SUBHEAD: A new model of the economy is needed that includes the environment
By George Mobus on 6 January 2009 in Question Everything
http://questioneverything.typepad.com
Image above: "Industry vs Nature" from http://picasaweb.google.com/mexbel/MonterreyForumBookFair#5121368287434326738
The big issue right now, for Obama and the new administration, is the economy. We are in the worst recession, according to all of the 'in-the-know' economists, since the Great Depression of the 30's. Well they should know. They predicted it, right? OK, not really. In fact the big question in my mind is: Just exactly what do economists know?
They have been appallingly bad at predicting much of anything, certainly of late, and yet politicians and media people keep going back to the economic 'experts' in an attempt to understand what is happening to our world. The problem is, the economists actually don't know the very basics of economic reality.
They are working on a bunch of hypothetical principles (not even real theories in the scientific sense) that are flat out wrong in many cases. But most of all, they don't understand the very basis of economic activity - the flow of energy through the system.
It is energy flow that allows any system to increase in complexity and stability over time, that is to evolve to its maximum state of organization. It does this by virtue of physical work, either mechanical or electrochemical, being done on the components within the system to increase their 'utility' within that system.
Some of those components are imported from the environment, others may be recycled materials from decayed components. Work must also be done to export material that is no longer usable (maximum entropy state) so that it doesn't clutter and choke the system's workings.
Energy of high potential and in a usable form must constantly be brought into the system to achieve this end. This description is completely general and universal. It applies to all systems, of any scale, and any location in the universe.
It applies to living systems and to the economic systems created by human endeavor. Humans take in both low entropy material and its stored chemical energy and use the latter to do the work of maintaining the body as well as generating muscle power to, among other things, acquire more material and energy (better known as food!)
The human economy is, at its roots, a social form of an extended metabolism. It is basically both a kind of ecosystem and a metabolism whereby artifacts and organizations form and develop in order to facilitate more work being done.
That, of course, means more energy needs importing in order to keep up growth and development. Whereas the economy of the body is designed and regulated by genetics, that of the human economy is developed by human ingenuity and culture. Genes and culture are both sources of knowledge to guide the respective energy flows through bodies and through economies.
An economy is subject to the same phenomena that plague a living body when energy is restricted. It appears, now, that it is also subject to the same problems that arise from taking in too much energy relative to the energy flow balance that would be found in a natural, healthy individual — namely the individual gets obese and bodily functions are often deleteriously affected.
Our economy, our social body, I suggest, is obese and we are seeing the detriment of that obesity in situations like our credit crisis and the Madoff Ponzi scheme. Things, institutions, are not working properly. Certainly our regulatory apparatuses are failing in their duties.
But in terms of what happens to a body on a diet, we should be mindful of what happens because we are now on what appears to be a restriction of energy flow that will worsen over time. Initially the body responds to restriction of caloric input by exhausting the stores of glycogen (stored carbohydrates) and turning to burning fat stores to keep the system running. We basically loose fat volume (unfortunately we don't lose adipose cells which during more profligate times will just go back to storing up fat!) and weight.
But if the restriction continues we begin to use up other stores, namely protein in muscle, and our bodies can become emaciated and weak. At some point our organs can go into failure and we die from starvation. Recall the images of the prisoners at Auschwitz at the end of WWII. Here is what I think is happening and what I think its effects will be.
This is based on the basic principle of biophysical economics voiced above. It takes energy to do work, plain and simple. Reduce the influx of high-grade energy and you will reduce the amount of work that can be done.
And we are in the throes of energy restriction now. The first thing you have to understand about energy input to the economy is that it now has to be very high-grade (high potential) and in a form that is able to drive our prime movers (motors, turbines, and heaters) directly. This is the kind of power that you get from high energy dense fossil fuels.
The second thing you have to grasp is that it requires energy to get energy. That is, you have to build drilling rigs and pumps and such to get the oil from underground, and now from deep water fields, and it takes no small amount of energy to build this stuff.
You have to subtract the energy you use to build energy extraction/capture equipment and the energy used to move the fuels to points of use from the total energy available. In other words, the net energy available to do economic work (other than energy extraction) is what counts as input to the economy. And that net value has been declining since the 70's.
The biggest input to our economy now is oil. And here I mean high-grade liquids. Oil shales and tar sands are anything but high-grade — they require too much extra energy to convert to usable form to produce a viable net gain.
