Work, Exergy, the Economy, Money, and Wealth
Posted by Gail the Actuary on October 5, 2010 - 9:15am
This is a guest post by George Mobus. George is an Associate Professor of Computing and Software Systems at the University of Washington, Tacoma. His blog is Question Everything.
This is something of a tutorial on the relationship between energy and the economy. I have been dismayed by how often people express their lack of knowledge about that relationship. Such expressions come in the form of beliefs that money is what drives the economy. Or the belief that the human desire to accumulate monetary wealth is the motive force for economic growth. Indeed I doubt that most people ever think of physics when they think of the economy.
But the reality is that the economy is very much a physical process that requires energy to continue operating. All of the money in the world will not suffice to maintain the motivation of the wheels of industry unless it can be used to exchange for energy flow. Here is a guide regarding how the real wealth of nations is created and a more concise look at the nature of energy flow needed to do so.
Wealth Production, Movement, and Work
Let's start with a basic definition of wealth as all physical and abstract assets that have some value to some human being(s) at some time somewhere. And to generalize the concept a bit more, let's include human, pet, and ornamental plant biomass as part of that definition. We certainly value ourselves and consider human beings (their minds and efforts) as instrumental in making more wealth. We value our non-food animals and lawns and flowers. We are willing to spend money to acquire and maintain them.
Humans convert natural resources into assets by performing various kinds of physical work on those resources. The resources must be extracted from the natural world. They must be moved about and modified in various ways. Wealth is the product of various work processes in which atoms are moved and rearranged according to our desires. This applies to what we ordinarily call services as well. The provider of the service did some work, if nothing more than moving signals around in their brain, or moving their muscles. It is all work in the pure physical sense.
In all such activities work requires highly specific forms of kinetic energy (energy in motion). The amount of work that can be accomplished depends on the form and quality of the energy applied and the characteristics of the work process that can employ that energy. Energy that is specifically qualified to do useful work is called exergy. There can be a lot of energy in a flow but only a fraction of that energy is able to be coupled to the process in such a way that actual work is accomplished. The rest is dissipated, usually as waste heat.
In our industrial economic systems machines and furnaces are used to produce mechanical and thermally-based transformations of materials (motion, shaping, and composition). These machines, etc., typically referred to as ‘prime movers and heaters’ are designed to extract as much transformation out of an energy flow as is feasible given the level of technology or the thermodynamic limits of efficiency.
In any of the many forms of energy that are used in the industrial and domestic economies (e.g. electricity or liquid fuels) is found the exergy that runs everything we do. Let's take a look at a specific example of an economic activity that is valued by some human beings. There won't be a visible physical asset produced from this activity, but we assume that the activity was undertaken because the people involved will be better off economically in some fashion.
Suppose a family elects to move from town A to town B and decides to carry all of their possessions on top of their car. Mass has to be moved from point A to point B. The definition of mechanical work is that a mass is moved from one location to another by applying a force that changes the kinetic energy of the mass. We measure the change in velocity of the object and its mass and then we know how much its kinetic energy was changed.
The unit of work is the joule, defined as a force of one newton over one meter, which is the same for energy content of potential energy (energy in storage). Thus we can calculate how much work is done to move the family if we know the mass of the family, their belongings, and the vehicle. Like all good physics thought experiments we are ignoring friction (road and air) and most other relevant factors just to demonstrate the principle. These other factors could readily be determined and computed as well to get a more realistic number.
The fuel (e.g. gasoline at a particular octane rating) contains a specific number of joules per unit weight (or volume). At the end of the trip we can compute the number of joules actually used by the weight or volume consumed. The difference between the computed work and the actual energy consumed was given off in heat from that friction and inefficiencies of the engine. The total energy of the system (fuel going in and heat given off plus the work accomplished) is conserved in accordance with the First Law of Thermodynamics. The exergy that was represented in the fuel is the same as the actual work accomplished (in joules) not the total potential energy in the fuel.
Figure 1 shows the relevant factors.
Figure 1. Exergy is the amount of energy contained in the fuel (potential energy) that is able to be used by the machine to do the mechanical work of moving the mass over some distance. Once the work is done the exergy is used up, but the energy is dissipated as waste heat.
We are assuming that the move represents some potential greater wealth for the family (as in moving to take a better paying job).
Of course the fuel had to first get into the car tank before this work could be done. For that to happen many steps were needed to go from raw oil deep underground to the product pumped at the gas station into the car. And the relations between many of the relevant factors here are not simple linear ones. Exergy is supplied from a very complex web of transformations. In other words, much work had to be accomplished just to get the fuel to the gas station. Figure 2 shows the network of a few of the major relations. Note that electricity is needed in order to run electric motors to drive pumps to move the fuels in the various forms.
Figure 2. The exergy web is a complex set of relations describing the transformations of raw oil to its final form (gasoline) in the tank of the car. This diagram does not account for the energies used in manufacturing and emplacement of the exploration, drilling, refining, and transportation equipment, nor for the electrical generation and delivery system. These are capital costs that could be accounted for with some effort. The red arrow from the car to the exploration represents the information feedback from the users to the oil producers (dollars spent on fuel) to spur further production.
At each transformation the energy going into the work process is greater than the actual exergy available since no transformation is 100% efficient. If we were to work backwards from the car trip to the oil extraction we would find that a great many energy units of oil would be needed to provide the exergy needed for the trip.
Energy Return on Energy Invested — EROEI (EROI)
A great deal of work has gone on in the analysis of energy flow regarding how much energy is returned for every unit of energy invested in acquiring that energy (see: EROEI, Encyclopedia of Earth - EROI, and this by David Murphy & Charles Hall).
Generally, when done on oil or other fossil fuels, the energy returned is measured in terms of the raw energy content of the oil (usually given in barrels of oil equivalent) and not in terms of the actual exergy itself. As can be seen from the above diagram doing so would involve calculating (or collecting data on) the energy losses at every transformation from raw oil to final gasoline in the tank. This is a daunting task. Nevertheless, it is only the final exergy for the automobile under the specific load that counts as energy returned since that determines the amount of actual economic work that is done.
In other words, we are probably vastly overstating the EROEI with regard to actual economic work since no form of energy comes to us from a raw source. One problem is that at each node in the above web there is a periodic building of new machinery that, on the face of it, might reduce the energy consumed to accomplish the intermediate work (e.g. the gasoline delivery truck can deliver more gas per unit of diesel fuel used), but requires considerably more investment energy to build out. In truth we don't actually know if the newer equipment's higher efficiency offsets the consumption of investment energy so that there is a net energy gain to society. The reason we don't know this is that we don't do energy accounting and under the conditions of constantly increasing availability of energy (as more oil was pumped per unit time) the effects of declining return on investment could easily be masked by the volume effects (we lose $0.02 on every transaction but we make it up on volume!)
This is what concerns me the most about the current state of energy analysis. We are acting too much like the drunk who looks for his keys under the street lamp even though he lost his keys down the street: there is more light under the lamp. Thorough EROEI analysis is next to impossible to perform for the reasons just mentioned- no data. So we really don't know how much actual exergy we are supplying to the economy to do our economic work. Hall, Balogh, and Murphy did tackle the problem to estimate total net energy that is needed to support just the transportation system (which is why I chose this example - see ”What is the Minimum EROI that a Sustainable Society Must Have?“, Energies 2009, 2, 25-47; doi:10.3390/en20100025). However, they limited their boundary to just the energy used up in the transformation and did not consider energy consumed by other operating factors (e.g. labor) or capital investments in infrastructure. This might suffice as a second-order approximation that would likely not be substantially changed by adding in amortized investment costs, but in truth we just do not know. We won't know until someone tackles this very hard problem. I just hope we don't get an unpleasant surprise in the answer.
Exergy is the net energy that goes into economic work processes to accomplish that work. Net energy is the difference between gross or raw energy in the extracted fossil fuels and the exergy supplied to the prime movers/heaters, etc. We can estimate the first-order net energy as the number of barrels of oil (or joule contents of a barrel of benchmark oil) less the number of equivalent barrels it took to get it out of the ground and to the refinery, and maybe through the refinery as Hall, et al did.
But for non-transportation sectors like manufacturing, households, and services the situation is much less clear. In the above diagram I showed electricity as another form of exergy produced by the energy contained in the water behind the dam. This is what complicates the analysis so much--the mix of energy forms that have to be taken into account working backward from the point of use in economic work to the raw sources.
Money and Wealth
Howard Odum noted that money flows in the direction opposite the flow of energy through the economic system (see: 2007, Environment, Power and Society for the Twenty-First Century: The Hierarchy of Energy, with Mark T. Brown, Columbia University Press.)
Figure 3 captures this in an ‘idealized’ and ‘simplified’ economic system. In this figure there are five kinds of energy flows. We start with ‘raw’ but high potential energy from a suitable source (e.g. fossil fuels — ancient solar energy). This energy is captured by special equipment (or by crops on the farm) that extracts the exergy that the economy needs. This is distributed to all work processes, including the extraction processes (internal exergy within the energy extraction process is not shown). Consumption of food provides the labor pool with energy that is returned to the work processes. The fourth kind of energy is embodied in the material flow that ends up in consumption. Finally, all energies are consumed in one way or another and all work processes produce low grade or waste heat that must be carried away in the atmosphere and eventually radiated to deep space.
Raw material resources are extracted from nature and worked upon to produce intermediate products, the parts that will be used to construct a final product (or service). The materials contain some emergy from the Earth's natural energy flows that produced, for example, high grade (low entropy) ores (the black straight arrows surrounded by white outlines). The intermediate products (grey straight arrows with white outlines) represent more embodied energy as work was accomplished to make the raw materials useful in production.
The final product goes to the consumption process, where end consumers are people. In turn, people form the labor pool and supply human energy back to the various work processes. The ultimate fate of all materials (over sufficiently long time scales) is as waste that is essentially dumped back into the environment as high entropy by products of economic activity.
Figure 3. The economy is viewed as a set of flows of material, energy, and information. The physical resources flow from left to right. Every process requires specific exergy to perform its work. That energy is consumed and dissipates as waste heat (red curvy arrows). Eventually the consumption process produces waste materials (actually the work process and extraction processes do also, but it is not shown to keep the diagram simple). Consumption helps to produce labor energy (grey curvy arrows) which is fed back into the extraction and production processes. Money (dark, thin, curvy arrows) flows in the opposite direction of exergy and embodied energy (emergy) flows. Money is used to purchase labor energy which is how money gets recycled even while all energies flow in only one direction, out to the environment as waste heat.
In this view of an economy, each downstream process must signal the providers of materials and exergy of their needs/desires. They do this by using a very abstract message token called ‘money’. When anyone buys a product or service they are signaling the producer that there is a continuing demand for that product or service. The producer then signals his suppliers by buying the goods and services he needs to produce his output. The flow of money, represented in the figure by thin black curvy arrows, runs exactly counter to the flow of exergy and emergy, including labor energy (which we might label lexergy). Since people provide the lexergy in the system, money then recycles through the economy.
What should we count as wealth in this picture? Currently economists count wealth as being the sum of all money transactions (purchases). As long as the monetary form being used (such as a fiat currency) actually was used as shown in Figure 3, then this would be a correct approach since all money would represent the actual work being accomplished in all forms. Typically this will boil down to the production of goods and services that are deemed economically useful.
But, unfortunately, we people have gotten into some very bad habits that cause a major distortion in this measure of wealth. And those distortions have a positive feedback effect on those bad habits. The distortions make it look like we are producing more wealth as measured by that summation of transactions (the Gross Domestic Product, GDP) than there actually is physical wealth in the system. This leads to doing the things that caused the distortions in the first place and makes us feel good about how much supposed wealth we have made.
Finance
The bad habits I refer to have to do with the false creation of more money that is not represented by an equivalent amount of exergy. The bad habits are actually venerated today. They are collectively called ‘financing’! Some time back I wrote more about this insidious practice that evolved out of our historical and very reasonable practice of borrowing from past savings to stimulate some new economic activity.
Bankers are to blame for stepping onto the slippery slope first. Fractional reserve banking originated as a means to provide loaned money to people who were going to do something new and useful economically. As long as the bankers maintained a reasonable reserve as backup against too many savers wanting their funds, this was an effective way to take advantage of opportunities to create new wealth. For a short period of time it looked like there was a bit more money than there really was, because savers assumed that their savings were intact or could be made whole again in a reasonable amount of time. But the bankers were not satisfied with the marginal profits they made by managing this process. How to make more profits? Lend more money and keep fewer reserves! What made this work was that most people had become relatively comfortable leaving their savings where the savings were safe (until they weren't!).
As time went on, and except for a few business cycle-caused hiccups, the practice of keeping smaller and smaller reserves seemed like a good idea to even conservative bankers and regulators. But what they didn't grasp, mostly because they had long since forgotten that money = ability to do work, is that this trick only worked as long as the supply of exergy was on the increase. Financing in this manner, and other more sophisticated forms of borrowing from the future, depends entirely on economic growth.
Economic growth can only take place as long as there is growth in the availability of exergy. It's that simple. For all those years we have been increasing the production of fossil fuels, even with declining EROEIs, there has been an increase in exergy year over year. This is what has ‘financed’ growth in the economy and the seeming effect of a rising tide raising all boats. I've written about this as well (see also: this earlier piece).
Financing based on betting on the future was not a completely unreasonable approach while the whole system expanded. But it did create a false impression of the availability of exergy. It began to be treated as a foregone conclusion that there would always be more wealth created in the future and that that wealth would more than compensate for the ‘risk’ of being caught with our pants down if it didn't happen. In other words, it didn't seem all that risky. So the practice was expanded, especially in the past few decades, with all kinds of creative ways to make more money than was warranted on energy standards alone. The stock and bond markets and various derivatives, the housing market with rising prices, the cheaper goods coming from overseas manufacturing (where the energy demands of the workers is far greater than in the OECD countries), and many other false signals simply provided a kind of reward feedback that just kept us inventing more ways to fool ourselves into thinking we were producing massive wealth.
But reality is starting to bite. Starting back in the 1970s the flow rates of exergy began to slack off, even as the flow of raw energy, mostly oil and gas, were increasing dramatically. This was due to the negative impact of diminishing EROEI. By the 1990s the flows were probably past the peak and starting to actually decline. That is when there was a tremendous explosion of new tricks in finance that were meant to maintain the illusion of wealth creation.
As things currently stand, the economists, politicians, talking heads, and pundits all believe that the problem with the economy is that we are simply not spending enough money, thereby increasing the GDP and causing jobs to be created. They are universally calling for a return to growth. The politicos scrambled to save the financial system because they knew it was the ‘engine’ of creating new money. And the new money always made it look like GDP was growing. By inference, then, the economy must be healthy when the GDP is growing. Except, of course, it isn't. Only the growth of exergy can support a growth of real wealth. Money has no causative power whatsoever, except perhaps to drive men mad. It certainly seems to be doing so today.
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Thanks George.
One way to look at the situation is that on the physical side we have less exergy, meaning a larger % of societies energy/resources need to be diverted towards the energy production sector over time. Also in the social sphere, since money comes into existence via loans but the interest to service those loans isn't created at the same time, total interest due, society-wide, grows and grows each year. Thus in the same way that lower EROI necessitates a resource shift from non-energy economy towards energy procurement, the interest/servicing requirement of our monetary situation diverts more and more resources from the non-finance productive economy mostly towards future expectations and foreign creditors (i.e. interest).
Other than the foreign creditor part, the future expectations component is much like 'saving', except that with less exergy the savings we expect to be able to spend in the future (interest) will function more like a write-off. I.e. our expected future consumption won't be possible.
So over time our current system, based on cheap energy and extended with cheap credit, diverts more real stuff to energy sector and more money towards the interest sector. Holding everything else constant, these two trends obviously can't continue...The interest/currency problem will be self-correcting (either by conscious devaluation/default from governments or (worse) defaults due to lack of confidence of participants). Then any new system will need to factor in the lower expected exergy details or be a short-lived one...
When I was a kid, and tv was something of a treat, we were allowed to watch the cartoons on Saturday mornings sometimes.This was back in the days when cartoons were technically really well done-properly drawn and animated by real artists.
For some reason one particular one stuck in my mind; thre was a giant Rube Goldberg factory, filled with sound and fury and huge machines , as well as a slew of cartoon characters, all moving at a very hectic pace.
Big logs were being fed into the factory at one end, and out of each log a single tooth pick was being boxed up in a matchbox size container at the other end.
All that work , and all those logs, for a handful of toothpicks!
The guy or girl who came up with the cartoon story line deserves to be famous;I suppose that if some part of the bau literary establishment survives, some professor of art history will "discover" him or her in a century or two and write a page or two about the cartoon in his book about art and the long descent.
Really...,
I was freaked out by the Lorax.... Took it very seriously when I was very young. Made sense to me.....
Then any new system will need to factor in the exergy details or be a short-lived one...
And that would need to be recognized as continually declining exergy details, which will eventually dawn on consumers who have been building monuments to overconsumption, and a new normal will emerge. There will be many clingers-on to the old way of thinking, of course.
Will
Right!
And if those consumers understand that 'less stuff in the future' is due to declining exergy and not due to the Republicans or enviros or another country etc., things might go better.
Of course, it's taken me 5 years to understand exergy -two years alone to realize it was spelled correctly - so this story is going to have to be simplified...
Is there a dummy book for exergy..., If so, I can use it........
Is it net energy...?
BTW, I'm supposed to be LES(S)ISMORE....
its an appropriate moniker. You have one less 's'.
The way I look at it, applied to a social system, exergy is simply net energy x scale - total amount of energy that can be used by society after the energy costs have been accounted for. I use it interchangeably but its origins are in thermodynamics and there are arguments/boundary issues when applying to to other areas as with everything else.
Thanks.
Hi nate
Exergy is simply net energy x scale - total amount of energy that can be used by society after the energy costs have been accounted for
Are you sure this is right? I confess I get confused by the terms sometimes but as I understand it exergy is a thermodynamic term referring to the potential to do useful work but does not take into account the energy that is required to, for example, build the infrastructure to extract the exergy. Net energy on the other hand should include this required energy. So the exergy present in a given amount of wind could be equivalent to that in a certain amount of oil but the former would usually require far more in energy inputs to extract.
So in some examples (e.g. diffuse fields) there could be the potential to do work (exergy) according to simple thermodynamic analysis but the net energy might be negative once the energy inputs required to extract the exergy are accounted for.
Or is that wrong? Just wondering because if not then it would make an important difference - i.e. exergy analysis could be misleading in terms of what is actually available to society.
Confession - my thermodynamics (and physics generally) is seriously rusty!
TW
exergy is a thermodynamic term referring to the potential to do useful work but does not take into account the energy that is required to, for example, build the infrastructure to extract the exergy. Net energy on the other hand should include this required energy.
That is correct, and note that infrastructure O&M costs (including replacement) need to be figured in over a set timeframe (e.g., 30 years). Some helpful cost modeling tools include NIST Energy Escalation Rate Calculator (EERC)and DoE Building Energy Lifecycle Cost model (BLCC);
http://web.mit.edu/2.810/www/exergy.pdf
If there is a way to state an argument in terms of net energy rather than 'exergy' that's how the argument should be stated IMO. If 'exergy' is only used once in a essay or whatever, then simply rephrasing the sentence in terms of net energy even at the cost of some awkwardness is probably the best bet.
