A biophysically-based A biophysically-based economics for the economics for the second half of the second half of the age of oil age of oil Charles A. S. Hall Charles A. S. Hall State University of New York State University of New York College of Environmental Science and Forestry College of Environmental Science and Forestry Kent Klitgaard Kent Klitgaard Department of Economics Department of Economics Wells College Wells College Aurora, New York Aurora, New York Presented at Gulf Coast Economics conference Presented at Gulf Coast Economics conference Houston October 7, 2005 Houston October 7, 2005
Transcript
A biophysically-based A biophysically-based economics for the second economics for the second
half of the age of oilhalf of the age of oilCharles A. S. Hall Charles A. S. Hall
State University of New York State University of New York College of Environmental Science and Forestry College of Environmental Science and Forestry
Kent Klitgaard Kent Klitgaard Department of EconomicsDepartment of Economics
Wells College Wells College Aurora, New York Aurora, New York
Presented at Gulf Coast Economics conference Presented at Gulf Coast Economics conference
Houston October 7, 2005 Houston October 7, 2005
What should we be teaching our young What should we be teaching our young people in economics courses? people in economics courses?
Is the world a different place now than in Is the world a different place now than in the past several decades? the past several decades?
We say yes We say yes If so, should we be adapting to that? If so, should we be adapting to that? We say yes We say yes Does our current generation of economics Does our current generation of economics
textbooks reflect these necessary textbooks reflect these necessary adaptations? adaptations?
We say no We say no
SOME FACTS: SOME FACTS:
The economies of the United States, and The economies of the United States, and the world, run basically on oil, gas and the world, run basically on oil, gas and coal coal
Liquid and gaseous petroleum provide Liquid and gaseous petroleum provide about two thirds of the energy we use in about two thirds of the energy we use in the United States (and the world)the United States (and the world)
Production of oil in the United States Production of oil in the United States peaked in 1970. Today we produce only peaked in 1970. Today we produce only 40 percent of what we did in 1970. 40 percent of what we did in 1970.
Consequently the world and the U.S. Consequently the world and the U.S. became became increasinglyincreasingly dependent upon dependent upon
petroleumpetroleum
Today two thirds of U.S. energy comes Today two thirds of U.S. energy comes from oil (nearly two thirds imported) and from oil (nearly two thirds imported) and gas, most of rest from coal gas, most of rest from coal
New sources (except nuclear) remain New sources (except nuclear) remain trivial and are decreasing as % trivial and are decreasing as %
The US economy survives by using every one else’s oil
Global production in the world will peak (or Global production in the world will peak (or has peaked) relatively soon. has peaked) relatively soon.
Campbell and Laherrere (1998)
2004
U = 1800 BBO
……because we are using 2-4 times because we are using 2-4 times more oil each year than we findmore oil each year than we find
We are not alone…. We are not alone…. The sea change currently taking place in The sea change currently taking place in
economic theory is revealed by the views of economic theory is revealed by the views of recent Nobel prize winners in economics: recent Nobel prize winners in economics:
Amyarta Sen and Daniel Kahneman were Amyarta Sen and Daniel Kahneman were recognized for their work critical of the rational recognized for their work critical of the rational actor modelactor model
Joseph Stiglitz and George Ackerman for their Joseph Stiglitz and George Ackerman for their work on alternatives to the standard model of work on alternatives to the standard model of competition.competition.
OUR FIRST QUESTION: OUR FIRST QUESTION: What is economics?What is economics?
Well we all know the answer:Well we all know the answer:
Economics is the study of the Economics is the study of the allocation of scarce resources among allocation of scarce resources among competing ends.competing ends.
Standard view of inputs and Standard view of inputs and outputs to an economy (U.S. in outputs to an economy (U.S. in
1990) 1990)
U.S. Economy U.S. Economy (Average for one person for one year)(Average for one person for one year)
CAPITAL $5000?
LABOR 2000 hours
GDP $20,000?
This is a social definition of economics:This is a social definition of economics:
It implies that scarcity is only relative It implies that scarcity is only relative scarcity, that humans are rational, that scarcity, that humans are rational, that firms, households and markets are all that firms, households and markets are all that you need to make a legitimate economic you need to make a legitimate economic analysis or understanding. analysis or understanding.
We all know that that is not true…..We all know that that is not true…..