With the move to non-traditional oil extraction, especially off-shore platforms for wells, the net energy gain to society has been starting to decline. The meaningful measure here is energy return on energy invested (EROEI or EROI). As this ratio (energy out/energy in) declines due to more energy being expended just to get the oil out of the earth, the net gain for each unit of energy goes down as well.
For the past several decades we have been exploiting our large and giant oil fields at a greater rate even while the net gain has been decreasing. This provided the comforting feeling that our energy influx was still increasing. So we felt we could do ever more work and generate ever more wealth in our economy.
But another, related phenomenon was starting to raise its ugly head. Oil is, and all fossil fuels are, a finite resource. There is only so much in the earth and we have been pumping it out at an accelerating rate for the past 100 years. Or at least we were trying to do so. Back in the 50's M. King Hubbert, a geoscientist working for Shell labs proposed a theory about the long term properties of oil production.
Essentially he showed that oil production follows what looks like a normal curve, i.e. it rises semi-exponentially but then peaks and starts to fall in a symmetrical fashion. This theory, Peak oil, proved prescient for oil production in the lower 48 states, where production did, indeed peak in the early 70's. Hubbert's model has been applied to the world oil production as a whole but it is hard to draw precise conclusions since so much of today's oil production is nationalized and data on production rates (as well as valid numbers on so-called proved reserves) are not available for analysis.
Still some basic principles apply and there is no reason to think that the pattern of new oil finds (which has been dropping steadily) and subsequent peaking of production will not follow for the earth as a whole. Indeed there is growing circumstantial evidence that suggests the peak is already here.
A number of analysts have begun converging on a date in the early 21st century. Indeed production rates seem to have been flat since 2005. Some believe that looked at close up the reality is not a peak per se, but a plateau in which there is considerable fluctuation generated by various feedback loops, such as the price of oil and our financial system acting counter to one another to keep the price and availability of oil in wild volatility, averaged around the plateau level.
Sound like anything we've seen lately? The combination of peak oil and declining EROEI from early in this century have had a devastating effect on wealth production. Manufacturers and certain kinds of service companies have sought cheaper labor costs in an attempt to forestall higher cost production.
We know where that one got us. Put simply, we are not able to produce as much wealth because we have less net energy. In other words, our economy is starting to go on a diet and before long it will be starving. What makes this worse is that Hubbert's peak theory actually applies to any commodity that is finite. It applies to all fossil fuels, but also to necessary minerals and even uranium. And there is no recovery.
The curve tends downward after the peak until it bottoms out at essentially zero. This is the case for all finite resources. Period. Moreover, don't forget that to get coal out of the ground it takes diesel fuel (from oil). So as oil becomes less available, so does coal (and natural gas). Imagine yourself on a diet where each year your caloric intake was decreased and at an exponential rate! At some point your body crashes. You need a minimum caloric input just to maintain yourself.
And children, of course, need to grow, let alone maintain. Now imagine the economy as this extended body with its metabolism being restricted by its food supply diminishing. It is as if you need fruits, vegetables, and meat, but you are only able to find grass, bark, and bugs; because of their poor energy content you are still starving. Another fall out from this economic diet, the money that everyone thought was the currency will not be able to buy anything.
And what there will be will take too many dollars to obtain in the old ways. Money is almost meaningless any more. The prices of stuff, especially fuels, is disconnected from the underlying value.
Our financial system was built on borrowing against a future of wealth production that will never come. It is really no mystery at all why we're seeing this crisis. Pumping more dollars into the systems (creating fiat money with no backing) will only make matters worse in the not-so-long-term. Even if there is some minor recovery in the economy (that is we go back to spending and consuming junk just so we maintain jobs for people who need to borrow to spend on junk) it will be shallow and only lead to a worse crash.
Our whole economy is little more than a giant Madoff Ponzi scheme. Or a pyramid scheme that has no base. Now lest you maintain that hope for technology to come to the rescue, bear a couple of things in mind. First, the amount of energy coming from renewable sources today is exactly zero.
That's right, zero. Secondly, alternative energy sources, such as wind and solar, account for little more than 1% of the total energy consumed by American society. That means a massive build up of these sources would have to happen almost over night. And the reason I claim we get no energy from renewables is that the equipment used to capture sunlight and wind is built using oil, coal and natural gas (with a minor input from hydroelectric).