Maybe if it is used over and over and really needs to be used over and over to cut down on awkwardness and it really can't be factored out, then swallowing 'exergy' might be worth it. Maybe..
My ears shut off at the sound of it for some reason.
'exergy' and 'net energy' are pretty different concepts. I'm not sure how this thread has gotten them confused.
Exergy is the maximum useful work possible that brings a system into equilibrium with its heat reservoir. When applying it to a social system (which is awkward), it roughly equates to net energy x scale - this is not a physics definition, but an economic way of interpreting exergy. The main point being is that the 2nd law always intervenes and there is a biophysical cost to harnessing any energy source.
I agree with those who say the term is so confused and used differently that it is largely useless other than in physics papers/work.
In short, exergy is useful energy but not a useful term.
Yes, I think it's pretty awkward. I'd say it would help to come up with another term, or at least get in the habit of appending 'social' to 'exergy' if we are not talking about heat engines.
It also seems to me that when you said (above) that "Exergy is simply net energy x scale", the word 'simply' is a lie. ;-)
Really? They seem similar to me. So similar that I suspect exergy is redundant and confusing jargon.
When I read 'exergy' I substitute 'net energy', but I'm left with a nagging feeling that there might be some subtle difference. This feeling makes me not want to invest the time to read and deeply understand any argument where the word 'exergy' occurs, because whatever conclusion I may reach will lack certainty since I have not got a clear idea what the difference if any is.
Here are some definitions I've found:
Net Energy
- Net Energy Gain (NEG) is a concept used in energy economics that
refers to the difference between the energy expended to harvest an
energy source and the amount of energy gained from that harvest.(http://en.wikipedia.org/wiki/Net_energy
Exergy
- In thermodynamics, the exergy of a system is the maximum useful work
possible during a process that brings the system into equilibrium with
a heat reservoir (http://en.wikipedia.org/wiki/Exergy)
Exergy
- 1. In thermodynamics, a measure of the actual potential of a system
to do work. ( wiktionary.org )
- 2. In systems energetics, entropy-free energy.
Thermodynamic free energy
- In short, free energy is that portion of any First-Law energy that is
available for doing thermodynamic work; ( http://en.wikipedia.org/wiki/Thermodynamic_free_energy ) (eg: Gibbs free energy, Hemholtz free energy )
These don't seem substantially different to me. Maybe one could say that any infrastructure already in place would increase the exergy of a closed thermodynamic system since one would not have to expend the energy to create it in the first place, but over time, you are going to have to repair or replace it so exergy would seem to approach net energy in the limit. Also, if you calculate exergy BEFORE the construction of infrastructure then the exergy and net energy are equal.
Does the little infrastructure nit warrant the use of a bit of Jargon? I would opine 'Hardly ever'.
Perhaps the difference is subtle, but there's a difference. 'Net energy gain', in human economics, can conceivably refer to portions of the human 'system' that don't include all the entropic losses, whereas 'exergy' traditionally must be defined in reference to entropic losses. (I think this is why Nate is saying that social exergy = net energy x scale, and not leaving that last part out. Note his equation is not merely exergy = net energy.)
Thanks for all the responses to this although I confess Nate I'm not sure what your 'scale' term is in the exergy = NE x scale.
I've been trying to think of an example to illustrate what I percieve as the difference between exergy and NE and the simplest I can imagine is a waterfall. Gravitational potential energy is pretty much (correct me if I'm wrong!) exergy and is defined for a given mass of water at a given height;
= mgh
where m = mass, g = gravitational constant, h = height.
But water of equivalent m and h need not be distributed equally in different systems. We could, for example, have situations in which the width of water is different, a sort of Angel vs Niagara falls. Or the water could take a more tortuous route to the bottom in one system than the other. The upshot of which is that although the systems have equivalent exergy (mgh) they would require very different amounts of energy input (e.g. fixed infrastructure, ongoing effort) to acquire.
Nate - is this what you mean by scale? Sorry, just trying to tie this down a bit more clearly.
Thx again,
TW
Right, and it's not due to the Democrats either. But I really don't see how people realizing this will make things any better.
Ron P.
Because right now we have a financial problem, not an energy problem. If we were consuming 10,000 kcals per day of primary energy and 2,500 internally that would be a physical problem with few solutions. But we consume 230,000 kcal each (in USA) of primary energy and endogenously need only 2,500 or so. However, the financial claims - when we entered into agreement to promise the future in order to consume immediately - are going to be left unpaid. This is a social problem - not a physical one - if the dollar/yen/euro disappear tomorrow we still have the same amount of energy and population as today - not so if energy disappeared tomorrow.
We're headed for some rough times when the debts go poof. But in my opinion, not as rough as you might think Ron. Therefore I can see more benign trajectories manifest if people understand there really isn't anyone to blame. If we're all in it together (or most people) there is much larger chance the the cooperative nature of a social species can be magnified as opposed to squelched.
That would be a lovely fiction to accomplish, but the masses eventually understand the process of labor extraction, and gather their pitchforks.
well, I didn't say we were gonna kumbaya our way out of this. My main point is though we are going to have less energy we still have plenty - just not to run this social system, aspirations, and claims. That is (and has always been) a social problem, not a physical one. Lots of possibile futures - some better than others. All will have less aggregate consumption.
Boil it down.... its that simple.
the biggest social issue I think will be overcoming a disparity in wealth.
It isn't the Republicans' fault, but they are doing a good job of grabbing a bigger share of the shrinking pie for the oligarchs while convincing their base that they can maintain their lifestyles by merely throwing everyone else under the bus. That's obviously not a helpful attitude for working together through this predicament, something akin to burning down the house to spite your opponents.
Say what you will about it, but it's a more realistic plan than the Democratic fantasy of providing the material abundance of our lifestyle, or something approaching it, to every man, woman and child on Earth.
Hi Nate,
Simplified story: Humans created the machine species (plural of species is species? speaking of spelling), upon which the human species - (with the possible exception of isolated small human groups) - now utterly depends.
The machine species (plural), together with the human species, created and evolved various niches of the machine eco-system, to which they (both species and species) adapted. The machine species perform different functions relative to each other, and to humans.
As the machine species grew in number and variety, so did their nutritional requirements, which humans, in turn, were happy (or, so it seems) to supply.
The machines need to eat, and what they eat is the fossil fuels, primarily.
The FF are in plateau and/or decline, and/or about to decline.
Storyline something like the above.
Hi, George. One comment on how to represent the energy flows. It's helpful to take a step back up one more scale first, otherwise you forget about all of the transformations in energy that come before the human economic scale of things. For 200 years we've been cheating, and that allows us to think that we can dispense with nature. Sucking the last rays of ancient sunlight out of the ground at a phenomenal pace has allowed us to also extract materials and allowed us to blossom like yeast. If you exclude the stored environmental reserves (that storage tank upper left in the diagram), we've got to get back to depending on the basic natural flows that would only allow logistic growth in the first place, instead of the exponential growth that we've had for the last 150 years. We're screwed. From here on out, we're going into permanent economic contraction because we're so far into overshoot with everything, starting with our monetary system, which is in even worse overshoot because men like casinos and the money is make-believe globally. That's all you need to know. It's a sure thing at this point, thermodynamic certainty, unless the little green men and magic ponies come and rescue us. You can see from the figure that the money (dotted lines) in no way represents the real system, and as the storage tank depletes rapidly, there will be collapse and restructuring of the financial systems at local levels. They call it a free market because the contributions of nature are free.
Plan accordingly.
Here's a diagram (Sergio Ulgiati, 2002?). If you want a better picture and a solid grounding on what constitutes wealth, check out Dr. Ulgiati's PPT below. I sure am going to miss the Google when it's gone.
www.lu.lv/Sharing/presentations/ulgiati.ppt
Hi Ianto
re: "...unless the little green men and magic ponies..."
I'm holding out for the little green men:
http://www.headlinerwatch.com/7307/ufo-chinese-airport-video-aircrafts-g...
re: "They call it a free market because the contributions of nature are free."
Very nicely said.
And, yet again, now that I think about it - (although I'd really rather not) - what humans have done in order to obtain those otherwise free contributions has often required the unwilling (not free) "contribution" of the labor of many other humans.
Hence, an enormous (overwhelming) amount of suffering also flows through the system.
I'm going to put this up front, since this thread is getting stale. Lots of dancing around the issue here. The problem can be simply stated in 3 words; Permanently Contracting Economy. So here's a challenge. No one wants to come out and say it, but it is the thermodynamic fact. We have to accept those three words to move forward in our feeeeeeeellllings about peak oil. C'mon, boys, let us dispense with the tortuous explanations, and call it what it is?
What is economic growth, anyway, and how should we measure it? You say it "looked like GDP was growing". Well, as defined, it apparently has been since the recession supposedly ended last year. You say the economy is not healthy even if GDP was growing. But GDP is the measure that almost everyone depends upon to determine the health of the economy in broad terms.
You appear to believe the economy is not healthy. I agree, but what do you measure to determine the non health of the economy. I would agree for other reasons that it is not healthy, like unemployment, and income inequality, but that is all within the sphere of traditional of measuring the economy.
Stipulating that the growth of exergy is necessary for the support of real wealth, something needs to cause people to make decisions to produce things. Money seems necessary to fulfill that function regardless of the role of exergy.
You say GDP has been distorted because it doesn't really measure physical wealth in the system. But how do we measure that physical wealth?
I think GDP has been a very poor way of measuring real wealth and well being for years, but maybe not in the same way that you mean it. It does not really measure well being as it is a very imperfect proxy from the real value that people get out of their lives. Saving energy might benefit me personally but it will actually show up as a reduction in GDP.
Another thing. What you call wealth, I would call throughput. I would call GDP not wealth, but throughput. I think this would comport with what Herman Daly would say. Income helps us create additional wealth but we can be wealthy without much income especially if we find a way to conserve our stocks.
Color me a bit confused about where you are really going with this.
ts et al - Interesting point as to just how one measures economic conditions. Remember that I'm a geologist so I not intentionally being overly simplistic...just my grasp of the big picture. The ts comment got me thinking: we're "out of the recession" because we have a positive increase in GDP. So why doesn't life look better for everyone one? Simple IMHO: GDP may be increasing but it doesn't mean we're close to being back where we were in better times. I hear about GDP as increasing but never in absolute terms. I'm sure someone here has the numbers to share. What has been the absolute value of GDP for each of the last 30 years? GDP increase is fine but if the GDP for 2010 is 10% less than it was for 2009 then that would seem to be a better indicator of economic conditions. Granted the baseline changes but it seems the most significant aspect would the increase in the number of folks working which, if I recall correctly, has been a constant increase. Thus GDP would have to increase absolutely a little every year just to stay "flat".
Perhaps a simple metric would be the GDP/population. Doesn't take into account aging, changes in the work force, etc. But could give some sense of normalization. And since the current discussion is relating economic growth to energy resources wouldn't some metric relating the absolute values of energy consumptions and GDP be of interest? So doesn't framing the conversation around the absolute value of GDP make more sense than focusing on the change in GDP? Or am I missing something?
I think that there is a disconnect between the economists' definition of "end of the recession" and what the common sense meaning would be.
The economists' definition is that the recession ends when the GDP is no longer falling.
A common sense meaning would be that the recession ends when the GDP has climbed back up to the level immediately prior to the beginning of the recession.
Of course, the common sense meaning envisions a sawtooth curve with an upward long-term trend. If the long-term trend is now downward, then the recession will never end according to the common sense meaning.
Merril - Good point. I also suspect most here understabd why there's an emphasise on the increase in GDP vs. the absolute value: political manipulation. TPTB can say things are "getting better" as we go forward so just re-elect me and all will be well. Then they can project that times will be good again if you just wait. But what's new there, eh? We've been hearing politcians of both parties tell folks we're moving towards energy independence for the last 30+ years. And look where we really are today. Their verbage doesn't tend to bother me much with one big exception: "ENERGY INDEPENDENCE". It always reminds me of what my grandma would say every time we passed a cemetary: those are the folks with no problems. And I would add they're only ones who will ever be energy independent IMHO.
Good points.
Life doesn't look better for everyone despite GDP increasing because of one very simple fact, GDP doesn't correlate to the decrease in the GNH, (Gross National Happiness) index.
http://en.wikipedia.org/wiki/Gross_national_happiness
BTW for the record suicide rates have been increasing:
http://www.sciencedaily.com/releases/2010/09/100927105201.htm
Not a huge surprise to me at least...
FM. Thanks for your many good comments. I have noted in the past that there is some evidence that Hungarians tend to do more good than people. *
*-note to the literal-minded among us- this is a feeble attempt at a 3 AM joke.
A few additional notes on your theme above
1) Look at the contents of ANY standard retail outlet in the USA. It is chock-a-block full of stuff that adds NOTHING to any properly defined real happiness index.
Example, I went down to town to get a bit to fix my solar water heater, and walked by rows and rows of lawn tractors. What do these things do? They mow grass, they use gasoline, they take energy to make, transport, sell, use and repair. They use up gobs of real resources that could be used for real benefits, like superinsulating houses, and solar energy and ----. Instead they are used for zip- or mowing grass, which is zip cubed.
And in their souls, people know this.
My hypothesis is that people evolved in tribes, with strong instincts to cooperate and produce real wealth, and today they aren't doing that, and so they are very very unhappy right down to their core.
Goddam it, we could make this planet a paradise if we got to it. We know how to do it, we still have the resources to do it, and there are lots of people who are dying (literally) to do it.
Meanwhile, back in reality, I see my local politicians are saying that if they get elected they will cancel the passenger train initiative, and to save even more money, they will drop the 2 tenths of one percent of GDP we now throw willy-nilly at sustainable energy research.
Point of clarification from the article:
"The fuel (e.g. gasoline at a particular octane rating) contains a specific number of joules per unit weight (or volume)."
This reference to octane confuses the point being made since it sounds as if "octane" adds energy to the fuel.
Octane ratings indicate the rate of fuel burn where a high octane rated fuel burns slower than lower octane fuel. Thus high octane retards energy release.
However, the meaning of the sentence is generally correct. If the internal combustion engine has a high enough compression ratio and a high octane rated fuel is used, it will burn more efficiently and generate more mechanical energy.
"The bad habits I refer to have to do with the false creation of more money that is not represented by an equivalent amount of exergy."
There needs to be a more detailed conceptual treatment here. Money has been in use for over 6,000 years and, thus, accounts for labor without energy. The more recent battle over who gets to create (and benefit from) money has been going on for the last 1,500 years. At present, private interests create money (behind the wall of banking secrecy) while most Western governments have surrendered the majority of their public supervisory powers.
Regardless of dwindling raw energy supplies, money will continue to exist. We can only hope that governments will reclaim their right to create money and have it done in a transparent fashion.
Money is a funny thing.
The S&P 500 has a total market capitalization of about $10,000,000,000,000. If the S&P 500 goes up 1% today, does it create $100,000,000,000 of new money?
If US homeowners had 100,000,000 homes worth an average of $200,000 each in 2008, and they now have 100,000,000 homes worth an average of $150,000, where did the $5,000,000,000,000 go?
Assuming your question is not rhetorical, it went to money heaven.
In other words, it was never there. Stock market valuations are hypothetical. Which is why all the new money (numbers in an account) is created by the Fed and used by primary dealer banks to buy stocks and thereby "keep the market up." Also, the new money is quarantined, so to speak, keeping inflation down.
The lucky ones are selling their stocks to the bankers, getting their hands on that new money, and getting out. (Which explains the recent ratio of 1,400 insider stock sales to one stock purchase.)
Same is true in home valuations. The Federal Reserve (through its illegal Maiden Lane I, II, III holding companies) plus Fanny and Freddie hold the majority of home mortgages. What's their worth? Maybe $0.10 on the dollar?
When private interests can create money in secret, it's a game of "money chess" and we are the pawns.
The money must be there. It is not just imaginary.
In most years before this one, if you have enough stock in your portfolio and you die, the government will want a percentage of the money, even if there is no sale of the stock by your heirs.
Depending on where you live, some governmental body will want property taxes on your house that are figured on the basis of a mil rate times a roughly market-value asset price for your house and lot.
Merrill:
Still caught in the Matrix, are we?
The money isn't there. The Great Crash of 2007-2008 proved that conclusively.
If money is just digits on a screen, then it doesn't have any value in the physical universe. Not even as paper notes! It exists only as a product of the human mind, whether that particular mind be Joe Six Pack's or Weimar Ben Bernanke's.
I think I'm a millionaire, therefore I am a millionaire!
It doesn't necessarily have to be this way...in theory it is possible to have sound fiat money. And, in fact, sound fiat money would be better than gold.
It's just that we apes aren't capable of that yet, anymore than we're capable of colonizing the Moon.
In the meantime, I'm betting on gold/silver while keeping liquid in currency to at least allow ongoing purchases, such as food and fuel, among many.
I doubt that there can be one simple definition of money. As far back as the 30's Elgin Groseclose (author of Money and Man 1934) noted that money wore many hats. Money could function as a store of value, a standard of value or a medium of exchange. Franz Pick, who lived through the European hyperinflations, also had interesting comments on money. I have been following deflation/inflation arguments for many years and am still mystified by the subject.
There can be. Money represents social power. Think about it. It even accounts for fraud and theft. (It's almost too vague to be useful, but any other idea about money can be understood within it, and that's what makes it true.)
Money is a subset of the mechanisms for acquiring social power, which might be defined as the ability to get others to think and act differently than they otherwise would. One can certainly pay people to do stuff, but there are other methods of coercion and persuasion as well. Suicide bombers, for example, don't seem to be in it for the money, although the assurance that their families will be rewarded is part of the motivation in some cases.
Social power, for example a celebrity status, can also be used to acquire money. Ownership of copyrights, patents and other property can be used to collect rents.
Yes, thanks for the clarification, it is a subset of the mechanisms not only for acquiring social power, but also for 'spending' it.
That assertion can be falsified with but a simple example.
Being that yesterday was the "First Monday in October", consider the case of the 9 judges on the US Supreme Court.
None of them make the big bucks ($$millions, billions) in their job, but they nonetheless are at the top of the heap when it comes to "social power". Ditto for the position of President of the USA.
I agree with Robert Wilson upthread that "money" is a complex thing and is not easily defined.
I never said money encompasses all social power. That's the converse of what I said, and thus not logically entailed. Your example falsifies nothing.
That statement's a tad naive. The President, Congress and SCOTUS all basically answer to the same master: Wall Street, and specifically the world's largest investment banks. All you have to do is compare the actual economic policies of our supposedly "liberal socialist" Democratic President to that of his ultra-conservative predecessor to see who is truly "running the show" (think $Trillions spent on bailouts and industry-friendly "reforms" vs. relatively paltry sums spent on regular Joes & shovel-ready projects). If I had to pick one organization that was truly calling the shots, I'd go with Goldman Sachs, with Lord Blankcheck at the peak of the pyramid.
I agree with you that the current Roberts Court clearly leans toward favoring the corporate state (e.g. the Citizens United case) and that the Obama administration seems in many respects to be the errand boy of Wall Street.
However, I doubt that the right leaning members of SCOTUS and that POTUS are receiving direct money bribes from Wall Street.