AN EQUALLY LEGITIMATE VIEW AN EQUALLY LEGITIMATE VIEW OF THE US ECONOMYOF THE US ECONOMY
U.S. EconomyU.S. Economy
[Includes material and energy flows][Includes material and energy flows]
(Average for one person for one year)(Average for one person for one year)
[KG/person/year] [KG/person/year]
OIL 2500
COAL 3000
CO2 89,000
GAS 2000
BIOMASS ETC
HYDRO, NUC
Water 140,000
Lost soils
Wood 1000
Rock 81,000
Iron 186
Other M
etals 43
Cem
ent 349
SOx -- 84
PARTIC. 29
NOx -- 80
Polluted Water
VOC -- 80
toxins
Interdisciplinary Economic Model
Ecological & Physical Systems
Households Firms
Economic System
Solar Heat
Energy Waste Heat
Nat. Res. Pollutants
Our second, quite different, definition of Our second, quite different, definition of economics comes from the great economics comes from the great Hungarian economic anthropologist Karl Hungarian economic anthropologist Karl Polanyi (Polanyi (Trade and Market in Early Trade and Market in Early Empires) who Empires) who provided what he termed a provided what he termed a SubstantiveSubstantive definition of economics: definition of economics:
Economics is the study of how Economics is the study of how people transform nature to meet their people transform nature to meet their needs.needs.
Economic development is often a series of resource booms and busts
Ecuador’s exploitation cycles
For me economics is summarized as this: For me economics is summarized as this:
For every dollar you spend the energy For every dollar you spend the energy equivalent of roughly a coffee cup’s worth equivalent of roughly a coffee cup’s worth of oil is spent somewhere in the world to of oil is spent somewhere in the world to bring you that dollar’s worth of good or bring you that dollar’s worth of good or service service
OUR SECOND QUESTIONOUR SECOND QUESTION
What is wealth and where does wealth What is wealth and where does wealth come from?come from?
Money is our usual measure of wealth, but Money is our usual measure of wealth, but money is notoriously slippery: money is notoriously slippery:
Printing more money does not make us richer, Printing more money does not make us richer, but just leads to inflation. but just leads to inflation.
So some people think we should use a So some people think we should use a “harder” measure, usually gold“harder” measure, usually gold
But when in the 1500s Spaniards But when in the 1500s Spaniards doubled the quantity of gold in doubled the quantity of gold in the old world– they halved its the old world– they halved its value! value!
The wealth was from the energy The wealth was from the energy used there: from the sun, rain used there: from the sun, rain and wind and from the activity of and wind and from the activity of foresters, fishermen, farmers, foresters, fishermen, farmers, housewives, artisans etc who housewives, artisans etc who
did the physical work to did the physical work to generate the wealthgenerate the wealth
AluminumIron
Titanium
MananeseVanadiumZinc
ChromiumNickelCopperr
NiobiumCobaltLead
Tin
TungstenMolybdenum
SilverPlatinum group
Gold0.001
0.1
1
10
100
1000
10000
100000
Tons rock per ton metal
Crustal Abundance of MineralsCrustal Abundance of Minerals
CrustalAbundance
0.01
Gold is expensive largely because it is Gold is expensive largely because it is rare in the Earth’s crust.rare in the Earth’s crust.
It takes roughly 60 million Kjoules to mine It takes roughly 60 million Kjoules to mine a Kg of Golda Kg of Gold
Expensive things are usually energy-Expensive things are usually energy-intensive intensive
In the Classical/Marxist world view:In the Classical/Marxist world view:
Wealth comes from the activity of laborWealth comes from the activity of labor
But labor is an increasingly small input relative to the But labor is an increasingly small input relative to the FUEL ENERGY that does the work of economic FUEL ENERGY that does the work of economic
productionproduction
60
Fuel
Domesticated Animals
Labor
1850 1890 1930 1970
0
20
40
80
100
Per
cent
age
In the neoclassical world view:In the neoclassical world view:
Wealth comes from Capital Wealth comes from Capital
(In the 1970s Solow dropped even (In the 1970s Solow dropped even labor) labor)
The Standard Economic Model
Households Firms
Goods & Services
Labor & Capital
Consumption & Investment
Wages & Profit
e.g. Cobb- Douglass production function:
P = f(K,L)
“residual” assigned to innovation
Ignores the most important element!!!
Neoclassical production functions--Neoclassical production functions--
When energy is included in production functions, When energy is included in production functions, it explains the observed output with greater power it explains the observed output with greater power
than does than does eithereither capital or labor capital or labor
Japan
Germany
United States
As natural scientists we believe that these As natural scientists we believe that these models of Neoclassical Economics:models of Neoclassical Economics:
-- Is inconsistent with Laws of -- Is inconsistent with Laws of ThermodynamicsThermodynamics
-- is largely based on articles of faith rather -- is largely based on articles of faith rather than empirically validated sciencethan empirically validated science
We need a new approach to economics:We need a new approach to economics:
Biophysical economicsBiophysical economics
It is neither labor nor capital that It is neither labor nor capital that generates wealth, generates wealth,
butbut NATURE NATURE
Including especially the energies used by nature Including especially the energies used by nature
and also by humans to exploit nature and also by humans to exploit nature
Henrich et al.Henrich et al. ““Experimental economists and others have uncovered Experimental economists and others have uncovered
large and consistent deviations from the textbook large and consistent deviations from the textbook representations of representations of Homo economicusHomo economicus. .
