Pernicious Dystopian Myth, October edition

Try to fill in the blanks (I know, I know, this kind of boilerplate crosses my eyes every few weeks as well, so it could truly be anything ... but this is from a very legit news organization, seriously).

They hope that a set of theories they call "________ economics" will improve upon neoclassical theory, or even replace it altogether.  But even this nascent field finds itself divided, as evidenced by the vigorous and candid back-and-forth debate last week over where to go next. One camp says its models prove the world is headed toward a dramatic economic collapse as ________ takes hold, while another camp believes there is still time to turn the ship around. Still, all ________ economists see only very bleak prospects for the future of modern civilization, putting a whole new spin on the phrase "the dismal science."

Your choices are:

A. Singularity / technological acceleration and automation
B. Rawlsian / globalized labor arbitrage
C. Heterogenous / insolvent overconsumption  
D. Biophysical / energy scarcity

Skip below to the see the answer ...

 

 

 

 

The answer is D.  And it comes from the New York Times, hat tip Free Exchange / Tyler Cowen. And here's more:

In 1926, Frederick Soddy, a chemist who was awarded the Nobel Prize just a few weeks before, published "Wealth, Virtual Wealth and Debt," one of the first books to argue that energy should lie at the heart of economics and not supply-demand curves.

Soddy also criticized traditional monetary policy theories for seemingly ignoring the fact that "real wealth" is derived from using energy to transform physical objects, and that these physical objects are inescapably subject to the laws of entropy, or inevitable decline and disintegration.

The sharpest difference between biophysical economics and the more widely held "Chicago School" approach is that biophysical economists readily accept the peak oil hypothesis: that society is fast approaching the point where global oil production will peak and then steadily decline.

Let's take this seriously, and take it apart carefully.

1. I suspect a great many economists agree with the notion of peak oil, and it is a question of when and how, not if. Given a finite energy source and its increasing usage rate, will it deplete? Yes. The more interesting question is what happens to oil prices, and here I think neoclassical supply & demand is a great tool to understand the consequences.

2. Just labeling your straw man as the "Chicago School" is not much of an argument. Please. Stop.

3. The core argument of BPE is that all economics, and hence economic growth, is about physical goods. That all wealth, all consumption, all value comes from physical things and their production.  This takes energy. And since energy is finite, QED, there is a thermodynamic limit. I think there are four problems in that chain of logic. (1) efficiency in energy consumption will continue (see Obama, smart energy grid), (2) efficiency in goods consumption is a dominant trait of economic growth, and impossible to violate (see the fixed quantity of atoms on Earth, endogenous growth theory, Paul Romer), (3) services are non-physical and an expanding component of GDP (see Poetry, Music, Medicine, Art, Athletics ...), (4) the Sun's energy is finite but not in our time horizon (see Sun).

4. Before the hate mail starts rolling in, keep in mind that I am a member of the Pigou Club. I'd love to see the U.S. replace taxes on labor with taxes on energy. It would do the world a world of good. And help economic growth! 

Comments

[Anonymous]

BPE is not about physical goods as you try to pigeon-hole it, but rather returns to energy. If an activity (including services) requires more energy than what is received from doing that activity, the performer of said activity can't survive. If the energy expending doing your job (whether a poet or an iron smith) doesn't bring in enough income to buy food, shelter, and other energy needs to survive, you're going to have a rough time.

BPE doesn't argue against efficiency gains, but that current trends in efficiency gains and diminishing return on investments suggest that energy consumption becomes more difficult in the long-run given a decreasing supply of energy (in this case oil). The discovery of a new source of energy (see hopefully viable fuel cell technology and hydrogen in the future) radically changes any projected limits.

Statements like 3(2) are dangerous. Efficiency in goods consumption is [emphasis] impossible to violate? Impossible? 100% not possible?

This is a generic statement that can be discredited in a number of ways depending on what your intent was.
Goods can certainly become bloated and inefficient. Organizations certainly can, and products certainly can. The efficiency of consuming a given good can be inherently inefficient (see historical MPG ratings of the U.S. automobile industry--hint:think SUVs in the late 90s) or negatively impacted by the production (or attributes) of the good.

[Tim Kane]

Thanks Anonymous. Here's the point: there are a fixed number of atoms in the world that we organize and account for each year in terms of value. In year 1, we say the GDP of arranging all those atoms is N dollars. In year 2, it is (1+g)N dollars where g > 1. That's growth, and by definition an efficiency in dollars per atom. The weight the economy is the same as it was when GDP was 90 percent smaller, even 99 percent smaller. Mass is constant, value is limitless. And I really don't buy that virtual services use anywhere near equivalent energy to produce as physical goods.

If BPE is saying (a) the world is running out of oil and (b) that oil will become much more expensive, that's a neoclassical argument and who could disagree? But it is trying to also say (c) therefore modern civilization ends because energy prices rise, which is thoroguhly unconvincing. There are already alternative energy sources, but they are marginally more expensive. Alternatives will ramp up quickly as oil prices rise, something I think my fellow greens will cheer.

[louis vuitton]

The comments seem to be talking all around the question but not addressing the heart of the entreprenurial debate. The issue should be: How to get state capital around the financial logjam and into the hands of the entrepreneur.

[replica watches]

The battle of ideas is not won or lost in Congress, or even in elections, but in the long assessment of history. Just ask Qeng Ho