Instead, the brains of the SCOTUS 5 and of POTUS have been washed (bathed) in the ideology of Wall Street.
That ideology deems itself to be above the laws of Nature.
__________________________
(Giveth onto us this day our daily moolah and we shall thrive oh Lord)
The money represented by the stock market cap or by the aggregate value of the houses does not and has never existed in any real sense, or perhaps I should say some revelant real senses.
On a small ( or smaller scale) it is possible for money and stocks or real estate to change hands in a reversible fashion , house for money for another house , stock for money for house or more stock, etc.
But a whole "Market" such as real estate or stock, cannot be liquidated;only small chunks of it can be traded or sold.
The price of houses, or stocks, has a lot more to do with EXPECTATIONS and regulations of many sorts than it does with reality in the larger sense.
The Japanese markets are an excellent example of what I'm trying to get at;after climbing to ridiculous extremes, to hieghts such that incomes could not support the debt and price structure, they have been stagnant or drifting down for a long long time.I expec t the long term trend to continue indefinitely.
Pretty soon, the people of the US will realize that we are in the same situation; everybody will sooner or later understand that a house is not going to be worth more REAL MONEY in a decade or two, let alone in a year or two-by real money I mean money that can actually be extracted from the house by selling it and buying goods and services.Actually we are there and past there already, except that the public doesn't realize the situation is probably permanent.
What I'm saying is that when the general public wants the money it supposedly owns in the form of real estate and stocks, and tries to actually put its hands on the money, the public finds that that money is mostly imaginary;the general public cannot cash out, because there is no one with the money to buy them out.
If you like you may think of the real estate and stock markets as being similar to ponzi scheemes that have not yet crashed;anyone who gets out early, by good luck or good judgement, can win big.
But the larger community of owners/investors are going to find themselves holding property that is worth one hell of a lot less than they thought when they all want out at once.
I expect a great deal of the stock market price declines have had to do with millions of people trying to convert thier IRA /ROTH/ and other paper assetts into actual concrete or physical goods and services.
I have watched the same game played out on a smaller scale , faster, with emus, buffalo, chinchilla, llamas,longhorns, and other critters in the farm economy.Prices shoot up to levels that have nothing to do with sustainability/reality, and suddenly the supposed bonanza vanishes overnight.
"The price of houses, or stocks, has a lot more to do with EXPECTATIONS and regulations of many sorts than it does with reality in the larger sense."
I believe that home prices in the United States are driven by two forces, mortgage terms and household incomes. As rates decline and terms stretch to 30 years, for the SAME monthly payment buyers can afford to pay more. And when household incomes rise, the portion of the twice monthly paycheck is greater, leading to a larger principal balance available for purchasing a home. This is easier to communicate graphically so I created a simple, interactive site. You are welcome.
www.homeflator.com
Glenn Wisuri
I think you missed a t least a third factor, speculation. At the peak in 2008, how many of the homes being bought were ever occupied, or ever intended to be occupied, by the purchasers? The higher that ratio gets, the closer you are to a crash. I've seen it twice myself, simply from observing and listening to co-workers.
That would be a useful added control. If the housing market gets hot, start requiring mortgage lenders to demand that the mortgagee MUST occupy the site for at least 1 year. That'll kill speculation.
Another factor is cost of new home construction. It sets a floor on new home prices.
New home prices, in turn, set a cap on existing home prices (at least in areas with available building sites), and existing homes are the bulk of transactions.
Somewhere in the past we lost the notion that home ownership has utility value instead of investment value. People need homes because they need some place safe and comfortable to sleep, socialize, and to store our stuff. This even extends to the owners of rental property. Instead of using the collection of rent as income some have rented out at operating cost in the belief that in the future the big profit will come when the property is sold. Many years ago I read a book that claimed that if I bought a $30,000 house every month for five years I would end up with a net worth of over a million dollars due to the inflating price of homes. A classic case of bubble wealth. A few years later I read that the author had gone bankrupt when the S&L bubble popped.
But if people are out of jobs, they can't afford homes, so they move in with relatives or friends. So soon you have more people per occupied home, and a lot of unoccupied homes. Then home prices tend to go down, and very few new ones get built.
That'll kill speculation.
Right - because people would never EVER lie.
how many of the homes being bought were ever occupied, or ever intended to be occupied, by the purchasers?
Given you seem to have a number in mind, perhaps you can tell us of the numbers of these very same homes that would be called 'the primary residence' and the goal was to sell and take advantage of the no tax profit?
As I see it, mortgage terms and household incomes , considered together, delineate the upper limits of housing prices.
If prices are such that people can qualify for loans on average for amounts greater on average tha the price of houses, the stage is set for a possible speculative bubble.
Easy credit,small or nonexistent down payments,and falling interest rates, combined with rising incomes enable both those who are buying a place to live and speculators to start bidding wars.
The only real impediment to rising prices under such conditions is new construction, which may be cheaper, but all too often there is simply no buildable land in or near the price hot spots.
When prices finally get so high, or the economy turns sour so that qualified potential buyers become scarce,or interest rates go up, the bubble necessarily bursts.
Everything else is mostly just commentary.
Merrill - How does this answer fit into the discussion: Where did that money go? It didn't go anywhere: it's right where it has always been: in the system. The homes may have lost value but the money paid for those homes didn't evaporate with their market value. And that's takes me to a place beyond my fundamental understanding of the system. That cash was generated through the mortgages on those homes. Some of those loans will be paid back...some won't. But whatever gets paid back it won't be the money created as a result of those mortgages. Those repayment monies have to be generated by some other component of the system. The full cash value of those purchased homes was injected into the economy creating that great economic boom all the politicians wanted to take credit for. What's obviously lacking today is the component needed to repay those loans. Of course the original plan was that increased valuation would generate the repayment funds: sell the home for a nice profit, repay the loan and take out a bigger loan of the next house. And just like in the oil patch: there is THE PLAN and then there's what actually happens.
That $5,000,000,000,000 went into the accounts of the home builders, construction loan companies, real estate agents, etc. Notice how none of them are on the hook for the debts generated by those home sales. Pretty smart folks, I reckon.
I think you are right that a fair slice of the $5,000,000,000,000 actually was taken by homeowners who sold homes at a profit or who refinanced and "took out equity" during the rise of the housing bubble. This accounted for a lot of the robust consumption economy during the 2000s. It was a one time event, and it won't repeat.
Some of the increase and the decrease was simply paper profits and losses. In this case, the effect is largely psychological. However, paper profits did decrease savings rates and increase willingness to consume, and paper losses have increased savings rates and decreased willingness to consume.
This imaginary part of the asset bubble can occur because for thinly traded assets, a small amount of trading can affect the prices a lot. So a small amount of money into a small amount of trades can have a disproportionate effect on the market cap of a stock issues. This is exploited by the "pump and dump" operators.
Pricing of assets as a macroeconomic parameter is a dangerous thing. I don't support the "mark to market" philosophy that FASB is so fond of.
I think of asset prices as being quantum mechanical in the sense that they only have specific values when a sale actually takes place. In between sales, they are just coupled probability functions. The probability of being able to sell an asset for price x at time t depends on the current price, as well as the number of similar assets offered and their selling price at times prior to t, and possibly other things.
Rockman,
You seem to understand the system just fine-at some point somebody is left holding the bag of debt represented by the bad loans.
That somebody would be you and me courtesy of Uncle Sam.It looks as if most of them either already belong to him, or soon will.
mac- If I recall your age correctly neither one of us will be left holding much of anything a few years down the road. LOL. If we weren't worried about the younguns we could just sit back and watch the THTB fight with everyone else for the scraps. I would go on put it's too damned depressing.
Now you go on back to your rocks there, old timer... an quit rainin on us younguns parade!
Why some of us must have a least another decade or so to go before we check out.
I've been reading many articles on the oil drum about how the current fractional reserve system requires economic growth to pay back future debt, there seems to be alot of people here who are obsessed with the relation between peak oil, finance and the fractional reserve system.
I have to say I'm not one of them.
The current economic system requires a constantly growing *money supply* in order that there is more future money around to pay back past debts. In the absence of a growth in money supply I agree the system will implode.
But that growth can come in the form of
a) economic growth
or
b) inflation
In the case of a the money supply grows and everyone can pay back their debts but we don't notice it because there are more goods available for that money to chase, so prices remain stable.
In the case of b) everyone can still pay back their debts so the system doesn't collapse but because there are less new goods being produced we find that our money no longer has the purchasing power it once had.
In otherwords in the case of a mild and continuous economic decline a "soft landing" could be possible without any sudden phase changes.
I do however agree that at some critical rate of real economic decline society will collapse, but that rate of critical rate of real economic decline is substantially below zero (-5%?? -10%??) I think it comes when the hoarding of existing resources becomes more profitable than the investment in future production, (e.g. when the rate of decline in agricultural production makes more worthwhile to buy cans of food and store them for a later date when their worth more then to buy farm machinery and grow more food) but because storing anything has a net cost associated with it, it does make sense to do it until the rate of appreciation of hard assets exceeds the cost of storage (i.e. a real economic growth rate measurably lower than zero, say -5% or so)
After this breaking point, you will get waves of hoarding and hyperinflation.
Below zero growth but above the breaking point, things gradually get worse, you have nominal growth in fiat currency, an annoyingly high rate of inflation (4% to 8%?) and a gradual reduction in standard of living but not swift collapse.
I believe this critical breaking point of economic could probably be lowered if draconian laws forbiding the hoarding of materials were passed.
But I don't by the argument that economies require real growth to avoid collapse, nominal growth fuelled by inflation will also do.
Meanwhile the debt-based finance system allows money to travel at the speed of light. I seriously doubt any other financial system would have allowed our industrial complex to have become as complex or productive as it has or lifted as many of of poverty.
People soon catch on that inflation doesn't give any real return. You can fool some of the people for a while, but it can't last for long. It is not a solution.
Catch on and do what? Revolt? Go to jail?
Revolutions hurt and if peoples situations get very slightly worse every year over and extended period of time, they'll slowly adapt to their new situation rather than revolt and get executed or imprisoned.
I'm not saying a real rate of economic decline will be nice, obviously everyone's lot will get worse, I'm just saying our current fractional reserve system will not necessarily collapse if the rate of decline is slow enough as all that is required is an ever expanding money supply, not and ever expanding real economy.
I hear since 1913 the dollar has lost 95% of its value so people have tolerated continuous inflation for almost 100 years now, I don't see any reason they are likely not to tolerate it for a few more decades.
It's not that they haven't caught on, its that they don't have much choice in the matter.
Again, eventually things will hit breaking point as people are squeezed tighter and tighter, but I
don't think if peak oil or a real economic decline happened tomorrow there would necessarily be total chaos with society breaking down, if the decline was gentle enough we could probable buy a decade or to of real recession, provided there was nominal fiat growth. And a decade or two is probably enough to churn out molten salt reactors or kitegen high altitude wind power plant or whatever, if there was a strong enough sense of urgency.
An inflation rate of 2 to 3 % (the desirable range according to economists) will wash away 50% of a bad debt, like an unfunded pension obligation, in about 36 to 24 years. It reduces the specific pain of poor investment and credit decisions, spreading the pain generally through the population. It is really a tax on everyone with assets instead of net debts.
You are right. Since the US government is a debtor, it is in their interest to adopt monetary policies that create inflation; like printing money with abandon during a recession. This helps reduce the actual cost of paying off the debt and will help everyone who has debt presently. The problem is that this inflation causes the values of things that are real assets to increase. Housing prices are still decreasing, but not all property is going down. Farmland is going steadily up (irrigated farmland, that is).
http://www.bbc.co.uk/news/business-11468402
The inflation has already started.
Well mainly a tax on people who have cash rather than net debt. As hard assets like houses with rise with the money supply, stocks are also generally quite immune to inflation as they are linked to real production.
I guess arguably though the other assets are hit with capital gains tax after you sell them even if they haven't appreciated in real terms but only in nominal fiat terms, though the tax for people who own hard assets is less than the tax for people who store their money as cash.
inflation will spurn higher interest rates so you can never catch up.
I am not going to lend out $100 at 2% if inflation is running at 10%
You won't but maybe the fed will (since they can make it out of thin air).
And if you have a load of cash what will you do? I suppose you'd buy easily storable high value assets, hence the increase in the price of gold. But eventually you'll have to sell those assets to buy food which is more expensive to store as it depreciates in value (rotting getting eaten by mice paying rent on the warehouse space etc.).
And there's always going to be slippage in gold transactions, so you'll end up having a buffer store of cash since its a lot easier to transfer. And every time you sell you fiat appreciated gold you'll have to pay capital gains tax.
I think during an economic decline you'll see more and more lending originating from the central bank. With average people either spnding their wages quickly or buying gold with it.
yes if inflationary measures are maintained
see Roman Empire
I think there is a third option, which is that people who made bad investments don't get their money back.
jmc1:
You've omitted option 3. Which is not so much an option, as it is what naturally happens when the first 2 don't work.
Namely, political collapse. It's happened before, and it will happen again. The last time it happened on a really grand scale was around 1989 when the USSR collapsed. And before then? 1945. And before then? The various revolutions around the world during the 1910's. In other words, remarkably frequently.
It's happened in the U.S. too, it's just that it's been 150 years so we've become complacent.
I believe you think that sociopolitical entities can avoid this through the first 2 options, but never assume that. If that were the case, why are there any revolutions at all?
This is what diminishing marginal returns on complexity is all about.
Well I'm not saying there's definitely not going to be political collapse. I'm just saying the debt based economic system isn't inevitably going to implode in a situation of gradual real economic decline so long as there's fiat growth which is quite easily achieved through the use of the printing press.
hard to see how some sort of discontinuity is not reached.
pretty much boarders on mathematical certainty
I would/could/should argue its occurring!
For instance, take a decline in oil of 4% per year, as a result of efficiency and substitution, that would probably translate into an economic decline of 2.5% per year (people buying more efficient cars, moving to goods sourced more locally where available car-sharing, etc. ). Then let raise the inflation rate to 4.5% and you've got yourself a nominal economic growth rate of 2% per year and everyone has enough money to pay their debts.
Plus if you lied about the inflation rate such as giving zero weighting to food and oil and a high rating to computers and electronics, you might even be able to fool people into thinking that there was a real but low economic growth rate (~1.2%) even as their groceries becomes less and less affordable (although quite a few people are obese so there's probably some slack in that department).
I suppose that's sort of what's happening now with Ben Bernanke telling everyone were entering a deflationary spiral inspite of wholesale food prices increasing by ~10% or so. I find it rather funny that whenever you read an article about deflation they always describe the goods whose prices are going up as "volatile" and best excluded while the goods that are going down are "more indicative of the overall trend."
In reality ofcourse, when one class of goods inflates in value such as food, you would expect the other goods to deflate in value because people are spending more of their petty cash on food and so have less money to spend on other things the result being less money chases the non-food goods which would cause their value to deflate.
The discontinuity could be avoided by replacing the oil dependent infracture with alternative methods of generation and transport before we get squeezed so tight that there's a revolution or something. I'd say in a situation of decline you would have about a decade or two before the financial systems actually breaks down.
I'm not sure a discontinuity is occurring yet, things are just getting steadily worse.
then its a race and one that is to some degree confidence based if you want to keep all the plates spinning on sticks waiting for some BAU energy industry to step in?
that's such an ask
OK BIG PREDICTION
some time in the next decade someone is going to call timeout and shut the markets for some extended period. IE not a day thing due to catastrophe 911 or somefink.
thats a pretty bold statement on my part and somewhat specific but i can really see it happening
"OK BIG PREDICTION
some time in the next decade someone is going to call timeout and shut the markets for some extended period. IE not a day thing due to catastrophe 911 or somefink.
thats a pretty bold statement on my part and somewhat specific but i can really see it happening"
I really doubt it, why?
Maybe if Israel attacks Iran, Iran retaliates by blowing up the Dimona nuclear reactor with conventional missiles covering Israel in fall out and then Israel responds back by launching an all out nuclear strike on every Iranian city and town, maybe then if the fallout blows into Russia who then decide to launch their nuclear missiles at Israel and then America decides to retaliate against an attack on its ally by launching a nuclear strike on Russia with Russia then launching a counter nuclear strike on America.
Maybe then I could see the stockmarket closing.
But as somekind of inevitable result of a gradual economic contraction resulting in the amount of oil slowly diminishing? No.
As long as the Fed has money to print the stock market will continue to rise in nominal terms and debts will continue to be paid back. You'll get inflation but not political collapse or the collapse of the stock market. Infact the only way people will have to preserve their wealth in the long term will be to invest it in somekind of productive enterprise.
Or own gold.
But if push comes to shove the government can alway ban the ownership of gold and rare metals.
I agree its head above parapet stuff
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Does that include the 40 million Americans currently on food stamps?
As for the financial system being the underlying engine that allowed our industrial complex to become so complex, (Heh!, that's funny...) I guess you could say that means we now have a complex industrial complex.
Anyways, to get some idea as to where all that complexity might lead. May I suggest a quick read of The Collapse of Complex Societies (New Studies in Archaeology) by Joesph A. Tainter
Oh, and I won't even bother to dwell on an attempt to actually question what exactly it is, that our oft touted, golden calf of super productivity, is actual producing. My short answer would be, "a lot of shit and misery!" Personally as I look out upon the wastelands we are creating, I'm not very impressed.
Oh, and I won't even bother to dwell on an attempt to actually question what exactly it is, that our oft touted, golden calf of super productivity, is actual producing. My short answer would be, "a lot of shit and misery!" Personally as I look out upon the wastelands we are creating, I'm not very impressed.
Ha. We need a thread for "pictures that are just wrong in so many ways?" This would be my contribution. Heck, the dogs even have their own treadmills. What's wrong with this picture? We're going down.
"Oh, and I won't even bother to dwell on an attempt to actually question what exactly it is, that our oft touted, golden calf of super productivity, is actual producing. My short answer would be, "a lot of shit and misery!" Personally as I look out upon the wastelands we are creating, I'm not very impressed."
I don't know, I think alot of people who think that 'all these riches haven't made us happy' assume that their removal will bring about some kind of social utopia.
I would tend to agree that wealth isn't enough for happiness and that people also need to foster their spiritual side and maintain relationships with those they care about, but as a general rule purely from the point of view of history empiricism and the contempory experience of other countries, more times than not poverty and scarcity does not bring about a social utopia of caring people who have learnt the error of their ways and decided to cease being greedy, quite the opposite, collective poverty tends to bring about more violent, crime and despotism (at a national level anyhow, though a grant this isn't necessarily the fate of every poor village ).
I think that misses the point. Sort of like saying that removing an addict's drug of choice will not make him happy. Of course it won't because when it is removed he or she will go through a period excruciating and very painful withdrawal. Certainly not what the addict would consider as a nirvana.
However there is no way of achieving a better state, and I certainly wouldn't go so far as to describe it as a utopia, if one doesn't at the very least get the addicts to admit they have a problem and then get them some help to deal with it.
Would we also consider a seriously ill drug addict whose access to his drug has been curtailed to have suddenly become disadvantaged or underprivileged? I don't think therefore that the analogy to poverty and it's connection with unhappiness applies in this case.
What I was talking about is not someone who is suddenly starving and living on the street but instead someone who is cut off from the ability buy one more unnecessary plastic doodad with which to satisfy his artificially created craving to consume.