Literally hundreds of experiments in dozens of countries Literally hundreds of experiments in dozens of countries suggest that, in addition to their own material payoffs, suggest that, in addition to their own material payoffs, people have social preferences: people have social preferences:
subjects care about fairness and reciprocity, are willing subjects care about fairness and reciprocity, are willing to change the material outcomes among others at to change the material outcomes among others at personal cost to themselves, and reward those who act personal cost to themselves, and reward those who act in a pro-social manner while punishing those who do not, in a pro-social manner while punishing those who do not, even when these actions are costly.” even when these actions are costly.”
About half of the Nobel prizes in economic About half of the Nobel prizes in economic in last two decades have gone to people in last two decades have gone to people (Kaneman, Stiglitz, Sen etc.) whose (Kaneman, Stiglitz, Sen etc.) whose worked has undermined the basic worked has undermined the basic neoclassical model neoclassical model
Economic development is often a series of resource booms and busts
This is how This is how realreal economies work economies work
Energy Sources
This is how This is how realreal economies work economies work
Raw Materials
This is how This is how realreal economies work economies work
Exploitation
This is how This is how realreal economies work economies work
Processing
This is how This is how realreal economies work economies work
Manufacture
This is how This is how realreal economies work economies work
Consumption
This is how This is how realreal economies work economies work
QUESTION III. ENERGY AND QUESTION III. ENERGY AND ECONOMIC PRODUCTION ECONOMIC PRODUCTION
For most of its existence the United StatesEconomy used energy in almost direct proportion to its GNP
How to have successful How to have successful development (Hall model)development (Hall model)
Countries with energy growth greater than population growth become richer
Those whose population growth is greater than energy growth do not
Hence we in the natural sciences, and Hence we in the natural sciences, and indeed any thinking person, indeed any thinking person, MUSTMUST reject the reject the
neoclassical model as a representation of neoclassical model as a representation of real economies. real economies.
It is a fairy taleIt is a fairy tale
““Tell me the fairy tale about the economy.”Tell me the fairy tale about the economy.”
QUESTION 3 QUESTION 3
Haven’t the earlier biophysical models Haven’t the earlier biophysical models been negatedbeen negated? ?
Remember: Remember: 1) Barnett and Morse 1) Barnett and Morse 2) Paul Ehrlich’s Bet 2) Paul Ehrlich’s Bet 3) Limits to growth3) Limits to growth
Barnett and Morse: No increase in the inflation-Barnett and Morse: No increase in the inflation-corrected price of any major resource (except corrected price of any major resource (except forest products) forest products)
? Some circularity there … ? Some circularity there … However Cleveland (Barnett and Morse However Cleveland (Barnett and Morse
Revisited ) found that prices were kept low only Revisited ) found that prices were kept low only through the use of more and more energy, which through the use of more and more energy, which was becoming cheaper at that time. was becoming cheaper at that time.
Paul Ehrlich’s (one of my heroes) stupid bet Paul Ehrlich’s (one of my heroes) stupid bet
1972
The model showed violent oscillations in the conditions of humanity
Economists didEconomists did
not like this model not like this model
and attacked it and attacked it
fiercely fiercely
“ “ A close look by economists has led many A close look by economists has led many competent independent analysts to conclude that competent independent analysts to conclude that
the underlying assumptions are pure fantasy the underlying assumptions are pure fantasy
There are no inventions .. Output per unit There are no inventions .. Output per unit input has been rising between one and input has been rising between one and one half and three percent (Denison)… one half and three percent (Denison)…
……did not refer to a single scientific study … did not refer to a single scientific study … There is a clear possibility that the There is a clear possibility that the development of nuclear fusion will open up a development of nuclear fusion will open up a vast and perhaps enormously cheap source of vast and perhaps enormously cheap source of power ..power ..
And since these oscillations did not come And since these oscillations did not come to pass most economists believed its to pass most economists believed its results spurious. results spurious.
Discussion of any limits to growth disappeared Most who Discussion of any limits to growth disappeared Most who thought about it said the thought about it said the market had solved the problemmarket had solved the problem
The oil issue has, until the last few days/months, The oil issue has, until the last few days/months, disappeared from the media disappeared from the media
Growth returned as the god Growth returned as the god Those who raised these issues were alarmists, Those who raised these issues were alarmists, Casandras Casandras Even mpg goals were essentially eliminated Even mpg goals were essentially eliminated There was not even any place to apply for money in NSF There was not even any place to apply for money in NSF
or DOE (except for technical studies to produce more) to or DOE (except for technical studies to produce more) to study such issuesstudy such issues
The economists won the debate!!! The economists won the debate!!!