And unless those capital goods can be built using strictly their own energy capture then they are not truly renewable, or sustainable for the long term. That is the problem.
We use way too much energy, both collectively and per capita, compared with what we could get in a truly sustainable way, in a time frame necessary to prevent a real crash. There is no way to get there from here. Third is that any policy based on the magical thinking that a new, revolutionary energy source will be found if only we put the right incentives out there for entreprenuers and inventors is going to be dead wrong.
These are the thoughts of people who have never studied science and technology in depth, do not understand the nature of the second law of thermodynamics (as in you will NEVER invent a perpetual motion machine), and who were spoiled by the apparent effects of Moore's law as it works in digital electronics (but not in energy systems).
There will be new technology. There will be breakthroughs that will help. But there will be nothing in the offing that will replace fossil fuels at the current level of demand (I know, never say never; but energy technology is truly constrained by laws that don't leave me with great hope.)
Even if new technologies are forthcoming you still have the scale up, and adoption times to contend with. Believe me, this is a tough nut to crack. I know that this is hard to swallow because of the implications — that the American/Western way of life is coming to an end. But it is time to face reality and start planning for the most likely scenarios.
Rather than trying to jump-start the old consumer, wasteful economy, Obama should be leading the charge to get Americans off the energy splurge we have been on and start dieting ASAP. We have to shed the fat and conserve the raw energy as much as possible.
This is the only way we will be able to have enough fossil fuels to bootstrap a new economy based on true renewable resources. It will mean abandonment of current lifestyles and beliefs about human destiny to be rich. It will require humans to recognize the ways of nature and forego hubris. It will require sapience!
Unfortunately, as I will be revealing in my future post on the evolution of sapience and its likely future, I am somewhat discouraged about the current species' capacity for sapient decision making. More likely, I suspect, that as the contraction gets more serious and people start dying governments will resort to what they always have resorted to in the past. We'll use up the last bits of fossil fuels trying to steal the resources from someone else. But, of course, we'll then not be able to exploit them even if we succeed. More likely we'll just go out with a bang.
See also:
Island Breath: Biophysical Economics
.
By George Mobus on 6 January 2009 in Question Everything
http://questioneverything.typepad.com
Image above: "Industry vs Nature" from http://picasaweb.google.com/mexbel/MonterreyForumBookFair#5121368287434326738
The big issue right now, for Obama and the new administration, is the economy. We are in the worst recession, according to all of the 'in-the-know' economists, since the Great Depression of the 30's. Well they should know. They predicted it, right? OK, not really. In fact the big question in my mind is: Just exactly what do economists know?
They have been appallingly bad at predicting much of anything, certainly of late, and yet politicians and media people keep going back to the economic 'experts' in an attempt to understand what is happening to our world. The problem is, the economists actually don't know the very basics of economic reality.
They are working on a bunch of hypothetical principles (not even real theories in the scientific sense) that are flat out wrong in many cases. But most of all, they don't understand the very basis of economic activity - the flow of energy through the system.
It is energy flow that allows any system to increase in complexity and stability over time, that is to evolve to its maximum state of organization. It does this by virtue of physical work, either mechanical or electrochemical, being done on the components within the system to increase their 'utility' within that system.
Some of those components are imported from the environment, others may be recycled materials from decayed components. Work must also be done to export material that is no longer usable (maximum entropy state) so that it doesn't clutter and choke the system's workings.
Energy of high potential and in a usable form must constantly be brought into the system to achieve this end. This description is completely general and universal. It applies to all systems, of any scale, and any location in the universe.
It applies to living systems and to the economic systems created by human endeavor. Humans take in both low entropy material and its stored chemical energy and use the latter to do the work of maintaining the body as well as generating muscle power to, among other things, acquire more material and energy (better known as food!)
The human economy is, at its roots, a social form of an extended metabolism. It is basically both a kind of ecosystem and a metabolism whereby artifacts and organizations form and develop in order to facilitate more work being done.
That, of course, means more energy needs importing in order to keep up growth and development. Whereas the economy of the body is designed and regulated by genetics, that of the human economy is developed by human ingenuity and culture. Genes and culture are both sources of knowledge to guide the respective energy flows through bodies and through economies.