I suggest in future your wording would more wisely include "to a point". I certainly can tell you from firsthand experience as a child that I and my siblings lives were consistently improved as our parents gradually acquired a better eg. higher income. Certainly there is evidence of excess about now, but painting with too broad a brush simply destroys your cred.
+5
Question of the day
__________________________________
(Maybe if we crunch "the numbers", we could "figure" it out?)
I think if you want to compare the US to Europe the answer is probably: Not much
Europe's economy is a little slower than Americas in terms of GDP growth and GDP per capita but I'd say the overall quality of life is higher.
If you want to compare the US economy to Africa then the answer is:
Healthcare, lower child mortality, less back-breaking labour (mostly done by machines), computers television, internet (something that some would snear at the value of computers but from the fact that you've made this post I assume you use one), a varied diet (rather than bread, potatoes and more bread everyday), modern conveniences that save time on household chores (like using a washing machine rather than scrubbing your clothes for hour in wooden basin with a bar of soap)
So don't we need to be super-productive? No
Do we need to be somewhat productive? Yes
I think in many ways the trick in productivity is to produce what you want and need with the minimum ammount of work and then kick back and relax.
There's alot of sense in getting the most productivity out of a given ammount of time spent working.
There's less sense in boosting a nation's productivity by maximizing the number of hours that everyone has to work.
If the hypothetical family moves from Norfolk to San Jose, their potential energy is unchanged, since their altitude above sea level is unchanged, and their kinetic energy is also unchanged, since they are stationary at both the origin and destination of travel.
All the energy in the tanks of gas they burned has been dissapated as waste heat, through air resistance, tire friction on the road, rolling resistance of the tire, friction in the brakes, bearings, and drive train, as well as thermodynamic waste heat in the engine.
No useful work has been done.
If they have a job in San Jose and not in Norfolk, I'm sure they would disagree.
My apologies to all the exasperated Oil Drummers.
However this is an energy forum so it is my duty to present a formal, mathematically based explanationof the "cold fusion" phenomenon by Widom and Larsen.(2007)
Conclusions.
1 This has not got anything to do with hot fusion theory.
2 It involves the creation of slow neutrons.
3 All phenomena are accounted for.
and
Last but not least, there is an energy dividend.
I do not know if there has been enough time to have rigorously tested the hypothesis.
This belongs on Drumbeat.
Sorry for all the comments, but this article is pushing my buttons...
It's more complicated that this. The politicos have been suborned by private banking and other mega-corporate interests. The lack of finance regulation (adult supervision) has led to unfathomable amounts of credit creation (about $750 trillion worldwide) which, of course, far exceeds anyone's ability to pay this debt. The world's GDP, for example, is only about $40 trillion.
Since 2008 the bankers want the politicos to continue the status quo. But cracks are now appearing as we see the credit freeze continue. We see a number of sovereign debt defaults. We see Switzerland, Japan, Peru, and others devalue their respective currencies firing the first volleys of a currency war. And we see mortgage origination fraud lead to a nation-wide foreclosure moratorium. Next on the list will be rampant bank failures, followed by imploded pension funds.
If we are really lucky through 2011 and 2012, the best case scenario is that the private bankers do not continue to create "excess reserves" leading to a currency crisis (hyperinflation). Rather, we continue the 6-11% yearly inflation we have seen over the last decade.
My point is that we will see a financial crisis before we see an energy crisis and this crisis will push the coming oil crisis back, maybe decades.
It is questionable an energy crisis would be pushed that far back. The economy, unhealthy as it is, still requires a certain amount of energy to maintain BAU. Oil is the limiting factor, as we all know, and without investment, it will get worse as the decline eats away at our production volumes. You could argue that the financial problem will make even this problem a non-issue, but if that's the case, we won't be worrying about peak oil. The economy will have already totally collapsed.
The energy crisis was already pushed back by the global recession. We're running out of time that we can sit on the plateau and I doubt anything that happens to the economy will prevent us from falling off the plateau somewhere around the 2015-2020 timeframe that is emerging.
The thing is, in pointing out that money is being lent out at a rate at which it can't reasonably be expected to be paid back, you're saying the same thing that George is. The reason that politicos and bankers are doing this is that in the 20th century it largely worked: the economy grew enough to pay back most debt, thanks to the increasing use of energy. I agree with you that the current lending can be considered unreasonable even if we assume that energy supplies would grow at the rate that they have in the past. But the fact that energy supplies (oil, at least) are almost certainly going to shrink compounds the problem a great deal.
That really depends on what you think oil declines rates will be, and whether they will 'catch up' with financial problems quickly or slowly.
I am not sure the financial crisis and the energy crisis are separable.
I know when I was first writing about peak oil, I talked very little about high prices (except "initially") and much more about recession and problems with the financial system. This is a link to a post I wrote in April 2007, before I was a staff member.
The main points I had about what would happen were as follows:
1. Initially, higher prices for energy and food items and a major recession.
2. Longer term, a decline in economic activity.
3. Transportation difficulties and electrical outages.
4. Possible collapse of the monetary system.
5. Failure of economic assumptions to hold.
6. Changed emphasis to more local production.
7. Reduced emphasis on debt.
8. Reduced emphasis on insurance and pensions.
9. More people will perform manual labor.
10. Resource wars and migration conflicts.
11. Changes in family relationships.
12. Eventual population decline.
Regarding (1), I say,
I think if you start out with an erroneous view of what peak oil will look like, then when new information comes along, you will try very hard to figure out a way to get rid of this "impostor" peak oil response, so the "real" peak oil, as you imagined it can appear, in the form you imagined it. But what if your original view of what peak oil would look like was wrong?
We live in a world with interconnected systems, and if one piece has a problem (like exergy), then it will affect the entire system, and not necessarily in the way a person might think.
I am not the only one to come up with most of these ideas. M. King Hubbert talked about the need for growth to maintain the monetary system. He says:
I struck me recently that the degree of loose fit between the matter/energy system and money can be measured by the length of time the production plateau for energy(oil whatever) can be maintained.
the slack is in some terms the amount of surplus capacity?
is that just shoddy thinking on my part?
as with peak the tight fit can only be seen in the rear view mirror?
Geroge,
Thanks for the post!
One thing I have been trying to figure out is when exergy flows started decreasing in total. You say, "in the 1990s".
We know the price of oil hit a minimum in the 1998-1999 period, so if I knew nothing else, I would guess that the exergy flows started decreasing then. But there were financial funny things going on before that, too, and I suppose they may have been related to covering up decreased flows.
Do you have any reasoning in particular to pinpoint the timing of the beginning of the decline in exergy flows?
Thanks Gail.
The model I worked up a year ago re: net energy and asset production indicates (if we are at or near peak oil today) that net energy flow has already peaked, perhaps as much as 20 years ago or more. This makes sense in light of the expansion of drilling in exotic locations caused the EROI to jump downward back 30 or so years ago. So even while the rate of oil (gross) production increased, the increasing energetic costs caused an inflection in the net curve which then went into deceleration and led to eventual peaking (top part of the S in the logistic).
Meanwhile there are a number of reasons to believe the improvement in equipment efficiencies throughout the 80s and 90s helped keep the exergy flow rate from following exactly that of net energy. However there are also reasons to suspect that the marginal rate of return (in exergy) for improved efficiencies were approaching zero faster so that exergy may have peaked just slightly after net energy peaked (sometime in the 90s).
Now all of this is speculative based on the model results and assuming we are at peak raw oil production now (to fix a point in time) and anecdotal evidence of declines in efficiency improvement rates for many prime movers, etc. However, this model also predicts some interesting economic phenomena assuming that money is, a la Odum, correlated with energy flow, and therefore measures like GDP etc. have some vague relationship to energy flow rates. It predicts a decline in the rate of production of real wealth, which seems to have happened in the OECDs, in part by transferring manufacturing, for example, to low wage countries where the workers lead a lower energy consumption lifestyle and in part by ignoring repairs and maintenance of already built infrastructure. It predicts that if one wants to maintain the appearance of growth (in GDP) then one had better generate more money and transactions (through debt and speculation) thus diminishing the underlying link between money and energy to a point where people think they can ignore the energetics and just focus on making profits by any means necessary. Bubbles seem to fit the bill here.
All-in-all my guess (educated I hope) is that we have long since seen the beginning of declining capacity to do useful work at the scale we need to keep our economy going stably even if not growing.
@George Mobus
Insightful post. Thanks.
However, I would beg to differ on the definition of "money" as being directly linked to "exergy" (the useful portion of the river flow of energy that moves from the Sun to outer space).
Some of those promises can be fulfilled.
Some of those promises will be reneged on.
Certainly "exergy" is needed to fulfill those of the promises that rely on manufacturing physical product. But so too are many other things.
A great deal of our USA economy has been transformed into the making of promises whose bulk weight lies in the fantasy world of "finance" (i.e. the promise to pay a "mortgage" over a term of years in exchange for a piece of paper saying you have legal "title" to a given abode).
It is not "exergy" itself which is critical to the money promises being solid versus spinning hot air but rather the honor, rationalism and trustworthiness of the people making the promises and the people receiving/accepting the promises.
No problems with your characterization of money but I don't think these are mutually exclusive ideas.
Except I didn't say they 'were' directly linked. I am trying to convey that they probably should be to have a saner monetary policy.
If I borrow $X from someone and promise to pay it back in one year with $Y interest it is because I expect to make an income over the next year of $Z, my living costs, plus $X and $Y, and plus maybe $S, some savings or net profit. I can have this expectation because this is how it has worked in all my past years. Either I have a stable income that would allow this, or I expect to make a larger income because the demand for my work is increasing (growth). So I made the promise, but held the expectation that I could make good on the promise. Now, what happens when I do not make that income because I cannot do enough useful, income producing work? Suppose there wasn't enough exergy to power the machines I run to produce salable goods. Unless I do the work I don't get paid and therefore would be unable to pay my debt.
Actually I think the process has been more subtle than that. Food is the primary form of exergy in our system. And the EROEI of food production has gone down even as the efficiency of production per unit of weight of crops has improved a bit (see my comment to Gail). Food costs have been on the rise for a while now (not counting that empty calorie stuff) and this has eaten (no pun intended) into the consumer's budget. This has the same effect of not being able to keep a promise because the above equation doesn't produce the requisite amount. Instead you have Z+X+Y+S - Z', where the latter is the increased cost of living from food (could work for every other element that undergoes price inflation). Either way, the borrower's expectations cannot be met because the exergy flow into the system is not supporting the X+Y+Z'. Ergo, resort to refinancing (to extend the time period) or default eventually. In general I think this has been a more gradual process, so much so that we haven't really noticed. We knew something was wrong but couldn't actually pin down the cause.
Also what I tried to point out is that in today's milieu the link between the ability to do work, produce real wealth, and fulfilling promises has been generally severed. Today people think they can create value out of a procedure of aggregating inflated assets and by magically slicing and dicing create wealth. Or some such scheme.
The combination of financial types getting creative, and the insidious creep of declining exergy flow led ultimately to the amplified impacts we are seeing today. The financial guys are scrambling to patch up the edifice even while the next surge of flood waters are building up pressure on the dikes. I think we are about to see a whole new meaning to the phrase "double-dip recession".
The beauty (and downside) of "money" ($$) is that it has always severed the link between fulfilling promises and work that has or is to be done.
When your boss pays you "money" ($$) for work that you already did, the link between that promissor of value (your boss) and the actual delivery of compensatory value to you is permanently severed.
Your boss has no personal obligation to make good on the implied promise.
Instead it is the nebulous (cloud like), society as a whole, that is expected to somehow, with the help of the magical invisible hand, make good on what was promised to you (an in kind amount of goods and services).
If oil is an un-substitutable necessity for society making good on the value promised to you by the "money" ($$) that you were compensated with, then when oil is no longer available (for all practical purposes), the promise will have been broken.
However, our society has coal. So oil is not at the moment an un-substitutable necessity for society making good on its implied promises.
What is a problem is the demand for human labor (a.k.a. jobs).
Due to automation and improved productivity, the demand for human labor keeps dropping while population keeps growing.
I would have to disagree about not having a method of accounting for energy. The accounting method is Thermodynamics. It is a fact that most graduates from engineering colleges do not have a grasp of the subject, physicists little, economists none. Most people don’t know what the First Law says and forget trying to explain the Second Law. The first law says we can move energy at 100%. The second law tells us how poorly we were at moving the energy.
Efficiency is basically = work / energy chargeable to the system or heat added. So there’s the accounting. Availability of energy is heat added – heat rejected. Raise the sink temperature less availability. Lower the sink temperature more availability. Power plants in the winter have more available energy and less in the summer. The Gibbs function also helps in these situations.
“As can be seen from the above diagram doing so would involve calculating (or collecting data on) the energy losses at every transformation…”
Much literature has been written on every conceivable transformation of energy. Our dumb down society can’t read the literature. So to cover their ignorance of the subject they start creating new concepts and mathematics. “If you can’t dazzle them with your intelligence, baffle them with your BS.”
“In truth we don't actually know if the newer equipment's higher efficiency offsets the consumption of investment energy so that there is a net energy gain to society.”
Efficiencies multiply together. If a diesel engine is connected to a gear box which is connected to a generator, the efficiency of the engine (E1) is multiplied by the efficiency of the gear box (E2) by the efficiency of the generator (E3). If the generator is tied to power lines with E4 efficiency to a substation with E5 efficiency, then the total system efficiency is E1 * E2 * E3 * E4 * E5.
If E1 = .3
E2 = .8
E3 = .8
E4 = .9
E5 = .6
Of course these are guesstimates but getting these numbers has been done over and over and over.
Et = .3 * .8 * .8 * .9 * .6 = .103. Complexity causes the Et to decrease.
If we can increase the efficiency of the diesel to .31, the total efficiency is .107.
The change in efficiency in the hundredths place of the diesel changes the efficiency of the system in the thousandths place. Much energy can be saved by increasing the efficiency of the diesel.
So much energy can be saved if the diesel efficiency is increased from .3 to .31. Entropy growth finds those places where improvements may be found. Entropy growth means less available energy.
The accounting system to which I refer is one being used by accountants in firms (and household budgets). The whole point is that a thermodynamics based valuation of wealth and thus money base IS preferable. You will never get accountants to do the energy math. But you don't have to if the dollar is pegged to exergy.
My suspicion is that economists don't even want to understand entropy.
BTW, here is an interesting point of view regarding entropy in general.
http://www.entropylaw.com/thermoevolution10.html
To paraphrase the actual example the author gives in the above linked explanation, a warm house in a cold and snowy woods will, once the fire goes out, lose heat through any and all available paths to arrive at a temperature of equilibrium with the cold woods. If one were to open a window that would remove a constraint on the overall rate of heat dissipation and the entire system would immediately reconfigure itself accordingly to take maximum advantage of the new path.
A complete lack of understanding of these principles, is IMHO one of the greatest shortcomings of neoclassical economic thinking.
I really enjoyed this article. Now how do I better convince my wife of today's problem with energy, because when I start talking about this problem it leads to an interesting gender/role issue which I think is worth discussing. Women find that the electric appliances, pre-cooked meals, etc. (which are all forms of using energy to replace human power) are the means that liberated women last century. Therefore, the power down would in effect cause women to do more domestic labor in the home.
My half response is that men and women will need to do more human power in this century, namely biking, cooking, gardening, repairing.
A retrospective view on how my grandparents lived. My grandmother always walked to the store to buy groceries. My grandfather fixed everything until the appliance literally died an ugly death. They all had very robust gardens and only one car -- even to their last days!!!
Retrospectively this is our future. Of course in the near term people can use immigrants (illegals) and chinese to do cheap work to make energy seem cheaper but these are not going to save us in the long run. Americans need to get busy and burn off those unhealthy bellies of oil fat around their wastes (from not using human power)
My 2 cents. Thanks for that.
Women find that the electric appliances, pre-cooked meals, etc. (which are all forms of using energy to replace human power) are the means that liberated women last century. Therefore, the power down would in effect cause women to do more domestic labor in the home....namely biking
Ever hand washed clothes?
If you want to be happy for the rest of your life, you've got to get a stauber for your wife.
Stauber washing machine.
Under 400 watts (last time I looked). That means under $2000 of solar PV. The design is a big pully on the stainless steel top loading side working basket attached to the small pully of the motor. Why do I pimp 'em? Because I saw various people who claim they made 'em work via bicycle peddling.
Get yourself Grundfos or Dankoff pumps - depending on well VS surface water.
Now the 100 gallons of water moved by hand is no longer moved by hand.
Well, it would cause someone to do more domestic labor in the home, but that would only be the women if you insist on sticking to gender roles peculiar to the mid 20th century. Before the industrial revolution, both men and women did a lot more manual labor in the home.
My pledge to my wife is that we both learn/relearn to do some manual tasks. We both have to share the work load I think. but even in that case my wife feels she does more than before so it is taking away from normal free time. So it is a hard issue.
I think today some more manual tasks can be less work than in the past. Consider going to the store without a car. My grandmother used to walk. Today we have alloy-framed bikes with racks and a trailer that can haul 100 lbs. So I think today we can go carless with much less work than in the 1950-60s -- and we do it more efficiently.
Yes, but think of all the traditional female chores such as wood gathering that might be eliminated with simple solar cookers, not to mention all the already scarce trees that might be saved.
I think its time to start thinking in terms of still potentially great improvements in the quality of life for the world's severely impoverished.
The expectations and aspirations of spoiled, rich westerners, notwithstanding.
http://solarcooking.wikia.com/wiki/Yancheng_Sangli_Solar_Energy
What you're saying is that end-use efficiency has to be included in ERoEI calcs. While this is often true (and often overlooked), it's not necessarily true in all cases. It depends on the question you're trying to answer. If you're trying to compare, say, the ERoEI of oil to power ICE cars vs. the ERoEI of wind electricity to power BEVs, then you need to look end-use efficiency and boil it down to vehicle-miles traveled. If, OTOH, you're interested in the sustainability of producing electric power from coal, to be used for all purposes requiring electricity, then the end-use efficiency of the electricity delivered to market can probably be ignored.
I've come to believe that there is no "one-size-fits-all" definition of what needs to count as inputs or returns. ERoEI can hammer different kinds of nails.
I find it enormously annoying to encounter such errors in basic science included in any article which I am supposed to take seriously, George. Look, you get credit from me for having looked up and included the correct definition of "work" in the highschool science useage, but you then proceed to develop an example which completely ignores that definition. By the definition, the ONLY work done by the fuel input to the family's moving activity is in any increase in gravitational potential energy of the mass moved. Therefore, if the activity involved moving from a seacoast location to a town higher up in altitude by 100 meters, then if the auto, furniture and family massed a total to 3,000 kg then 9.8 x 3,000 x 100 = 29,400,000 (2.94 x 10^7) newton-meters of work were done. BUT, if the activity involved moving from a town higher up in altitude by 100 meters to a seacoast location, then -1 x 9.8 x 3,000 x 100 = -29,400,000 newton-meters (joules) of work were done. Say the trip took 1 hour to travel 100 km and used 8 litres of gasoline containing 8 * 1/30 x 10^9 = 2.67 x 10^8 joules potential energy. Only approximately 1/10th of the input gasoline goes into producing WORK by the scientific definition, AND ONLY IF THE DESTINATION IS HIGHER THAN THE START. The trip up should use 8.8 litres, the trip down should use 7.2 litres, all else being equal.