Economics has trumped science! Economics has trumped science!
Neoclassical economics, including Neoclassical economics, including especially monetary cost-benefit analysis, especially monetary cost-benefit analysis, has become the overwhelming choice to has become the overwhelming choice to make public decisions. make public decisions.
These ideas sometimes have become These ideas sometimes have become conflated with the anti-government conflated with the anti-government conservative agenda conservative agenda
““Let the markets make all decisions” Let the markets make all decisions”
But…. (a closely held secret): But…. (a closely held secret):
As of 2005 the limits to growth model is almost As of 2005 the limits to growth model is almost exactly exactly correct for all parameterscorrect for all parameters!!
In fact most biophysical predictions have been In fact most biophysical predictions have been right on: right on:
Oil production in US has declined by 60 percent Oil production in US has declined by 60 percent as predicted by Hubbert as predicted by Hubbert
Huge price increases in 1980s resulted in Huge price increases in 1980s resulted in lessless O&G production subsequently O&G production subsequently
Global oil production is at or near peak Global oil production is at or near peak Most other resource issues have been bailed out Most other resource issues have been bailed out
with cheap oil (soils, fish, water etc). with cheap oil (soils, fish, water etc). NO substitutes for oil have emerged NO substitutes for oil have emerged Renewables remain less than 1% (except hydro)Renewables remain less than 1% (except hydro)
Question 4. Efficiency Question 4. Efficiency Neoclassical economics is sold to the Neoclassical economics is sold to the
world from the perspective of world from the perspective of “efficiency” “efficiency”
In economics efficiency means that all productive factors are In economics efficiency means that all productive factors are optimally employed, and this should lead to lowest possible optimally employed, and this should lead to lowest possible pricesprices
So we tested that as science or engineering would:So we tested that as science or engineering would:
We found NO evidence for 40 countries that efficiency of turning We found NO evidence for 40 countries that efficiency of turning energy, water or forests into wealth was increasing -- if energy, water or forests into wealth was increasing -- if anything the opposite (possible partial exceptions US and anything the opposite (possible partial exceptions US and Hong Kong) Hong Kong)
(Ko et al 1998, Tharakan et al. 2003, Hall and Ko 2005). (Ko et al 1998, Tharakan et al. 2003, Hall and Ko 2005).
Wealth comes from resource exploitation!Wealth comes from resource exploitation!
Some difficult economic things that Some difficult economic things that biophysical economics can explain biophysical economics can explain
reasonably well: reasonably well:
Labor productivity Labor productivity Phillips curve excursionsPhillips curve excursions Failure of development (some aspects) Failure of development (some aspects)
What Denison missed
Phillips Curve:Theory
Phillips Curve: reality 1970’s
CONCLUSIONS CONCLUSIONS
Economics remains largely about investing Economics remains largely about investing energy in exploiting nature energy in exploiting nature
This needs to be the first principal of This needs to be the first principal of teaching economics, not something teaching economics, not something marginalized. marginalized.
In the long run mother nature holds the In the long run mother nature holds the high cards high cards
--
Neoclassical economics
My final professional goal
It is inconceivable to me that that the market or It is inconceivable to me that that the market or conventional economics is providing useful conventional economics is providing useful signals for foreseeing or dealing with these signals for foreseeing or dealing with these issues. issues.
In fact by glorifying trivial and manipulated In fact by glorifying trivial and manipulated tastes, by worshiping growth, by ignoring such tastes, by worshiping growth, by ignoring such issues as population growth and resource issues as population growth and resource depletion, the market approach is greatly depletion, the market approach is greatly exacerbating these very difficult problems exacerbating these very difficult problems
THE END
Real economies are based on resourcesReal economies are based on resources
Economic development is usually a series Economic development is usually a series of developments, depletions and then of developments, depletions and then shifts to new resources shifts to new resources
Economic development is often a series of resource booms and busts
Ecuador’s exploitation cycles
Predatory (i.e. large) Fish –catch per Predatory (i.e. large) Fish –catch per effort effort
Nature 423, 280 - 283 (15 May 2003); doi:10.1038/nature01610
We are NOT getting less We are NOT getting less resource dependentresource dependent
Costa Rica: Costa Rica: The myth of sustainable developmentThe myth of sustainable development
ResultsResults No silver bulletsNo silver bullets Vulnerable to oil pricesVulnerable to oil prices No possibility of sustainability No possibility of sustainability
for 20 reasonsfor 20 reasons BUT: Good society on a BUT: Good society on a
relatively poor resource base.relatively poor resource base. Much to learn from Costa Much to learn from Costa
Rica.Rica.
My Next Book:My Next Book:
Making Development work: Making Development work: A new role for science A new role for science
Two volumes:Two volumes:
1.1. Theory Theory
2.2. National histories and case studies National histories and case studies
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