An economy is subject to the same phenomena that plague a living body when energy is restricted. It appears, now, that it is also subject to the same problems that arise from taking in too much energy relative to the energy flow balance that would be found in a natural, healthy individual — namely the individual gets obese and bodily functions are often deleteriously affected.
Our economy, our social body, I suggest, is obese and we are seeing the detriment of that obesity in situations like our credit crisis and the Madoff Ponzi scheme. Things, institutions, are not working properly. Certainly our regulatory apparatuses are failing in their duties.
But in terms of what happens to a body on a diet, we should be mindful of what happens because we are now on what appears to be a restriction of energy flow that will worsen over time. Initially the body responds to restriction of caloric input by exhausting the stores of glycogen (stored carbohydrates) and turning to burning fat stores to keep the system running. We basically loose fat volume (unfortunately we don't lose adipose cells which during more profligate times will just go back to storing up fat!) and weight.
But if the restriction continues we begin to use up other stores, namely protein in muscle, and our bodies can become emaciated and weak. At some point our organs can go into failure and we die from starvation. Recall the images of the prisoners at Auschwitz at the end of WWII. Here is what I think is happening and what I think its effects will be.
This is based on the basic principle of biophysical economics voiced above. It takes energy to do work, plain and simple. Reduce the influx of high-grade energy and you will reduce the amount of work that can be done.
And we are in the throes of energy restriction now. The first thing you have to understand about energy input to the economy is that it now has to be very high-grade (high potential) and in a form that is able to drive our prime movers (motors, turbines, and heaters) directly. This is the kind of power that you get from high energy dense fossil fuels.
The second thing you have to grasp is that it requires energy to get energy. That is, you have to build drilling rigs and pumps and such to get the oil from underground, and now from deep water fields, and it takes no small amount of energy to build this stuff.
You have to subtract the energy you use to build energy extraction/capture equipment and the energy used to move the fuels to points of use from the total energy available. In other words, the net energy available to do economic work (other than energy extraction) is what counts as input to the economy. And that net value has been declining since the 70's.
The biggest input to our economy now is oil. And here I mean high-grade liquids. Oil shales and tar sands are anything but high-grade — they require too much extra energy to convert to usable form to produce a viable net gain.
With the move to non-traditional oil extraction, especially off-shore platforms for wells, the net energy gain to society has been starting to decline. The meaningful measure here is energy return on energy invested (EROEI or EROI). As this ratio (energy out/energy in) declines due to more energy being expended just to get the oil out of the earth, the net gain for each unit of energy goes down as well.
For the past several decades we have been exploiting our large and giant oil fields at a greater rate even while the net gain has been decreasing. This provided the comforting feeling that our energy influx was still increasing. So we felt we could do ever more work and generate ever more wealth in our economy.
But another, related phenomenon was starting to raise its ugly head. Oil is, and all fossil fuels are, a finite resource. There is only so much in the earth and we have been pumping it out at an accelerating rate for the past 100 years. Or at least we were trying to do so. Back in the 50's M. King Hubbert, a geoscientist working for Shell labs proposed a theory about the long term properties of oil production.
Essentially he showed that oil production follows what looks like a normal curve, i.e. it rises semi-exponentially but then peaks and starts to fall in a symmetrical fashion. This theory, Peak oil, proved prescient for oil production in the lower 48 states, where production did, indeed peak in the early 70's. Hubbert's model has been applied to the world oil production as a whole but it is hard to draw precise conclusions since so much of today's oil production is nationalized and data on production rates (as well as valid numbers on so-called proved reserves) are not available for analysis.
Still some basic principles apply and there is no reason to think that the pattern of new oil finds (which has been dropping steadily) and subsequent peaking of production will not follow for the earth as a whole. Indeed there is growing circumstantial evidence that suggests the peak is already here.
A number of analysts have begun converging on a date in the early 21st century. Indeed production rates seem to have been flat since 2005. Some believe that looked at close up the reality is not a peak per se, but a plateau in which there is considerable fluctuation generated by various feedback loops, such as the price of oil and our financial system acting counter to one another to keep the price and availability of oil in wild volatility, averaged around the plateau level.
Sound like anything we've seen lately? The combination of peak oil and declining EROEI from early in this century have had a devastating effect on wealth production. Manufacturers and certain kinds of service companies have sought cheaper labor costs in an attempt to forestall higher cost production.