This merely proves that essentially ALL the fuel input to such an activity goes into waste heat, drivetrain frictions, brake frictions, tire frictions, and areodynamic losses. The amount which goes into real WORK by your definition is rarely detectable to an average observer.
The bottom line is trying to (incorrectly) apply scientific concepts to such issues as resource depletion is a task which requires some rigour in the science, otherwise it simply alienates anyone with a familiarity with science. I also question your use of "prime mover" here, but will let it pass as being colloquially close. It's the same issue as when I took my wife to see that silly movie about an asteroid approaching earth. I got up and walked out when the director chose to show a spacecraft on near approach to the asteroid in order to plant an explosive device, after a journey from earth, with nose pointed toward the asteroid and engines still burning! Can't you non-scientific types please at least get some decent advice on scientific issues?
/rant off
This is nitpicking. The salient point is gotten across without any need to go into further detail about entropic losses within a heat engine. You might as well write off ALL science fiction for having sound in space if you're going to give such a concise treatise on what actually constitutes measurable productive work.
If I had to correct every news item I saw on TV regarding science whenever it came on, I'd never get anything productive done. It's dumbed down to get across a basic principle. When Dolly was cloned, they didn't spend half an hour explaining the concepts of exons, introns and restriction endonucleases, because it's totally redundant and (ironically for this topic) wastes energy.
But I share your pain in wanting people to be generally more knowledgeable about science overall. It's never happening, mind.
I disagree. In your example of exons etc., leaving that bit out doesn't change the core elements of information, eg. than a mammal had been concieved asexually. In this article, the shortcoming (IMHO error) which I pointed out is core to the discussion.
I suppose better wording wouldn't go amiss either way. It is inevitable that when something as complex as this topic gets simplified and made to cover a more diverse readership, these things happen. Any ideas for a better illustration?
Well first, use of the term "Work" in any formal way, without intending it to mean what science has meant by "Work" for hundreds of years, seems foolhardy to me. Why try to take over terms from science for purposes of economics? At least, if you're going to re-define the term, change it somehow. How about "EWork", as in "Economic Work"? For example my car, in delivering me physically to my daily worksite, though it accomplishes no "Work" in the scientific sense since both are at the same elevation, does perform a task which I value and which would otherwise require significant time and effort on my part, bicycling or walking, suffering the ravages of Canadian elements. Could there be a standard unit of "EWork", such as moving 1 kg 1 km in 1 minute? In that way, driving to work alone, my car with a comfort/utility level of 10 (on a scale of 1 to 10) is doing 100 x 1 km/min x 10 = 1000 EWork units per minute during the 20 minute time I drive to work. If I ride my bike to work the bike (and I) are doing (comfort/utility level 3) 100 x 0.5 km/min x 3 = 150 EWork units per minute for the 40 minutes riding time. Much debate over assigning those comfort/utility levels. How about a 20 ton truck? It gets a comfort/utility rating of 10 since the cargo can't be stolen, is insured, and will arrive promptly. 20,000 x 1 x 10 = 200,000 EWork units per minute. (EWork units are kg km/min utilityfactor). An 80 ton rail car gets a comfort/utility rating of 8 since it's slower and rougher on the cargo. 80,000 x 0.75 x 8 = 480,000 EWork units per minute.
It appears that the meanings of "Energy" and "Exergy" in the article are correct and aligned with science.
Isn't it true that burning gasoline in an engine performs mechanical work, as the potential energy from gasoline acts upon the car to change the car's kinetic energy? Isn't this still true even if the kinetic energy is subsequently dissipated thermally through friction? Aren't you going a little too far in saying that the physical definition of work doesn't apply to a car that moves a distance without changing elevation? The truth is that a certain amount of mechanical work is done to make the car move, and then a theoretically equal and opposite amount of mechanical work is also done to make the car stop again, so the total work physically defined, is zero. But most of that positive work (namely the work done to make the car move to point B) is 'useful' to us humans, while most of the negative work (the friction that slows us down on the way when we don't want to be slowing down) is not useful to us, so the amount of 'useful work' is NOT zero.
The problem, I think, is defining which part of that work (both the moving and the stopping) is useful work (or EWork if you prefer). Is it merely the mechanical work done to move the family from point A to B (and stop them at stop signs)? Or is there also "usefulness" in having gotten the car to point B as well? If the family has the option of biking instead of driving, does the car do more "useful work" by protecting them from the elements, and saving them the expenditure of their own food energy? What about the "useful work" done to the body's health through exercise by riding the bike instead? Physics can tell us how much work each of these involves, but it can't tell which parts are the "useful" parts.
I don't think so, since science has used the same definition I do for hundreds of years and everyone knowledgeable in science expects that meaning automatically, whether it makes sense to a person untrained in science or not. I do grant your logic in ariving at your own defintion of the scientific term, but must object to that process. Definitions must remain stable, else communication fails completely.
As I said above, much work remains to arive at the clear universally agreed statement of that value table.
Yes!! Exactly my point. Trying to use physics terms and formulae to manipulate economic values is an error. Economics needs to come up with its own, and far more useful, terminology and formulae.
Okay, how about: "Aren't you going a little too far in saying that the physical definition of work doesn't apply to accelerating a car?" I don't think my definition of 'work' is inconsistent with traditional physics. But regardless of terms, there is definitely physics involved in moving a car from point A to B, and that's where the motivation to bring physics into the economics of driving cars comes from.
Well, much work could go into it, but it's an impossible project. The value of such things is subjective, not objective. Humans will never reach consensus on the value of all economic goods.
hmmm... I'd say that that trying to use physics to define economic values is the error. Manipulating is okay in my book. There is going to be interplay, and it's not necessarily a bad thing.
Generally, the interplay of economics and physics should be like this:
Given a certain economic goal, how is it physically achievable?
Given a different economic goal, what is the difference in physical requirements compared to the first goal?
Given a set of economic questions, which physics applies?
...and so on...
Sometimes it could go the other way, but only subjectively...
Given what physics tells us about the effect of CO2 on planetary temperature, our economic valuations of burning gasoline should be adjusted accordingly.
Wait a minute.
Strictly speaking WORK and HEAT (in physical chemistry) are not State Variables, and they are the cumulative history of a process.
You would need to take a movie of a process and continuously measure the temperature of it (knowing the heat capacity) to have an entire history of the heat and work from the process.
Economically, what portion of that heat and work are useful -- well that is debatable.
For example, a light bulb produces 90% heat and 10% per kW. That light in my view is not nearly as economically useful as a bulb that produces more light than heat. However, thermodynamically the energy must be conserved. Furthermore, the lifespan of the bulb is a consideration as well as the costs to manufacture the light bulb Economically what did you get out of the kW-Hr of light or what did you get out of the lifespan of that bulb?
That is the question.
You claim to have a vehicle that is 100% free of friction, free of countering pressures, and slips between the air molecules as if they weren't there?
_________________
click on image for more info
Your claim that an auto's engine does "Work" by moving the car horizontally through air may have some merit. However, in my typical commute to work in city traffic, I would estimate that to be a very tiny proportion of the fuel energy input to the process, and clearly not the defining reason that I am willing to pay good money for the amount of fuel which I put into the car.
You may as well also argue that the engine also does work by constantly pushing the axles up onto the hump of the rubber tires (which then immediately collapse slightly requiring another work input to push the axles up onto the hump of the rubber tires to move forward the next centimeter.)
All of these "micro-works" are useless to our purposes, and as accurately treated simply as frictional losses in bulk, which is how I prefer to treat them for simplification.
You're not being serious, are you?
No.
Lengould isn't being serious because in Physics work is force acting through a distance. Going from home to the physical workplace is a distance and therefore would be work.
Going from home, to physical workplace, then back home would be no work.
But hey, don't let lengould's failure to understand basic math or physics detract from its arguments.
Yes, you're right Eric, my quick example of the car trip to my workplace is an error, "Work" according to physics would actually be done, as the drivetrain exerts a force through a distance. Sorry, it's been 45 years since I've done any of this for any purpose other than personal entertainment, and I actually do understand basic math and physics, just a bit rusty.
I still think that doesn't change my basic argument against the author's use of the term "Work" for the purpose he has, it really has no applicability.
"Work" according to physics would actually be done, as the drivetrain exerts a force through a distance.
While there was a distance, if your starting point is the ending point the distance is 0.
And you were railing about a simplistic definition of "work".
Someone up thread tried to point out that in physics, vector math is used and that work is the dot product of the force vector times the distance vector.
When you are heading home, yes your distance vector is pointing negative, but so is your force vector.
If we rusty old timers recall correctly (IIRC), a negative times a negative gives a positive.
W = (+F) dot (+x) + (-F) dot (-x)
I'm not sure it's merely a problem of wording. There are some conceptual difficulties here. The amount of energy expended to move a family and its belongings from point A to B is something we can only find out empirically. The way George has written this, it's almost as if he means to imply that it's something we can calculate theoretically. He's using the theoretical idea of mechanical work as if it were directly applicable. But what he's really after is useful work, and it's the eye of the human beholder that decides what's 'useful'. Its therefore not clear to me that the useful work in moving that family is reducible to physics.
In Thermodynamics steady flow, heat = enthalpy + potential energy + kinetic energy + work. This is the definition of work.
Non flow heat = internal energy + work. Heat - internal energy measures the mechanical terms in steady flow equation.
Yes, sure. And which of that physical work is economically useful work is not defined by thermodynamics.
I guess it would depend on which economic theory are we using to define economically useful work
Perhaps we could all agree to define it through the prism of Biophysical Economics as opposed to say some of the Neoclassical schools.
To me economically useful work might be very different thing than say Alan Greenspan's concept of it. But physics is physics..
Fred, I have had an epiphany recently in terms of the word "normative". I think everything in economics is designed to meet the needs of some idealized behavior. All the equations are mapped to reinforce this behavior. They do not necessarily map to any physical laws but to something akin to a game. Physics has nothing to do with it; for whatever math is borrowed, they steal the solutions.
WHT, yeah, I think you've hit the nail on the head with that observation.
http://www.scientificamerican.com/article.cfm?id=the-economist-has-no-cl...
Unfortunately the entire world is still listening to and basing their economic policies on what these charlatans are telling us is a sound and scientific theory. While in reality it's mostly reading tea leaves, with some nice colored charts and graphs thrown in for good measure.
I remember seeing that argument before when that paper came out.
I had to write down my thoughts on Black-Scholes, the Black-Hole of financial computations:
http://mobjectivist.blogspot.com/2010/10/black-scholes.html
WHT, I don't often laugh when I read your blog posts because I often find myself struggling with the math but this one had me in stiches, I LOLed through it all!
One minor quibble...
I would contend that you don't lie in it... you bounce up and down, just like the stock market, this really explains everything >;^)
On being "normative":
The so-called dismal science of "economics" is full of self-normativizing cacophonizations.
Our ears are so accustomed to the sweet bird songs of financial fiscallality that we hardly wince with wonder at how they come up with all that crap.
Maybe the simple story is merely that:
Nonsense of the Black-Scholes kind is the new normative.
Irrational exuberance is so yesterday.
Good discussion guys. It's more or less exactly what I've been trying to say in most of my comments on this thread. I was about to bring up normativity in my back and forth with George down below. (He seems to be confusing his non-normative observations with his normative ideas.)
I completely agree that neoclassical economics suffers from a normativity problem, but I'd go further and say that all economics is going to have a normative component. Economics is no more than half physics, with the other half being ethics.
Exactly. And that choice can be just about anything. What is 'useful' here is a normative question.
Best hopes for making Biophysical Economics the new mainstream. I'm all for it. But I don't think you'll ever get 'all' people to agree to it. And that's a theoretical problem, not merely a practical one. People can be completely consistent on their mathematics and physics, and there can still be room for normative disagreement about the purpose of economics.
(I a bit of an amateur on this physics and economics stuff, but here we're dealing with philosophy, and I'm trained in that.)
CUNOTFALOL !
Cracking Up Normatively On the Floor and Laughing Out Loud
According to Forbes here we are the ones in the sunk boat who we have been waiting for to bail us out after it is too late.
A sweeping claim, don't you think? How do you know ethics doesn't involve physics as well? Indeed much of the work on the evolution of ethics/morals in Homo sapiens indicates its very practical nature. Nothing normative about it, just high variation on implementation of fundamental tendencies. Moral and ethical propensities are looking a lot more like language development than something that can be decided arbitrarily.
See: Hauser, Marc D., Moral Minds, HarperCollins
Geary, David C., The Origin of Mind, American Psychological Association
Pinker, Steven, The Blank Slate
and
Sober, Elliott and Wilson, David Sloan, Unto Others, Harvard University Press
Contributing factor with ethics is uncertainty. And uncertainty fits in perfectly with a Bayesian framework. All of business is making calculated judgements or figuring the odds on "whether I can get away with it".
I've actually already addressed this some time back:
What is useful work.
I suspect the textbook crowd will have heartburn with this as well. It's a dirty job, but someone had to do it.
"The definition of mechanical work is that a mass is moved from one location to another by applying a force that changes the kinetic energy of the mass."
The above given definition of work is wrong. Work done is the dot product of force and displacement vectors. It may or may not have any thing to do with kinetic energy change. Far from nitpicking, this is fundamental and important.
You're correct, the author's definition, to be scrupulously correct, should have stated "that changes the kinetic or potential energy of the mass."
As Jagged says, the idea I got from George's wording was for useful application of energy, rather than waste from a thermodynamic aspect. For the average reader, I don't see any real issue, even if it isn't technically correct from a scientific perspective.
The problem is the use of the term "Work" as if it were being used scientifically, which it clearly is not. What benefit is gained by communicating more clearly (in your hypothesis) to "the average reader" (a claim which i would dispute) by communicating in a more confusing way with the knowlegeable reader?
It doesn't help that the concept being discussed is rather nebulous, though. Since the "work" George is talking about is clearly value added, rather than that which goes into simple wastage, he could say "e-work" or "net work" and run into the pitfall of what exactly constitutes that kind of enterprise. I suppose it's like the issue people have with EROEI itself, that being that it's simply a concept that has a very wide definition to many making it difficult to assign any truly accurate values.
Work is being done, either way (last I checked, my car moving didn't break thermodynamics. Unfortunately for my bank account). Whether it's the kind we want to quantify for this exercise as productive work or not is a different can of worms.
I think this is right for an east-west move. But for a north-south move, the kinetic energy changes, since the new location is nearer or farther from the earth's axis of rotation.
nope. The classic definition is 'force over distance'. You need to start and stop at the same place (distance = 0) so that the work becomes 0.
I'm not so sure about that one there, dude.
For that to be true, you'd have to view the return journey as being minus 20 miles. As there is no such thing as a minus distance, going to and coming back from work is not the same as not going at all. The boss is quite insistent on that point.
If you go straight to work on a frictionless plane, the work needed to accelerate your car is positive, since the force vector is in the same direction as the displacement vector. As you decelerate, the braking vector is in the opposite direction to the displacement vector, so it is negative and equal to the acceleration work.
So you do positive work getting up to speed and negative work slowing down. You do no work going to work. Or coming home for that matter.
http://en.wikipedia.org/wiki/Work_(physics)
Today is not April 1st.
So why all this clowning around with absurd physics?
Warning: There may be some innocents out there that actually take this nonsense seriously.
(For you innocents out there, mechanical work is not the only kind of work. Pumping hot air into the cooler ambient is also work. When you hit the brakes on your car, the energy of deceleration is converted into heat and pumped into the surrounding air. It does not negate the F=m*a times distance form of work done for achieving acceleration. It all goes up into the air as entropic waste heat.)
I find it enormously annoying to encounter such errors in basic science included in any article which I am supposed to take seriously, George.
And I find it disappointing that no one is telling you that after you were caught making up statistics that you lost the moral high ground to make such a statement.
Can't you non-scientific types please at least get some decent advice on scientific issues?
And you, making up statistical data has the moral authority to say this how?
And in http://www.theoildrum.com/node/7016#comment-729277 I show that you are wrong right up front on material and middle school student paying attention would catch - and you claim to be 'annoyed' with 'basic science errors'.
??? Please elaborate, or provide a link to an example.... My ignoring your past acusation is nothing more than an acknowledgement of your poor taste.
If your reference is to my discussion of the (absence of) risk associated with the Chernobyl meltdown, please hash it out first with my reference, Dr. John K. Sutherland, Health Physicist who worked with radiation for almost 20 years in the non-nuclear industry, and then spent 20 years in various aspects of radiation protection at a CANDU nuclear power plant. My experience is he will happily correspond with you to clarify any issues or questions. Warning, be prepared in advance to discuss Hormesis.
Following is a small except from one of his articles on EnergyPulse.net.
Nuclear Power Comparisons and Perspective
Radiation Hormesis Overview - T. D. Luckey
I grant that so far the powers that be have refused to acknowledge that there is yet sufficient irrefutable evidence for the Radiation Hormesis effect, and continue to cling to the LNT hypothesis despite it's lack of proof as well. (Any politics involved there you suppose? Any anti-nuclear activism perhaps?) Its interesting that they've also refused to fund any further studies of the existing evidence or generation of new evidence....
Note: For those unfamiliar, LNT postulates that there is no such thing as a safe dose of ionizing radiation. Ie if say a dose of 500 Sv to one individual over 10 days will typically kill that individual human immediately, then a dose of 0.05 Sv to 10,000 separate humans over 10 days will also result in the death of a human. It is this sort of error (LNT) which is being used by Mr. Blair above to predict the injuries from Chernobyl. It is comparable to saying that since we know that a dose of 1000 asparin to one individual is lethal (it is) THEREFORE WE CAN BE SURE THAT A DOSE OF 1/10TH OF AN ASPARIN ADMINISTERED TO 10,000 HUMANS WILL RESULT IN ONE DEATH. Nonsense, we all know that proposition is not true.
For an article on radiation hormesis published in a peer-reviewed radiology journal see:
http://www.ajronline.org/cgi/content/full/179/5/1137?ijkey=ee869ed020945...
Critique and rebuttal
http://www.ajronline.org/cgi/content/full/181/1/278
I'm certainly no expert, but I'm reasonably confident that you're wrong.
If I understand you, you're taking final potential energy of the belongings from initial potential energy of the belongings to calculate work. This is not the correct way to look at it.
Work is the force which is applied over a distance. Basically, energy is transferred. It's transfered from fuel (chemical) to the belongings (kinetic). The belongings move for a while, and end up stationary in some other place. The work is the energy expended to get this stuff to move*, and it all comes from the oil. Their potential energy doesn't get transferred to kinetic energy (unless they go down a hill or something), it's only oil doing this work. There's no need to consider the potential energy (assuming a flat surface because it's easier in theory) at all.
Incidently, most of the actual work done will be overcoming friction, and friction is ultimately what slows the objects down again.
*technically, only some of the energy, i.e. the exergy, from the oil goes towards the this process because the process is not completely efficient.
/Not a physicist. Corrections very welcome, and likely needed.
Uh, George, that's not what people usually mean by Net Energy. Net energy is returns minus inputs, or ERoEI - 1. What you're describing is better termed 'conversion efficiency'. I'm surprised you're muddying the waters like this.
