The Not-So-Simple Role of Energy in the Economy

Last week Tim wrote about a New York Times story on "biophysical economics," a small but apparently growing group of scholars who seek to make economics more in tune with the laws of thermodynamics and energy use. Several blogs linked to the story, which I take to mean that this line of thinking was somewhat new to the economic blogosphere. Many of the ideas put forward by these thinkers, however, are not new and if you happen to be interested in things like "net energy" and "energy return on investment" (EROI) and the continuing viability of civilization, you would not have been too surprised by the story.

Tim used the story as the latest installment in his "Pernicious Dystopian Myth" series, which I wholeheartedly applaud and periodically endorse. But for the sake of intra-blog dialogue, I was a bit confused by some of Tim's points. To recap: Tim says "efficiency in energy consumption" will continue," "efficiency in goods consumption is a dominant feature of economic growth," and that since services are less physical than goods, we should expect a less energy-intensive economy.

Let's take these in reverse order. First, services have never been a smaller share of the United States economy than manufacturing. This goes all the way back to 1789. Services have always been an important part of the economy, so it's not necessarily true that more and more services (there has to be a ceiling on this, one would think) will lead to a less energy-intensive economy. Furthermore, services are not necessarily more friendly toward energy efficiency. One of the great ironies of the "intangible" new economy is that many of things techno-utopians like to laud as transformational (the Internet, Web 2.0 companies, software startups, etc) are fundamentally dependent on something as physical as energy. Specifically, electricity and thus coal and water and nuclear power. The computing cloud that is a favorite futurist topic would not exist but for ways to generate electricity. Thus, we have no choice but to remain focused on energy use and extraction and efficiency, notwithstanding our so-called intangible services economy. 

(As an aside, something as cutting edge as IBM's push into services science recognizes the enduring physicality of many service systems.)

Second, yes, efficiency in goods consumption has been a mark of economic growth. This doesn't mean it will continue to be. More deeply, some research does show that we have had to use more and more energy (as well as debt, a subject for another day) to generate incremental increases in economic output.

Tim's third assertion was that energy efficiency in general will continue. Efficiency here is a slippery term; the biophysical economics crowd, as noted in the NYT story, focuses on something called the energy return on investment (EROI), which basically measures the cost-benefit ratio for energy production and consumption. What is the marginal energy return on increasing investments in energy generation? You could still see positive efficiency even if the EROI is narrowing. And, in fact, mounting research does indicate that, at least when it comes to petroleum, the EROI has been falling. We are expending more and more energy to extract energy: the marginal return is falling. So even if "efficiency" appears to continue, it doesn't mean everything is fine and dandy.

In fact, there is nothing dystopian about saying that, pending a negative EROI on the source of energy that makes the world economy run, we are in for a rude awakening when it comes time to transition to whatever comes next. (Natural gas?) It might actually help if the biophysical economists made some headway and expanded the purview of economic analysis to include the things that actually make the economy go. (In this vein, Steven Johnson's latest book, The Invention of Air, includes some delightfully pithy observations about the sometimes invisible, sometimes ignored, connections between what is in the ground and what occurs in the human economy.)

So anyway, Tim's right that pessimism can go too far. But that doesn't mean pessimism is unwarranted.

Comments

[louis vuitton]

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.

[Thermalean]

Thanks for the amazing post, Now I will read time to time that...