We know where that one got us. Put simply, we are not able to produce as much wealth because we have less net energy. In other words, our economy is starting to go on a diet and before long it will be starving. What makes this worse is that Hubbert's peak theory actually applies to any commodity that is finite. It applies to all fossil fuels, but also to necessary minerals and even uranium. And there is no recovery.
The curve tends downward after the peak until it bottoms out at essentially zero. This is the case for all finite resources. Period. Moreover, don't forget that to get coal out of the ground it takes diesel fuel (from oil). So as oil becomes less available, so does coal (and natural gas). Imagine yourself on a diet where each year your caloric intake was decreased and at an exponential rate! At some point your body crashes. You need a minimum caloric input just to maintain yourself.
And children, of course, need to grow, let alone maintain. Now imagine the economy as this extended body with its metabolism being restricted by its food supply diminishing. It is as if you need fruits, vegetables, and meat, but you are only able to find grass, bark, and bugs; because of their poor energy content you are still starving. Another fall out from this economic diet, the money that everyone thought was the currency will not be able to buy anything.
And what there will be will take too many dollars to obtain in the old ways. Money is almost meaningless any more. The prices of stuff, especially fuels, is disconnected from the underlying value.
Our financial system was built on borrowing against a future of wealth production that will never come. It is really no mystery at all why we're seeing this crisis. Pumping more dollars into the systems (creating fiat money with no backing) will only make matters worse in the not-so-long-term. Even if there is some minor recovery in the economy (that is we go back to spending and consuming junk just so we maintain jobs for people who need to borrow to spend on junk) it will be shallow and only lead to a worse crash.
Our whole economy is little more than a giant Madoff Ponzi scheme. Or a pyramid scheme that has no base. Now lest you maintain that hope for technology to come to the rescue, bear a couple of things in mind. First, the amount of energy coming from renewable sources today is exactly zero.
That's right, zero. Secondly, alternative energy sources, such as wind and solar, account for little more than 1% of the total energy consumed by American society. That means a massive build up of these sources would have to happen almost over night. And the reason I claim we get no energy from renewables is that the equipment used to capture sunlight and wind is built using oil, coal and natural gas (with a minor input from hydroelectric).
And unless those capital goods can be built using strictly their own energy capture then they are not truly renewable, or sustainable for the long term. That is the problem.
We use way too much energy, both collectively and per capita, compared with what we could get in a truly sustainable way, in a time frame necessary to prevent a real crash. There is no way to get there from here. Third is that any policy based on the magical thinking that a new, revolutionary energy source will be found if only we put the right incentives out there for entreprenuers and inventors is going to be dead wrong.
These are the thoughts of people who have never studied science and technology in depth, do not understand the nature of the second law of thermodynamics (as in you will NEVER invent a perpetual motion machine), and who were spoiled by the apparent effects of Moore's law as it works in digital electronics (but not in energy systems).
There will be new technology. There will be breakthroughs that will help. But there will be nothing in the offing that will replace fossil fuels at the current level of demand (I know, never say never; but energy technology is truly constrained by laws that don't leave me with great hope.)
Even if new technologies are forthcoming you still have the scale up, and adoption times to contend with. Believe me, this is a tough nut to crack. I know that this is hard to swallow because of the implications — that the American/Western way of life is coming to an end. But it is time to face reality and start planning for the most likely scenarios.
Rather than trying to jump-start the old consumer, wasteful economy, Obama should be leading the charge to get Americans off the energy splurge we have been on and start dieting ASAP. We have to shed the fat and conserve the raw energy as much as possible.
This is the only way we will be able to have enough fossil fuels to bootstrap a new economy based on true renewable resources. It will mean abandonment of current lifestyles and beliefs about human destiny to be rich. It will require humans to recognize the ways of nature and forego hubris. It will require sapience!
Unfortunately, as I will be revealing in my future post on the evolution of sapience and its likely future, I am somewhat discouraged about the current species' capacity for sapient decision making. More likely, I suspect, that as the contraction gets more serious and people start dying governments will resort to what they always have resorted to in the past. We'll use up the last bits of fossil fuels trying to steal the resources from someone else. But, of course, we'll then not be able to exploit them even if we succeed. More likely we'll just go out with a bang.
See also:
Island Breath: Biophysical Economics
.
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