EDIT: Perhaps it would be clearer if you has said: "and the exergy supplied to the prime movers/heaters doing the extraction."
Thanks for the edit clarification. This is more correct.
Taken together, George, you're implicitly advancing an energy theory of value here. This has its limits. While energy/exergy certainly has value, not all value is reducible to energy. Suppose two brothers go exploring in the woods after lunch. One of them plays in the trees and has a good time. The other plays in the stream, has a good time, and finds a big nugget of gold. They both expend the same amount of (lunch) energy, but one comes back with a bunch of 'wealth' that the other doesn't bring back. Don't ask me why humans value gold, but they do, and it's not really explained by any energy or exergy analysis. Moreover, if you think that these boys aren't comparable to certain venture capitalists with lots of money to spend, well, think about it some more.
So where did the gold come from and based on probabilities both boys would have equal chances over time for finding a little gold on their playtimes. So what is your point? A venture capitalist cannot make money when the energy spent on the venture is worth more than the returns. A venture capitalist will have much trouble finding good investments as energy resources deplete. Luck has little to do with macroeconomics -- yes maybe in the micro-sense -- luck is important. but that point is trivial.
That's contingent. Suppose there was only one nugget of gold to be found in the stream.
One venture capitalist may pay for the expenditure of a lot of money by a lot of startups, and yet if he makes bad investments, might never produce products at a profit. Another VC meanwhile makes some good bets and brings something of value to the market for the same energy expenditure. The point is simply that value creation is not inherently proportional to energy expenditure, nor reducible to it. How much monetary value is attributable to energy on a macroeconomic scale is certainly an interesting question. I'm not disputing that energy has value, or even that it accounts for most monetary value in the system. I'm just saying it can't account for all of it in a reducible way.
Why does GDP and population growth track basically with oil production?
Is this a coincidence or a reality of our economy?
First, GDP doesn't track basically with oil production, it tracks basically with energy production, and according to some, tracks better with exergy or 'useful work'.
Second, I think you'd be hard pressed to show that population growth tracks closely with energy production, let alone oil production. It is certainly not the case on a country by country basis. You'll need to present a statistical analysis if you want to convince me that there is a clear tracking.
Finally, try not to hear me saying something that I'm NOT saying. I am NOT saying there is no relationship between energy and the economy, or that it is a small relationship. I'm simply saying that an energy theory of monetary value has its limits. (George is advocating pegging currencies to energy or exergy amounts. Can you be sure that that could be done rationally, and wouldn't create weird problems?)
Our recent economic activity seems to be tied to oil production with financial gaming (starting in 1970 to mask domestic oil decline by deficit spending and so forth -- and removing gold standard). In essence, growth driven by oil production since 1950 -- with hidden financial tactics -- lowering taxes, interest rates and the like. If the economy were like 1950s then well we would not need financial trickery.
Many products that are basically forms of reworked fossil fuels, since manual labor is not used anymore in our factories.
You can squeeze a little more growth with reduced fossil fuel consumption to a point -- but either manual labor or solar/renewable energy must be used in my view.
We are using Chinese labor/immigrant labor to do some of this heavy lifting today to supplement the higher energy costs to reduce the costs of goods.
So why not develop a better system that favors the right types of domestic energy development rather than the current system which is designed to use up oil to pump more oil out of ground as EROI decreases like an exponential decay function.
Seems like a recipe for disaster.
Hmmm..Even Newton's laws of physics have their limits - they won't work at the quantum level. I think that all meaningful economic value does come from energy- especially when looking at an appropriate scale of more than just two boys.
How about this example:
In 1910, 20 boys went out in the forest after eating a lunch that gave them each one unit of energy. Ten went to play in the trees to expend their one unit of energy, and they had a good time. Ten went to the streams in the woods to expend their one unit of energy. Eight of them had a good time and found a nugget of gold. The other two just had a good time playing in the mud with nothing to show for it. So, in total the boys expended 20 units of energy , and came away with 8 nuggets of gold ("wealth").
In 2010, 20 boys went out in the forest after eating a lunch that gave them each one unit of energy. Ten went into the trees to expend their unit of energy and they had a great time. The other ten went to the streams to play and expend their unit of energy. Nine of the boys had a good time playing in the mud, but found nothing but methyl mercury and PCB's in the stream. One lucky bugger playing in the streams found a nugget of gold. So, in total, the 2010 boys expended 20 units of energy and came away with 1 nugget of gold ("wealth").
So any economic value that does not come from energy is not meaningful? I think you're begging the question a bit.
And as far as your version of the thought experiment, I'm not disputing that energy matters on macroeconomic and historical scales. How much it matters is an interesting question that we can't get at merely through thought experiments. I do think that energy accounts for the majority, if not the overwhelming majority, of economic value. But I also think there are appreciable amounts of 'economic value' that are difficult to reduce to energy. Attributing the ascribed value of the Mona Lisa to energy inputs, for example, is pretty silly.
jaggedben,
I couldn't agree more that attributing the value of the Mona Lisa to energy inputs is silly. I think there are different types of value. Things like literature, art, and music have a greater value in my mind than do any of the industrial materials and processes we use here in developed nations to simultaneously live our lives and destroy so many others. There will always be art - our earliest ancestors had art. Peasents have always had music and art. To me, this type of value exists somewhere outside of the realm of discussions of industrial economies. Perhaps I should have emphasized the word ECONOMIC in my statement that you've highlighted above. To me, when I think INDUSTRIAL ECONOMY, energy flows, and material wealth - I cannot bring myself to lump the much more meaningful actions of artistic expression into that discussion. It exists outside the realm of industrial discussions, speaking to what it means to be a human being, not an industrial consumer. Hopefully, we never have to talk about "peak art". :)
Attributing the ascribed value of the Mona Lisa to energy inputs is silly because the Mona Lisa is a 'bubble'. Consider the following-
The Mona Lisa cost Leonardo a certain amount to produce. He had to buy or make paints and canvas, and it cost him an amount of time. It is currently valued at an estimated $713m. One day, it will be worthless as it will cease to exist. Maybe it will be burned in a fire by accident. Maybe it will crumble to dust, but sure as eggs is eggs one day it will cease to exist. During that period of time when it existed, some people will have gained financially from having it in their possession, others will lose. Most likely all or most of this loss will be suffered by the painting's final owner, or their insurance company. The net worth of the painting over time is less than zero, when you take into account the associated costs of housing it, insuring it, and the initial costs of paint and canvas. Of course, the owners may have gained financially by charging for admission to see the painting, but that simply passes the losses on to a number of other individuals.
If you think you can make money out of owning a property, it's worth applying the same thought process to your house. Sure, you may be one of the owners who makes a profit, but who's to say you won't be one of the loss makers, given that the net value of the house over its entire existence is less than zero?
That the children were allowed to play in the woods instead of laboring in a sweatshop or out in the fields after lunch implies that their community was already wealthy enough to get by without their labor.
Of course. Energy availability may be a necessary condition for growth, but it is not a sufficient condition. Performing Granger Causality tests on GDP and energy growth is a pointless exercise.
I don't see how you're last claim follows from your first claim, or how your first claim is related to my comment about an energy theory of value (value being not the same thing as growth).
It also helps a lot to be willing to surrepticiously kick your fellow prospectors in the shins occasionally.
It seems we're in a continually loosing battle to develop laws which can enforce economic social norms on economic sociopaths (Gordon Gecko et al.) Given the great debate above on world over-population, perhaps we should stop that process and simply revert to practices of two or three centuries past, were economic transgressors were simply sumarily executed.
I seems to me that the effort here is to try to replace money as a measure of the value of "stuff" and "services" in the total economy, with input energy. Does that make any sense? There are a LOT of valid valuations which can by definition have no value in energy or exergy. For one example: Builder Tasteless Inc. builds a large commercial development consisting of simple ugly box stores widely distributed across a landscape entirely dominated by pavement, poorly insulated with direct-fired natural gas heating and simple electrical air conditioning. With the same resources, builder Responsible Inc. builds a large commercial development consisting of well-connected retail spaces in a compact configuration with a light rail connection to the neighbourhood, well insulated, solar thermal heating and absorbtion cooling, and a large expanse of well-designed parkland.
Both projects use about the same amount of building material, land, and labour to finish. Idential fabrication input energy, differences essentially indistinguishable. But are they both exactly as valuable to society?
Hah, beat you to it. :-)
Assume it takes 100 units of input energy to build the commercial developments put up by Tastless, INC. and Responsible, INC. Responsible, INC also has the benefit of the human ingenuity to design a very efficient retail development.
If the 100 units of input energy went away, what would be the worth of Responsible, INC's human ingenuity and intellectual capacity to design an efficient system?
I think it is pretty clear that it would have NO worth. Without the physical energy to actually build the commercial development, the design exists only on paper or in the engineer's heads. No real value there. You could have the best baseball swing mechanics in the world, but if you don't have a bat, you're not going to hit the ball.
Ok, so we do have those 100 units of energy, so doesn't that mean that the human ingenuity for a better design now holds some value (even though we now know it can't exist independently from energy)? The design improvements of Responsible, INC that you describe actually work to PROVE that ultimately the value derived from this human ingenuity exists physically as energy.
"...consisting of well-connected retail spaces in a compact configuration with a light rail connection to the neighbourhood, well insulated, solar thermal heating and absorbtion cooling, and a large expanse of well-designed parkland."
These are all design features that would work to conserve energy and make the operation of the development more energy efficient. So, for example, while Tasteless, INC's development would cost society 50 units of energy per year to operate and maintain, Responsible INC's better overall design would only cost society 20 units of energy per year to operate and maintain.
The real physical value is in those conserved units of energy that can be used elsewhere in society.
Alternatively, I can also contend that the greater physical value in Responsible Inc., development lies in the parkland, and the improved community integrity fostered among the client population by their becoming acustomed to walking together to public transit facilities in order to get to the mall. And being able to develop more tightly-knit social structures. Not entirely energy-related necessarily.
I cannot argue that contention. In fact, the premise that an ecologically healthy landbase and tight-knit local social structures are of the absolute with out a doubt highest value to our species is the foundation of my philosophy. If we're talking about an indigenous culture that truly values healthy ecosystems and community cooperation, and uses these things to live their daily lives, then these things would definately have primary significance in economic value.
But, I think this essay is talking about how our wacko mutant corporate fascist ecocidal invidual-isolating industrial world works.
George,
Do you have a citation to Odum's original observation regarding the flow of money?
I, too had some trouble with your transportation example. Work is the dot product of force and displacement vectors. Work can be done on an object without a change in kinetic energy. Also, time has a lot to do with evaluation of the benefit derived from energy utilization. In your frictionless scenario, the family could move in nearly infinite time with an infinitesimal quantity of energy. Please see my July 9 article for another treatment of energy use in transportation:
http://www.theoildrum.com/node/6703
It is cited in the body. You can also find material following the link to Odum I gave.
Even with a move in finite time, the quantity of energy could still be infinitesimal in principle. The kinetic energy in the frictionless scenario can be recovered through a regenerative braking system such as the Prius uses (though the Prius brake system is far from 100% efficient, in principle there's no limit to the efficiency of recovery). I recall years ago there were proposals for underground evacuated tunnels for magnetically levitated trains that would use essentially zero consumed energy to transport people at high speeds from one end of the country to another (whatever energy was used to get the train up to 1000 mph could be recovered at the other end in braking).
That is, physics does not limit the potential efficiency of transportation (or many other useful activities) - the ratio of:
quantity of useful things done : quantity of exergy consumed (i.e. turned to waste heat)
is, in the real world, not constrained to be any finite value.
What is constrained in the real world is that ratio *under a given collection of technological capital*. Investment of available exergy in building up that technological capital (i.e. improving the efficiency of systems, or adding to the recovery of the free exergy flowing all around us) allows that ratio to increase.
There is some basic relationship to economics here, but I think it requires a much sounder handling of the science issues than is done in George's article here.
This is truly a very fundamental article. If one wanted to be selfish one might say I hope it does not become general knowledge because this is THE key determinant of growth and the creation of wealth. And it is nice to hold the key when all around are looking for it - like with QE.
What many people do not realise that much of the "economic growth" in the US and Europe from about the 1990s was simply generated by increments in debt. Take away from the rise in Nominal GDP in each year those percentage increments in debt, government debt, mortgage debt, credit card debt and bank loans and what are you left with in real economic growth terms - very low numbers indeed.
That is why your average wage earner in the US found that his wage in real terms was not improving at all. He could only improve his standard of living by taking on more debt. And he had the illusion of getting wealthier because the house he owned was rising in value -- pumped up by debt pure and simple. Now under correction. Inevitable.
But now the real thrust behind the demand for energy is coming from elsewhere, China, India, Brazil, and Asia in general, as they become consumer societies and that leaves the US and European economies in a very vulnerable position for their capacity to absorb rising costs of energy is now very limited. People are buying gold: the real black gold is oil.
Have you noticed that the "developing" countries are suddenly so popular with Wall street? I think it is because they use a lot more sun as the base for their energy inputs at the base level into nature. More commodities, more green plants, more localized village types of economic processes where the sun is the key factor at the start, not oil.
On the other hand, in a country like Japan there is no way to use the sun`s energy anymore as economic input (except limited basis in oil-based mechanized farming) because of all the cement that prevents us getting the plants and feeding them to cows, etc.. And the US has the same issues (suburbs prevent using the sun effectively as economic input). So everything just freezes up, without the oil energy that used to flow through as before. I am seeing that freezing up now. Empty shops, empty parking lots.
But we have mandated "no going back" to the sun.....the cars are forever, right? Cell phones, nice shoes, a college education, an apartmnet, a desk job, a hair-do...these are the "only" possible and acceptable goals for everyone....right???
How do you tell someone (who proudly went to college and graduate school) and whose 83 yr old father was the first in his family to go to college that his daughter may have to one day carry bundles of hay around in the process of making a living? Carrying around bundles of hay.....or baskets of fish you caught in a non-motorized boat, or reeds, or other sun-sponsored economic inputs is NOT, I repeat, NOT acceptable. No one wants to be a peasant again. It looks like defeat, like a huge loss. From prince to pauper.
Thus all the games, the QE, the lack of awareness. We don`t want to think about this. It somehow doesn`t bear thinking about. Well, only a few people on TOD will willingly think about it at least!
Thanks, George, for putting this together.
It's going to take some time before the correlation between the economy, in the form of money, and energy, are once again directly lined up (I'm not saying there isn't a correlation now, I usually strenuously point out that there is). That said, in short, we have to work off all this debt and that is going to contract the economy at an alarming rate.
Nicole was correct to notice that the financial system was likely going to implode sooner than we are going to experience some of the more difficult effects of a declining energy base. For a good overview of the pickle we're in, see:
What Bernanke Doesn't Understand
http://www.marketoracle.co.uk/Article22482.html
Once the debt is worked off, we will see an even stronger correlation between energy and the economy. Right now it's strong but not as strong as it will be once the debt disappears.
For people wondering about this correlation and are interested in learning about a practical application of Granger Causality tests, see Ayers and Warr's recent paper:
Evidence of causality between the quantity and quality of energy consumption and economic growth
Just published on Keen's blog is his talk at the American Monetary Institute under the entry titled:
Jubilee Shares and the American Monetary Act
http://www.debtdeflation.com/blogs/2010/10/04/jubilee-shares-and-the-ame...
The topic of his talk was "Why a credit money system doesn’t have to crash, and why it always does."
Many comments here ask: Where has the money that was created gone? Well money creation is not a question of printing dollar bills and rolling them out. The great bulk of money creation is a bookkeeping entry in the Federal Reserve System and the banking system.
The true losses are there in the books but concealed, deliberately so because if the Fed and the banks had to write down their so-called toxic assets to their true value ( the "money" disappears) they would wipe out their equity capital and would be technically bankrupt.
However, there is a great thick tranche in bank balance sheet liabilities above the equity tranche called bondholders and it is their refusal to countenance any reduction in the value of their bonds to say 70%/80% of par which has prevented clearing up this toxic mess and starting afresh.
Bank equity holders needed to take a hit; bank bondholders needed to take a hit. Citibank and other major banks needed to be shut down, preserving the depositors, clear out the losses and a new institution arise from ashes of the old. It didn't happen and the poison is still there.
We know why it didn't happen: because of the nexus between the Fed, Wall Street and Congress.
Here is the possibility of a whole new source of nuclear energy that doesn't produce radioactive waste, but I can't seem to get anybody's attention in the Federal Government. Is anybody interested?
April 24, 2010
Dear Mr. President:
1. Why doesn't the Federal Government provide any support for Cold Fusion research? It is not a hoax. For proof, see CBS 60 minutes segment on Cold Fusion and Defense Intelligence Agency Defense Analysis Report DIA-08-0911-003 dated 13 Nov. 2009 (unclassified).
2. Note statement in the DIA report: "Nuclear Fusion releases 10 million times more energy per pound of fuel than liquid transportation fuel". On an energy per pound basis, fusion fuel under-prices fossil fuels by about a factor of 1000, and would drive them off the market, provided it was not saddled with the expense of an International Thermonuclear Experimental Reactor.
3. Fusion fuel, Heavy Hydrogen, is obtained from Heavy Water which is obtained from water. The total amount of energy available may be stated thus: It is as if the oceans were filled 300 times over with gasoline.
4. Based on the above, fusion energy would instantly solve 5 major problems:
a. Energy shortage
b. Greenhouse gas emissions
c. Other pollution, including radioactive waste, by eliminating Nuclear Fission. The fusion of 2 heavy hydrogen nuclei produces a helium nucleus and energy. Unlike hot fusion, in cold fusion this is the preferred reaction channel.
d. Drain on the economy due to imported oil
e. This would give the American Psyche a tremendous boost and put people to work.
5. 20 years ago, Fleischmann and Pons in Utah reported their experimental meltdown which generated large amounts of excess energy and caused an enormous furor but no one could replicate it. Nevertheless, it did happen.
6. I have proposed a reason for this failure to replicate, and a modification of their experiment which might replicate their meltdown, and published it as the leading Letter to the Editor in INFINITE ENERGY magazine issue # 87. Of course this requires experimental verification.
7. I have gotten a commitment from Dr. Michael McKubre of Stanford Research Institute, who was prominently featured on the 60 minutes segment, to test my proposal if or when he has facilities to do so. He has proposed setting up at SRI a facility where independent inventors like myself could come and try out new ideas, but this has not been funded.
8. I have corresponded with Marvin I. Singer, DOE, on this, and was told to submit a proposal. I can’t do this on my own because I only have an idea. I need Dr. McKubre’s facilities and expertise to test it.
9. I hope you can expedite the funding of Dr. McKubre’s proposal.
Thank You.
James H. Cook
Attempting to reduce economic activity to energy and its uses is about as unsatisfactory as reducing economic activity to money and its uses. The former is attractive in its greater realism with respect to some physical quantities, while the latter is attractive in its greater ability to characterize preferences based on time and non-physical aspects such as rarity, aesthetic values, and social relationships.
Even if we set aside such business spheres as art, professional sports, the gaming industry, and financial markets, and focus on mainly industrial production and mass consumption of goods and services, it is not clear how to convert everything to energy terms.
