of course this will never happen. Bankers have got a real scam going and they own the government, so there will be no changes that are going to destroy their lifestyles. As smart as our species is, we generally use those smarts to figure out how to ignore nature rather than how to produce a truly sustainable society. We're great problem solvers but we just don't really understand what problems we should actually solve.
So now more politicians are starting to recognize the relation between global warming, climate change, and how that will impact society (dare I say civilization?) Nature has to slap us around pretty badly before we start paying attention. But, as it happens, probably too little, too late.