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Deep thought and economics - Nov 7

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Capitalism and the Curse of Energy Efficiency:
The Return of the Jevons Paradox

John Bellamy Foster, Brett Clark, and Richard York, Monthly Review
The curse of energy efficiency, better known as the Jevons Paradox—the idea that increased energy (and material-resource) efficiency leads not to conservation but increased use—was first raised by William Stanley Jevons in the nineteenth century. Although forgotten for most of the twentieth century, the Jevons Paradox has been rediscovered in recent decades and stands squarely at the center of today’s environmental dispute.

The nineteenth century was the century of coal. It was coal above all else that powered British industry, and thus the British Empire. But in 1863 the question was raised by industrialist Sir William George Armstrong, in his presidential address to the British Association for the Advancement of Science, as to whether Britain’s world supremacy in industrial production could be threatened in the long run by the exhaustion of readily available coal reserves.1 At that time, no extensive economic study had been conducted on coal consumption and its impact on industrial growth.

In response, William Stanley Jevons, who would become one of the founders of neoclassical economics, wrote, in only three months, a book entitled The Coal Question: An Inquiry Concerning the Progress of the Nation, and the Probable Exhaustion of Our Coal-Mines (1865). Jevons argued that British industrial growth relied on cheap coal, and that the increasing cost of coal, as deeper seams were mined, would lead to the loss of “commercial and manufacturing supremacy,” possibly “within a lifetime,” and a check to economic growth, generating a “stationary condition” of industry “within a century.”2 Neither technology nor substitution of other energy sources for coal, he argued, could alter this.

Jevons’s book had an enormous impact.

... Yet Jevons was stunningly wrong in his calculations. It is true that British coal production, in response to increasing demand, more than doubled in the thirty years following the publication of his book. During the same period in the United States, coal production, starting from a much lower level, increased ten times, though still remaining below the British level.5 Yet no enduring “coal panic,” due to exhaustion of available coal supplies, ensued in the late nineteenth and early twentieth centuries. Jevons’s chief mistake had been to equate the energy for industry with coal itself, failing to foresee the later development of energy substitutes for coal, such as petroleum and hydroelectric power.

... But there is one aspect of Jevons’s argument—the Jevons Paradox itself—that continues to be considered one of the pioneering insights in ecological economics.8 In chapter 7 of The Coal Question, entitled “Of the Economy of Fuel,” Jevons responded to the common notion that, since “the falling supply of coal will be met by new modes of using it efficiently and economically,” there was no problem of supply, and that, indeed, “the amount of useful work got out of coal may be made to increase manifold, while the amount of coal consumed is stationary or diminishing.” In sharp opposition to this, Jevons contended that increased efficiency in the use of coal as an energy source only generated increased demand for that resource, not decreased demand, as one might expect. This was because improvement in efficiency led to further economic expansion.

... British hegemony, rather than ecology, lay at the bottom of Jevons’s concerns. Despite the emphasis he placed on resource scarcity and its importance for ecological economics, it would be a mistake to see The Coal Question as predominantly ecological in character. Jevons was unconcerned with the environmental problems associated with the exhaustion of energy reserves in Great Britain or the rest of the world. He even failed to address the air, land, and water pollution that accompanied coal production.

... ndeed, there was in Jevons no concern for nature as such. He simply assumed that the mass disruption and degradation of the earth was a natural process. Although the shortage of coal, as an energy source, generated questions in his analysis about whether growth could be sustained, the issue of ecological sustainability itself was never raised. Because the economy must remain in continual motion, Jevons disregarded sustainable sources of energy, such as water and wind, as unreliable, limited to a particular time and location.26 Coal offered capital a universal energy source to operate production, without disruption of business patterns.

Jevons therefore had no real answer to the paradox he raised. Britain could either rapidly use up its cheap source of fuel—the coal on which its industrialization rested—or it could use it up more slowly.