Many engineers are familiar with the microeconomics of the firm, engineering economics, and the analysis of project financials. Typically, these start out by enumerating all the real estate, buildings, tools, equipment, labor hours by specialty, subcontracts, licenses or patent right to be acquired, etc., for the initial build; rents, maintenance, supplies, employees by specialty, ongoing royalties, units of production by type or grade, etc for the ongoing operation; and lastly, as similar list for decomissioning at end of life. These are all accompanied by diagrams and drawings of how it all works and fits together. This is all done in non-monetary descriptions.
Then comes the big fight with the firm’s cost accountants, who generally have control over assigning dollar values to such things as labor specialities and will supply standard values for time value of money, tax rates, internal rate of return, etc.
What is needed is a realistic macroeconomics, which deals with
This can probably be modeled as a graph similar to those in the original post. Processes would be nodes with parameters or descriptions of the transforms; flows of energy, material, labor, and intellectual property would be labeled links between nodes; and assets would be leaves attached directly to process nodes, with links from the capital goods producing nodes that they came from. Output-only nodes would be the oil fields, ore bodies, forests, agricultural land, etc., supporting primary production, while input-only nodes would represent consumption or returns of wastes to the environment.
The next step would be to assign prices and values and overlay the financial systems in order to convert the macrobusiness model to a macroeconmic model. The overall model could be used to investigate the financial impact of shortages of specific types of energy or materials, and it could be used to investigate the business impact of such shortages, e.g. what impact will a shortage of rare-earth metals have on the producition of specific goods, such as motors, solid-state devices, weapons sensors, etc.?
I've addressed this on my blog. Consider just the last items you mention. Rarity means more energy was expended to find and aggregate (EROEI). Aesthetics can only emerge in any meaningful way when there is an energy pyramid supporting the artists (more marginal energy directed to otherwise non-productive activities). Social relations aren't free. They have to be cultivated and the people doing the cultivation have to eat food over that time frame (and expend effort to build those relationships). It all does come back to the use of energy in the end.
So if a nephew is going through a box of books in a deceased uncle's attic, and one is an autographed first edition by a famous dead author, the value of that book reflects a lot of additional expended energy in comparison to the remaining worthless books?
Please see my above post about the Mona Lisa. The autographed 1st edition is a 'bubble'.
I need to think further about this further, but I think such bubbles represent temporary exceptions to George's theory.
George, I can see why this line of thought is tempting, I've certainly had such ideas myself. But without some kind of quantitative work, it's all rather speculative. It's one thing to say that aesthetics can only emerge with an energy surplus. It's quite another thing, and silly really, to say that energy explains why one artist's work ends up selling for millions of dollars while his contemporary goes starving. In the economy of surplus energy, it may well be that the monetary value of a great many individual things is effectively decoupled from their energy cost.
Two things (for you and Merrill):
1. Read Thomas Homer-Dixon's "The Upside of Down"
2. The famous dead author's life involved a tremendous amount of emergy, social emergy, which captured the flow of exergy during his/her life.
Think of it this way. If Einstein were a native born in Somalia, how much time would he be able to spend on relativity? It is the totality of social emergy that provides a platform for aesthetics and the application of intelligence. And it has been quantified!
I'll take a look at the book...
A famous dead author's life involved not necessarily more emergy or social emergy than a less-than-famous dead author. Yes, it's obvious that there is some bit of energy involved in producing all things. That is by itself a meaningless observation. What's at question here is whether energy (including emergy) explains the value that people ascribe to objects or services. You're a long way from proving that these value attributions can be explained purely through the objective flows of energy in the world, rather than also through the subjective judgments of the attributors. I suggest reading some Schopenhauer to help understand the difference.
Also, if 'social emery' is not the same thing as emergy itself, then why is the concept of social emergy even necessary here?
Where?
I think you have misread the piece and interpreted what I said as "emergy explains prices people are willing to pay for things..." or something to that effect. I didn't.
What I am saying is that emergy SHOULD be used as a basis for deciding what a "base price" would be (see: Energy and Value). If others place some aesthetic value on something greater than that base price that is fine, as long as their personal productivity and resulting income puts them in a position to pay that premium+base. Of course this would still allow a bubble condition to obtain, but at least we would know the size of the bubble.
When I say that social emergy supports artists, etc. this means that some marginal output from working people is used to compensate for what isn't being produced by the artist. As long as one is in a growing energy-growing economy situation that is perfectly fine, indeed I would argue necessary for the collective happiness.
I have never claimed that emergy is the only thing that explains value. Quite the opposite. I look at value as being completely derived from human desires and the psychology of aethetics. But I have said that if people (buyers) knew the emergy content of the object of desire they might be in a better position to judge their own assessment of value and make better decisions (applied mostly to consumer goods and services, not art). In the fields of the arts it would be difficult to assess the emergy of a painting other than to estimate the social emergy allocated to the artist. The more artists there are the greater fraction of social emergy has to be allocated to the lot.
What I will predict, however, is as exergy flow diminishes, social emergy will decline and there will less total social emergy to support the arts. Then the market and huam aesthetics will decide which ones get some of that pie.
The quantification I referred to is in Homer-Dixon's work. He used less refined terminology than exergy/emergy but did model the energy flows required, for example to build the Roman Colleseum. And what happened when the Roman Empire overextended itself doing so. Great EROEI on gladiator fights!
Okay, fair enough. As I said in my own comment responding to the keypost (not in this subthread) my concern is that, taken together, many of things you did say implicitly seemed to be advancing such an idea. But I acknowledge that you didn't actually say that, and as long as you acknowledge that this is not the idea you're advancing, I can consider that particular horse's skeleton kicked.
...and now I'm back to being skeptical. For what things should emergy be used as a base price, and who should determine that? If someone shows me a magnetic perpetual motion machine, that thing certainly has emergy. On the other hand, it's worthless junk. Surely you are not telling me that if I want to buy the thing, I 'should' pay a 'base price' on the basis of its emergy. Let's suppose I wanted to buy the thing as a curiosity, I should be able to offer whatever I'm willing to pay. Indeed, I should be allowed to pay for whatever I think the 'aesthetic premium' is, but not for the 'base price'. Somethings are just not worth the emergy they contain, and if I have such a thing, I should be allowed to sell it or give it away for less than its emergy value. It's human beings that decide how much things are worth, not physics.
You say in your blog post that "that energy is the only real currency in human life and social functions." It's a very long post, and I may read it over the next couple days, but let's just say that prima facie I'm far from convinced. Right now we have a fiat currency that is not nominally tied to energy. If it's true that energy is the only real currency, then our fiat currency should reflect that well enough in the prices we pay for things. On the other hand, if there are other things, not reducible to energy, that humans regard as real currency, then our fiat currency can account for those things as well. It may indeed be, de facto, that energy outweighs anything else in society, especially on the macro level. For now, I'll agree to look up the Homer Dixon work before hammering on this more, though.
If you want to know the size of bubbles, and you believe that only energy is real currency, then you can just adjust currency value according the price of your favorite energy source, such as oil or coal. I don't see the need for actually using energy as a nominal "base price".
I'm going to focus on this one thing and then let it go. If you have further interest in some of the ideas that form the basis for this post then they are at QE.
I am taken aback at this question for the simple reason that we have an entire system of cost/managerial accounting that does this already except that costs are denominated in dollars. If throughout the entire supply chain one were to maintain an emergy accounting just as we do dollars now, we would have an emergy cost buildup to the final product. But we don't do that. It's too "physical". Costs are measured in monetary terms and everybody understands this. The problem is, as Paul Samuelson noted many years ago, measuring value using money is like measuring distance with a rubber yard stick. You simply don't know what something may have really cost when the monetary system is being distorted by M3 through M-whatever, its all conjured money but it impacts the purchasing power of a real dollar.
Emergy cost accounting (with a nod to Odum again) is just as straightforward as cost accounting with money but it is based on real physical inputs to the value added process. For the life of me I don't understand how this could be so difficult to grasp. When companies decide what price to sell at they first make sure they are covering their costs. As things stand right now they can never be sure their costs reflect all of the real biophysical costs (not that they care but the triple-bottom line accounting standards may force them to take into account the externalities they are now ignoring) all of which are measured in emergy units.
Emergy accounting can be applied to every human activity, period. Any time an atom is moved for human benefit you can account for the emergy value. So that is where the base could be coming from. Hell, you don't even have to retrain accountants or expect them to understand physics. They will go through the same process as always but instead of counting money units they will count emergy units. In fact the two systems could be run in parallel, or better yet, an energy standard could be imposed (much like the gold standard only based on something useful) and then they could just continue counting money and no one would have to bother with the underlying energetic meaning of the monetary tokens other than the Fed where the energy standard was determined in the first place.
Reread my comment please. That is what I said. The difference is that if there were a transparently available base cost, you would at least know what premium you are willing to pay for the thing. As things stand now, you have no idea and the rule, 'whatever the market will bear' is what rules.
First of all, I'm sorry to be so contrarian in this conversation. We are in broad agreement that there are strong relationships between energy in the physical world and the human economy. We are also in broad agreement that emergy accounting is something that can provide useful insight regarding our economic choices. Moreover, I've also just read your Energy and Value post at QE, and I don't find anything to object to in the same manner as I have in this subthread. So with those things in mind...
In Energy and Value, you "assert as axiomatic that the real value of any artifact inheres in its contribution to net energy gain." This time I'll leave aside the philosophical issues raised by words like 'real' and 'inheres', even though your blog is called "Question Everything." ;-) I think I'm basically in agreement with you here. But note that an artifact's contribution to net energy gain is not the same thing as its emergy, and emergy accounting cannot tell you an objects potential contribution to net energy. Emergy accounting tells you what (some of) the inputs are, but not what the outputs will be. You need other measurements to find that out. So can we agree that the value of an object is not reducible to emergy?
This is what businesses attempt to do, to be sure. But if they find that the market won't bear it, then they 'cut their losses' and sell stuff below their cost. Of course they must balance such failures with successes in order to stay in business. But cutting losses happens all the time, and businesses fail all the time, too. To go back to your 'base price+premium' phrase, sometimes the premium is negative.
As things stand now, I can get a half decent idea of the base cost by shopping around for the lowest price.
I found your What is Money, Really? post on QE, and I have to admit that that I don't get it. How exactly would pegging a currency to energy -which energy, exactly, I'm not sure you explain - make certain costs transparent?
Indeed true. That is where the term 'useful' comes into play. See: What is useful work.
The category of products and services I've been referring to are established products with possibly some components of usefulness. E.g. a car is useful when it comes to getting to work, but you may want one with excessive features that cannot actually contribute to net energy gain (your work presumably, or equivalently saving your personal energy in transportation). I was not particularly thinking about perpetual motion machines as this kind of thing is pretty far outside the mainstream.
The "What is money really?" blog was an early attempt to record the basic ideas. Since I have been involved with biophysical economics those ideas have refined considerably. For example I think now that the inventory of potential exergy is what should be used to regulate the money supply. But we still need to find an appropriate conversion ($s to joules) ratio. I expect these ideas about fundamentals of biophysical econ will continue to evolve, but I do take a lot of guidance from Howard Odum and some of the ecological economists.
Einstein is an interesting example. Had he fully benefited from the social emergy associated with Physics and scientific research, he might have found a teaching position at a university instead of being stuck in a job at the patent office. Thus, he might not have published his four ground-breaking papers in 1905.
Or: he did benefit from the social emergy allowing him to be an "unpromising" student and ending him in the patent office where he had time (time is money and money is energy!) to work his first papers out. Obviously he did go on to an academic career where the social emergy continued to support his work.
True wealth is derived from renewable energy. Wealth is true and lasting only if the source of energy used to create it is true and lasting. This source is renewable energy. Non renewable energy by defintion will give rise to false wealth which will eventually just burst into flames as inflation. A currency that is backed by renewable resources, be they, agriculture, man power or animal power etc is the only long lasting currency as it is replenished by the sun's energy.
The wealth we have created today is false and cannot be long lasting.
To get another perspective on the money thing I recommend Bill Mitchell's blog - http://bilbo.economicoutlook.net/blog/
Bill is an economist of the unconventional kind at Newcastle University,NSW,Australia.
Thanks for the article. I enjoyed reading it.
I want to discuss briefly two serial errors that are made at TOD. Many people comment here as if they have a detailed understanding of the financial system when they do not. I consider my practical knowledge less than mediocre in most topics discussed on TOD, and I consider my conceptual scientific knowledge to be ok but not great. But fortunately, this self knowledge does some real WORK for me; it allows me to presume there is something to be gleaned from a great majority of the posts. This presumption is usually rewarded.
To assume that whole professions are not serious, suffer fundamental methodological problems, etc... is not serious. This post gets unnecessarily close to doing that in using a reductionist image of finance, money, debt, etc...that is not close to being accurate. And not surprisingly, a large number of the comments have correctly pointed out some of these inaccuracies. I want to point out one that I think is particularly common at TOD.
People do not take on debt because they think there will be more total income in the future. They take on debt for a variety of reasons, one of which is the above. Let me give you one other one, consumption smoothing. I find it so odd that people talk about debt repeatedly on TOD without understanding that THE MAJOR use for debt in society is consumption smoothing: the trading of inter-temporal preferences even with no net increase in claims on the future. People get old; without assets they could not consume without working. Just because there are assets does not mean that the repayment of the debt depends upon growth. In fact the existence of the assets doesn't even depend on debt, although by convention debt has been very important to both intermediating inter-temporal preferences and also to forming net new assets.
Is it really true that a parent loaning money to their child for college relies for repayment on the growth of the economy, even if that loan is thought by both parties to be repaid out of the child's earnings? Is it really true that he child's ability to earn a living sufficient to pay back the loan depends on the growth of the income of society as a whole? Might it be that it depends on the level of income available in society instead? It is easy for me to imagine a society in which the level of income was actually even declining at yet all sorts of debts were both entered into and paid back: easy of course because it has happened many times in practice. This is the correct thought experiment to understand how the DEBT DETERMINISM of many on this forum is a useless heuristic. If I had to guess i would argue that the tendency towards seeing the world from the perspective of physical determinism leads to the error in analysis whereby the opposing camp is seen to have used debt to escape the problems they didn't understand really came from physical realities. Debt as shibboleth. But that is of no consequence.
This also leads to the second problem. Any investment, which is the actual savings meant by most commenters, (substitution of current consumption by society as a whole for future consumption by society as a whole) makes society wealthier if its lifetime benefit exceeds its lifetime costs at zero percent discount rates. Hence the real question is not whether renewables are more expensive. This question has no meaning from the perspective of society's true wealth so long as non-energy capital costs (in either energy or money terms) are the major portion of the 'expense' of alternatives.
The two serious questions are:
Will society divert a material enough percentage of its resources today to ameliorate problems tomorrow? And more specifically, will society do so when the wealth created by this diversion is not well accounted for in our current method of valuing the future?
Is there something about the alternatives that makes them categorically less useful to society even after accounting for the above? I.e. even if we coerce resources in the present and lower our current consumption, is there a marked decline in the usefullness of the energy we'll get as a replacement that will lower our real wealth (the stream of future consumption from a future that exists in our minds but not in reality) even as by conventional definitions we will have been increasing it at the expense of lower consumption today?
I see TOD as saying yes to the bottom question and then using this excellent insight to do a muddled analysis of the the first question. Something like "we're losing a great resource that is truly exceptional in its usefulness, and even if we realize this we cant do anything about it because we don't/won't have the 'resources' to invest in alternatives."
If 'resources' in the above means cheap fossil fuel then I think this is an internally consistent, though implausible view. If 'resources' in the above means capital and other non-energy inputs, then I find the view not only implausible but also not serious. If 'resources' in the above means a recognition that the problem is fundamental enough to merit a coercion of currently plentiful resources in the present with utmost haste in a system that has been intellectually opposed to exactly this type of coercion for some time now, then I think one is close enough to the truth to not worry about getting any closer.
And then of course there is the corner case, where the problem is not that its hard and expensive to replace fossil fuels but actually impossible.
Your getting very close to my position there. Good analysis.
George,
When you attempt to formulate an explanation of the current financial system based upon a definition of money as a derivative of net energy ("money = ability to do work") you are walking quite far out on the end of the credibility limb.
What is money really? Regardless of whether it consists of a giant donut carved from stone, a nugget of shiny metal, or a sequence of digital bits & bites in a central bank computer memory, money is a pure illusion that exists only in the collective mind. Whatever its physical form it only has utility to the extent that groups of people hold a common trust in its worth to exchange for something that they want or need.
The individual and social human mind is far from a predictable or even rational collection of protoplasm. One need only watch Americans gather to leap off the end of the uncompleted Bridge to Nowhere. The study of mass psychology is perhaps a more useful course of activity than the study of EROI if you want to understand how money operates in the global financial system of 2011.
Apologies horizonstar. Exactly who are you? You sit in judgment of my credibility so I must assume you are great indeed. But your profile reveals nothing of your credentials.
Perhaps you should take some time to read my blog and see some of my other research interests.
Good points. 1 dollar has a different worth to different folks, seems to be inversely proportional to the ease of which it is obtained with. I think about an old Wall Street saying " the value of something is what it will bring." and then about how we tend to attach a different worth to the money we earn, based perhaps in deeper psychological rationalizations, but I tend to be of the mindset that re-evaluation of personal standards of living are long overdue. In the mind of a wealthy man, he sees a man without money to be poor, this is a problem. It is given a name,-poverty. In the mind of the poor man it's just called life. Only when that man decides he wants what the other has does it become a problem. I have been wealthy, I have been without, but never has the amount of money in my pocket been responsible for anything I would truly consider meaningful. Like time, the value placed in money is relative. Some of us struggle with our attachments more than others. How many of you here feel your material possessions are a measure of your success ? How many of you measure yourself by your accomplishments ? If your house was on fire, would you grab the TV, or the family photos ? I'm not saying that we shouldn't have money, but look what our lust for it has done to us. Such interesting times I have the pleasure of living in.
Great post.
What interesting to consider is what are the restart conditions for the economy.
My opinion is that the financial system has to roll all the way back to lending a fraction of the stored wealth. Today for the most part reserve level are about 10% of lending I'd argue that the restart will see this reversed with lending at 10% of reserves.
Obviously at first stored wealth will be close to zero but even as it grows the percentage loaned would be small.
I don't think we can see a return to growth from our current situation and I suspect most would agree however its important to consider that the cycle probably has to close itself before we even come close to lending at rates close to the recent historical past.
I doubt we ever return but regardless the real bottom seems in my opinion to be fairly close to what I'm postulating.
Given that exergy flows create wealth regardless of if they are increasing or declining it makes sense that if they are declining then the debt engine has to effectively run in reverse storing most of the wealth as it cannot be deployed profitability.
Small wonder gold aka a store of wealth was common in the past its use as money was secondary.
I've written about the implications of decreasing EROEI on the US economy at Another View of the US Economy: Observations on Exergy, GDP & Median Incomes.
Interesting! Thanks!
Thanks to all for your comments. I should explain that I have not responded to the textbook physics folks assailing of this piece because I was confident cooler minds would prevail and they did.
Some years back I had the privilege of a talk with Harold Morowitz about this exact kind of reticence to expand the physics definition of work to include economic (all) activity. At the time he was hesitant, but has since seen the opening and taken it. If you want to understand his bona fides look into "Energy Flow in Biology" for starters. Then get back to me about definitions of work!