... The Jevons Paradox was forgotten in the heyday of the age of petroleum during the first three-quarters of the twentieth century, but reappeared in the 1970s due to increasing concerns over resource scarcity associated with the Club of Rome’s Limits to Growth analysis, heightened by the oil-energy crisis of 1973-74. As energy efficiency measures were introduced, economists became concerned with their effectiveness. This led to the resurrection, at the end of the 1970s and the beginning of the 1980s, of the general question posed by the Jevons Paradox, in the form of what was called the “rebound effect.” This was the fairly straightforward notion that engineering efficiency gains normally led to a decrease in the effective price of a commodity, thereby generating increased demand, so that the gains in efficiency did not produce a decrease in consumption to an equal extent. The Jevons Paradox has often been relegated to a more extreme version of the rebound effect, in which there is a backfire, or a rebound of more than 100 percent of “engineering savings,” resulting in an increase rather than decrease in the consumption of a given resource.30

Technological optimists have tried to argue that the rebound effect is small, and therefore environmental problems can be solved largely by technological innovation alone, with the efficiency gains translating into lower throughput of energy and materials (dematerialization). Empirical evidence of a substantial rebound effect is, however, strong.
(November 2010)
Good exposition of an important concept. -BA

China pulls back from US Treasuries; buys hard assets instead

Leslie P. Norton, Barrons
THIS YEAR, FOR THE FIRST TIME EVER, China has been investing more overseas in assets like iron, oil and copper than it puts into U.S. government bonds.

China in this year's first half spent $31 billion on hard assets, compared with $23 billion on Treasuries and other U.S. government bonds. Experts say China's investments in each of these asset classes will total about $55 billion for the full year. But even a tie marks a major turnaround from China's previous practices. For many years, the mainland spent next to nothing on hard assets abroad, while its purchases of U.S. government debt ranged as high as $100 billion a year.

Why does China now have such a voracious appetite for hard assets? The most frequently cited reason is its need to feed its rapidly expanding industrial base. True enough. But it's also important to see China's reduction in Treasury purchases and its sharp increase in hard-asset deals as part of its currency strategy.

... In the face of such a weak dollar, it doesn't make much sense to keep investing heavily in Treasuries or any other dollar-based asset. The annual interest payments can easily be outweighed by the loss in the dollar's value. There are serious concerns in Beijing, too, about the creditworthiness of U.S. debt. The smarter bet is to invest in assets that are likely to hold their value, or even increase in value, as the dollar continues its slide.

Iron ore in Sierra Leone. Mines in South Africa. Coal and gas in Australia. Oil in Brazil and Venezuela. Even Canada's timber industry is reviving as a result of demand from China. Just last week, China jacked up estimates for how much uranium it will need for nuclear power plants

... For its part, China must maintain a balance between investing wisely and making sure the U.S. remains economically healthy enough to absorb Chinese exports. That consideration will become less important as China further expands its own domestic market and becomes less reliant on exports.
(6 November 2010)
Also at Marxmail.

The end of the world. That is, the end of the world we’ve known since WWII

Fabius Maximus
Summary: A status report about the end of the post-WWII world. The great recession has accellerated the process, revealing its weaknesses and showing the people of the rapidly growing emerging nations that they have outgrown it. The US is almost its lone defender, a futile effort wasting time and resources that could be spent adjusting to the new world being born.

The post-WWII era slowly winds down, slowly but noisily. It consists so far of two sets of interrelated dynamics. First, a reversion to the mean of history: the center of economic power returns to the East, ending a few hundred year long aberration.

  • The economic and political regimes of the developed nations (US, Japan, Europe) are failing under pressure of aging demographics and their accumulated public policy errors.

  • Growth in the Emerging Nations (EM’s) is accelerating as they adopt modern social and technological patterns.

Second, the foundations of the post-WWII’s geopolitical and financial regimes are washing away:

  • western leadership, with the US and Russia as hegemonic powers,

  • US dollar as the reserve currency,
  • free trade, and
  • (since 1970) free capital flows between nations.

How long will the transition take?