I'm reminded of the story of the landscape laborer who was told by the foreman to move a rock to a different location. The laborer expended much effort and finally got the rock into position. But then the landscape architect came around and told the foreman that was all wrong - move the rock back to the exact location where it had been. So the foreman told the laborer to move the rock back. By the book, no work was accomplished. Try to explain that to the laborer. What would he have done if the foreman told him he wouldn't get paid since, according to physics, he had accomplished no work?
Though this piece does suggest that there is and should be recognized a deep relation between energy flow and economics in the sense that money and energy are related (again this is not my invention) it does not claim that this is at all clear and useful under the current set of general economics understandings. Several commentators pointed out that my work is simplistic or naive relative to "what is known" about money, finance, economics, etc. But consider the possibility that "what is known", and accepted by those schooled in the fields, is possibly flawed and even wrong. From the perspective of a financial expert, or a money history expert, a simple explanation of economic activity as work is, well, simplistic. But are they able to view this whole system from the perspective of biophysical systems? Are they missing something deeply explanatory by being convinced that their siloed explanations are all that are necessary? For example those who rely on the classical definitions of money may have missed completely the deeper historical, evolutionary and ecological, role of value tokens in prehistoric societies. You need to study some modern anthropological works to get a more holistic perspective on why we use trinkets (and little bits of aesthetically worked tokens at that) to represent our capabilities (includes social power, believe it or not).
It is hard to capture everything that is relevant in a single piece of work. All I intended to do is pique the interest of those who have open minds and are curious about why things are the way they are, or more importantly why they are not the way they are supposed to be according to the experts. You are invited to QE and to investigate a wider array of writing (some musings and some more formal investigations).
Warm regards to all,
George
George,
I began my comment by saying thank you for a deeply useful post. I understand the error of demanding others to produce a comprehensive system when they neither set out to accomplish this nor are arrogant enough to believe that such is possible in any simplistic way. As one person, insignificant in any broad sense, I thank you for your work.
I commented only because I think I have a decent knowledge of both the limits and usefulness of conventional financial theory. If we make errors, as Im sure we do, it is not for possessing a view of the world that is inaccurate or errant. More likely it is because the discipline has not even considered the questions in any relevant sense. Whether it would make educated conclusions were it to face for example the questions you are particularly interested in, I cannot say.
I see it as one thing to try to understand money in terms of the physical analogy of energy because there is some concrete connection, in that money acts as a IOU for energy.
But then you look at high finance where the quants have taken over the physics realm of drift and diffusion and created some sort of fantasy playland. I think I kind of understand the Fokker-Planck equation because we use it all the time in engineering and physics, but then I see this variation of F-P:
-- this is the infamous Black-Scholes equation, and I say huh?
The BS equation says that concentrations of options (V) diffuse across the stock price (S) landscape, whatever that means.
But then I look at it from the perspective of a purely partial differential equation and you can almost solve it in your head. For one, you can factor the time dependence right out. Here is one quite obvious solution, where k is a constant:
V(S,t) = k/S * exp(-(σ2-2r)t)
Which basically says that options density vary inversely according to the stock price swings, and they damp out with time if the exponent has the one sign, or it will quickly accelerate if the exponent has the other sign. But you never see this solution anywhere stated, because I guess it is too obvious.
With that you essentially understand all you need to know about hedging. The quants have created some fancy financial artifice to work in the exact opposite way to the stock market swings so they can be protected, i.e. hedged, against that volatility. Everything is wrapped in this sophisticated sheen so people can't figure this stuff out. This gets a Nobel prize in economics.
What exactly am I missing here? I wouldn't go near this with a 10-foot pole but it sure is fascinating in terms of an elaborate mathematical strategy.
Welcome to the world of TOD where we Question Everything and can Explain Anything.
That's the beauty of theoretical mathematics.
One can create all sorts of fantasy playlands.
It is only the Physics major who is fool enough to try to remain on the Road to Reality
I can't tell what Penrose's take is about, but more power to him.
Look at the solution to Black-Scholes
V(S,t) = k/S * exp(-(σ2-2r)t)
σ is a kind of volatility or variability in the stock
r is an interest rate
What this proves is that derivatives can grow without bounds if the interest rate overcomes the volatility in this scheme. I think this says that when the determinism ouranks the randomness, "wealth" can quickly go to infinity. If a type of random walk or uncertainty in investor's actions occurs, it damps out the derivative's growth.
What does this all mean? For one, total wealth is not conserved. Nothing wrong with the damped variation, the solution to the real Fokker-Planck equation shows this all the time. It just proves that the exponentially increasing solution is creating money from nothing.
I used to joke with my ex (a physics undergrad at Oxford) that Penrose's magnum opus textbook about reality would better serve as a doorstop given his views on quantum functions inherent only in biological brains that forbid A.I. But I digress...
I have always found it fascinating, since the financial crash, reading about how the cream of the crop for physics, maths, engineering etc. are skimmed off from the big US (and likely UK) universities, in order for their abilities to be put to use in making ever more convoluted formulæ. All so the regulators can't do jack without exerting much effort.
Think of all that wasted talent out there being devoted to pushing numbers around a database in a more complex manner than normal. Makes one weep.
bizarre insight that. What is it?
its a system that is constantly evolving more ways to exploit loopholes within it self and with every increasing sophistication
the return in fiscal terms be it added complexity and investment in skilled resources looks to be growing IE more money/profit but in actual fact the cost to civilisation is a decreasing return in true productive capacity as skill/ingenuity is siphoned off into this virtual domain. that includes the regulatory efforts.
The markets are consuming human talent in an internal mathematical conflict with quite startling repercussions...
that's an odd thought. Mathematical warfare
this is one of the problems of using money as a metric... its malleable to abstract mathematical manipulation.
I hadn't thought of this before (cheers guys) but it's a really really odd thought
Midi, That's exactly my thought. This mathematics is a contrivance to allow people another way to make money.
They don't want you to know this.
They make it look like it is a form of physics.
It's not. It's contrived and contorted to fool you into thinking this.
I can't understand the outcome in any other way.
Physicists who become quants are the equivalent of games programmers.
If they raised a stink that this is all hocus-pocus, they would get fired.
" That's the beauty of theoretical mathematics. One can create all sorts of fantasy playlands."
..sounds like my bank.
The Road to Reality looks to be an interesting read, I'll have to pick up a copy, I've always considered myself to be somewhat's of a fool. Just going back over Ray Kurweil's book " The age of Spiritual Machines "..
http://en.wikipedia.org/wiki/The_Age_of_Spiritual_Machines
..I find it interesting that his prediction(1999) of ten years of economic expansion leading up to 2009 were not met, but yet many of his other predictions were. I'm eagerly awaiting Michio Kaku's new book :
Physics of the Future: How Science Will Change Daily Life by 2100 by Michio Kaku (To be Released on March 22, 2011)
I wrote him an email through his website( he does usually get back to people) posing several questions about the peak energy theories and how the growth of technology might counter these fears, I'll post his replies here, if I get them, just to add to the conversation.
Meanwhile, I'll scratch my cat, Möbius on his belly/back and continue studying. Fascinating thread.
fiscal ingenuity and innovation
capital abhors a vacuum and will move its problems around rather than solve them.
I think the vacuum is that people make no money when stocks are low. Derivatives and options are to fill this void.
Yes indeed, this is not solving a problem but capitalizing on an opportunity.
I think its the case capital will flee to new areas even geographically to evade the problems it has created
Wall street essentially sold its sub prime problems to the rest of the world
whats interesting is the degree that capital attempted to escape into the sodding matrix!
literally a computer generated world of spreadsheets!
free market capitalism has a long history of musical chairs... I know that all sounds a bit marxist but its a fair judgment I think.
The flaw in this project, to whatever extent it matters, is that determining which energy flows are "useful" cannot be done in a purely empirical manner. It is human beings that decide both which energy flows are useful, and how useful they are. Human beings have lots of differing opinions about which flows are useful and which are wasteful. This is a philosophical and social problem when it comes to "recognizing the relationship between energy flow and economics". It is not something that can be resolved simply by being a better scientist. And it is not a problem merely with the current set of general economic understandings, it is something that will most likely always be an unresolved issue in economics (like all things in economics, arguably).
Now, I'm not writing this comment in order to express opposition to the whole project. It is most certainly true that a for great deal of the energy that humans harvest and expend, broad agreement can be reached on which energy is the useful energy, and on how useful it is. (This is especially true when it comes to somatic energy, i.e. food). Such broad common-sensical agreement already undergirds a great deal of work that reasonable people can find the value in, and indeed even use in considering policy issues and various economic choices.
However, attempts at such a project (at least concerning extrasomatic energy) are most likely to be successful on a macroeconomic level, where the probabilistic distribution of random human choices smooths things out. In other words, if you average out all human choices on a large enough scale, then you can use this as a 'human consensus' about the value of energy. If you try to describe the relationship at smaller scales, you're likely to run into problems. And, even at the large scale, the averaged out human 'consensus' may change over time. It is highly unlikely, if not theoretically impossible, for there ever to be universal agreement on all aspects of the usefulness and value of energy, such that an exhaustive explanation of economics in terms of physics can come about. This will be especially true for activities that do not concern basic economic needs such as food and transportation to work.
jag,
See my reply to your comment up-thread. And if you have time read the blog entry I point to. Then perhaps we can stop kicking the horse's skeleton.
I have been uncomfortable with some of your broad and sometimes "authoritative"-sounding pronouncements. How do you know that we are dealing only with a "philosophical and social problem"? What details can you bring to provide evidence of the veracity of this statement?
On my side (if I have one) is the argument that starts with biophysics. We actually do have a tremendous amount of understanding of energy flow in nature and biological systems. And all of that evidence points to the same phenomena at work in human societies. Same, not analogous, phenomena - different medium.
There have been so many issues that were historically thought to be only philosophical questions that have long since relinquished that claim to the sciences. Current example is the status of mind and consciousness under the steady examination by neuroscience. I don't personally see this as making philosophy unnecessary. Quite to the contrary, I see the take over by the sciences as freeing philosophy to expand beyond. There will always be greater philosophical issues to explore. But we shouldn't claim something is in the realm of philosophy in order to raise the argument that it is therefore obscure and cannot be address by science.
Please consider that what makes high unemployment and worldwide austerity now a structural issue is that we are so close to (or past peak oil) and into declining production that we will structurally have to start doing less than we are currently doing because it is impossible to do as much as we used to do. This is really what "structural" now implies. Even the credit pinch that anticipates declining production of oil and by direct causality declining production of just about everything else in the world can force these issues to now be structural for all intents and purposes.
My comments below contain some links to other web sites. Please read all my comments here first, then go back and review all the websites.
The first thing I would like you to review is an analysis about the possibility that our world economy may have seen the end of growth. It’s at the below link.
http://www.silverbearcafe.com/private/08.09/end.html
The next thing I would like you to review is a crash course analysis on how much of the world functions relative to the economy, energy, and the environment. In particular, the most important chapter is chapter 17A regarding peak oil. This crash course was put together by a research scientist who is a former Fortune 300 Vice President. On the Chris Martenson web page below, in the upper left corner, click on and watch the crash course video material.
http://www.chrismartenson.com/
Both analyses above are very well written but they don’t consider thoroughly the possibility of a contraction of the economy. The below two analyses do consider the possibility of a contraction.
http://www.postpeakliving.com/blog/aangel/estimating-economic-impacts-pe...
http://trainsnotlanes.info/Documents/HIRSCHHOUSTON-ASPO-USA.pdf
There are warnings about possible massive unemployment and homelessness problems should a contraction in the economy occur and that world gross domestic product could fall at a rate of 2 to 5 percent a year. A falling world gross domestic product year after year would almost surely result in higher unemployment year after year. Our unemployment rate is around 10 percent right now in America. What affects would there be if unemployment started to increase every year by let’s say 2 percent a year? In 3 years, unemployment could go to 16 percent and in 5 years it could go to 20 percent, and in 10 years to 30 percent. Under this scenario, would many business models fail? Under that kind of pressure, even local, state, and federal governments may be forced to drastically restructure to keep functioning. And that would apply to most countries of the world.
Even the U.S. Military sees that potential economic issues could lead to serious consequences in the United States and the world and countries like Mexico could collapse.
http://www.telegraph.co.uk/news/worldnews/centralamericaandthecaribbean/...
http://www.foxnews.com/story/0,2933,479906,00.html
Mexico has serious oil issues with its Cantarelli oil field declining at a rate of 10 percent a year, as documented below, and since we currently import oil from Mexico, affects would probably be felt in America too.
http://www.cnn.com/2009/WORLD/americas/08/22/mexico.economy/index.html
http://www.dailykos.com/story/2006/1/26/9229/79300
These things do seem a little incredible, but remember that President Bush warned of a possible global financial collapse and panic.
Here are some more good links.
On the History Channel on cable TV, they have been broadcasting a Mega Disasters episode about peak oil. It can be watched on the internet at the below link.
http://video.google.com/videoplay?docid=495148273412977176&hl=en
In that documentary, they say that serious problems for the world could be occurring as early as 2012.
Here are a few other links to sites with information about peak oil, but the above link is probably the best.
http://video.google.com/videoplay?docid=-2266387029939225044
http://video.google.com/videoplay?docid=-1196967662079130915
http://video.google.com/videoplay?docid=2088037667104408930&total=40&sta...
http://www.silverbearcafe.com/private/11.09/denile.html
http://www.commondreams.org/headline/2009/11/10
Can we consider some forward looking projections?
I have documented some reports that indicated that we may be at the end of a growth phase for the world economy, and that we may have reached a peak or a plateau where the world economy tries to sustain at a constant level of gross domestic product, or that we may have even started into a decline of the world economy with declining world GDP.
There is evidence that world GDP has started to decrease, including America’s GDP.
In the last quarter of 2008 the U.S. economy shrank by 6.3% followed by a 6.1% drop in the first quarter of 2009 as shown below:
http://www.cnbc.com/id/30472516
Europe’s economy has shrunk too:
http://www.nytimes.com/2009/05/16/business/global/16euro.html?_r=1
Many rail road cars and ships have been idled.
http://www.thestreet.com/story/10515764/idaho-us-rails-clogged-with-cars...
http://www.dailymail.co.uk/home/moslive/article-1212013/Revealed-The-gho...
12 percent of the worlds container ships are sitting idle where normally they would be in use, and there are projections that 25 percent of the container ships may be sitting idle in two years.
Let’s consider the business models of housing and banking and how a decline in world GDP might affect them. Most home purchases are done when a home buyer gets a home loan from a bank with 5 to 20 percent of the homes sale priced used as a down payment at purchase, with the remainder being lent to the home buyer with almost always a 30 year loan, but sometimes a 15 year loan is used. Do you think there would be any impact to this business model if at some point between now and the next 10 years, there is a good chance that world GDP will start to decline by several percent a year and for this to occur year after year after year? Are 30 year loans a good investment for banks if the real possibility exists that there will higher levels of unemployment each following year if there is declining oil production year after year after year? A big part of the current financial problems is that a large percentage of the 30 year loans that were made over the last 5 to 10 years have proven to be part of a bad business model.
For almost all of our lifetimes, the housing business model always had an expected appreciation of 4 to 6 percent a year. Housing was a very safe investment because oil production was increasing in almost every year and future oil production was not yet close to peak production. It was even said that housing prices always go up and never go down and that belief became almost universally held by most people. But in 2007 and 2008 when oil prices skyrocketed many business models started failing, and housing and banking were among them. Oil production may be very close to its peak, or we may already be past the peak and have started into a declining oil production trend that could drop at a rate of several percent a year.
Our economy is a system, and one of the biggest inputs to this system is oil production as it is our prime energy source. Outputs of this system are jobs, cars, planes, food, electronics, and in general all consumer goods. One of the things they teach us in engineering is that if there is a change in the inputs to a system, then there will be a change in the outputs of the system. It’s very simple cause and effect. Engineers are very good at system analysis and it is very well understood since the math and computer models used are very well developed and very well proven. Electrical circuits are viewed as systems with inputs and outputs. Typically, electrical energy of a certain frequency and voltage are viewed as inputs and then the output are analyzed such as work done, etc. If the energy source in an electrical circuit reduces in power and voltage, then the work performed by that circuit is reduced. A light bulb may burn less brightly, or an electric motor turns more slowly. Since oil is a form of energy and used as an input to a system, just like electricity is a form of energy and is an input to a system, it would seem to reason that electrical engineers would have a natural understanding about possible effects due to a change in the input. If oil inputs to the world economy are reduced, then less motors will run, less plastics will be made, less fertilizers and pesticides produced, etc.
As a result of the rise in oil prices and the shock to the world economy that occurred, the banks and governments are now incorporating into their business models the risks of high priced oil and a decline in oil production and what that may mean to world economies. It has been well documented that credit has become hard to come by now and that banks are not making loans like they used to. There are smart people at the banks, and the rich investors are smart too, and they don’t want to see their money loaned out and lost. As long as the world economy was stable, investors and banks were looking for profits and credit was readily available. But when there is a risk of a global financial collapse and panic, investors and banks don’t want to lend money as it may easily be lost. That is why our government and many other governments around the world had to step in and do bailouts. And it does look like the situation in many of the business models, including the banking business model had deteriorated to a point where the business models were going to fail.
The science and projections behind peak oil is not a secret and many people have known about it for years. Many hoped that the few people who projected that we will not hit peak oil until 2030 were the ones who were correct and that the people that were saying that it would be around 2006 were wrong. But a lot of evidence is mounting that that we are very close to the peak or even past peak oil production now and about to enter declining production. As long as the price of oil was low, around $35 dollar a barrel, almost all business models worked well, growth could be expected, and there was money to be made by investing. When the price of oil went to $147 a barrel and the housing, banking, and other business models started collapsing, it fundamentally changed the way investors and consumers have to think about their business models. Governments, banks and investors are now starting to put credence into peak oil occurring very soon, or that it may have already occurred and they are trying to come to terms with and grip the consequences of that.
Recently, Germany’s government did an analysis that was leaked to the internet which warns of serious political and economic crises being possible.
http://www.silverbearcafe.com/private/09.10/oilcrisis.html
If you stop to think about it, what really runs the world is energy, and not money. Maybe the current economic situation could be best understood if I were to explain things in layman terms considering one specific example. If someone lives in the desert in Phoenix and wants a piece of corn how exactly does he get one? Well in reality, he is dependent on a far off farmer in someplace like Iowa who has enough gasoline to run his tractor to plant, fertilize, and harvest his crop. Then a truck driver needs enough gasoline to deliver the corn from Iowa to Phoenix. If there were no gasoline, then it would be very, very, difficult for someone in Phoenix to get any corn from Iowa. Even if you could print billions of new dollars in Phoenix, it wouldn’t get you any corn without a tractor running on gasoline in Iowa. This is an example taken to an extreme but it just goes to show that the world economy runs on and depends on energy and that even printing huge sums of money won’t necessarily solve a problem.
It only stands to reason that if any changes to available energy sources occur then there will be changes in other parts of the economy too.
Smart, influential, and very important people in the world do recognize these things as credible as shown here.
http://www.usatoday.com/news/washington/2008-07-15-2573469553_x.htm
If we do enter a declining world GDP situation with high levels of unemployment, the effects on people and their way of thinking, coping and behaving will be affected.