Large transitions take one or even two generations. The long peace (1815-1914) was the greatest period of peace and prosperity in recorded history. The transition which followed, 1914-1945, was painful. Poverty during the Great Depression. Megadeaths from two world wars and several civil wars, and a plague (the 1918 flu).
(7 November 2010)

A New Economics for the 21st Century

Neva R. Goodwin, New Economics Institute
Forthcoming in World Futures Review

The critical role for economic theory is no longer simply to explain how the existing system works, but also to explore how the economic system can be changed to become more adaptive and resilient in the face of the challenges of the 21st century, and how it can be more directly designed to support human well-being, in the present and the future. Simultaneous changes are needed, in both the actual economy (how it functions, by what rules, how it can be made responsive to constraints) and also in economic theory.

The economic theory that was accepted as standard in the non-communist world during the second half of the twentieth century erects serious impediments to meeting the challenges of the twenty-first century. These impediments include:

  1. Inappropriate goals: standard economic theory prizes wealth creation above all, and most often defines this goal in terms of steadily growing GDP – instead of focusing on what economies should really produce, which is human well-being, in the present and the future.

  2. A bias toward monetary values: application of cost/benefit analysis or a focus on narrow measures of economic success often lead to an effort to apply monetary measures to human values, such as dignity, health, or fairness. The focus on what can be submitted to the measure of money leads to an overemphasis on formal markets, and pays insufficient attention to essential unpaid economic activities.
  3. Difficulty in dealing with the future: the standard use of discounting often leads to conclusions that make future concerns appear less significant than they are.
  4. A de-contextualized view of the economy: economic systems are viewed as operating in a vacuum, without regard for the critical ways in which the economy affects, and is affected by, its ecological and social contexts.
  5. Bias toward the status quo: a number of tools and concepts used in economic analysis accept the existing distribution of resources as “given” – not really up for discussion. These include the concepts of Pareto optimality, aspects of the Coase theorem, and a focus on aggregate growth indices at the expense of disaggregated inequality indicators. The strong assumptions of rationality at the root of the theory often are used to assert that the existing system is the best possible; if it could have been made better, it would have. (This is the basis for the joke about the economist who walks past a ten dollar bill lying on the sidewalk. When asked why, he says “it couldn’t have been real; if it were, someone would have already picked it up.”)
  6. Bias against the public sector and in favor of markets: economists, business people and politicians have joined in a chorus of disparagement against government, buttressed by an increasingly blind, but fervent, belief that markets can solve all problems. In fact, while markets can be a part of the solution to many human needs, they rarely can be the whole solution. Markets need boundaries, rules, and safeguards against their internal tendency toward concentration of power and their lack of internal motivation to work for the wider good. In many situations markets are, in fact, the problem. Some attention to environmental concerns has led to the idea that, if there are market failures, they can be corrected by internalizing externalities. It needs to be emphasized that market actors have no inherent incentive to do this: that incentive has to come from outside the market system.
  7. Methods of analysis that exclude non-economists: Students, policy makers, and other citizens frequently complain about economists’ increasing reliance on highly mathematized modeling techniques. These require extreme simplifying assumptions – such as perfect competition, perfect information, and complete markets – and create a mindset reluctant to grapple with issues that are not amenable to such modeling. Meanwhile, the very sophistication of the mathematics used in these models means that fewer and fewer people can participate in an ever more obscure – and less relevant – discourse.

In order to redirect economics to be more useful, and more truly reflect the world we now face, a good starting point is to go back to the goals that are embedded in economic thinking. Here it is useful to make the distinction between intermediate and final goals. Final goals are ends that are worth achieving in themselves, while intermediate goals are pursued because they are expected to contribute to the final goals.

As final goals for any economy I would propose two overarching concepts. The first is well-being and equity in the present. A successful economy will maintain or increase human well-being especially among those who now lack the essentials for a healthy life. The second is productive capital for the future.
(October 2010)
About Us:

The New Economics Institute is working to make the new economics, one which supports people and planet, mainstream in the United States. Our current economic system is failing in its essential purpose: to provide fulfilling and healthy lives for all people while nurturing the social and natural systems on which the economic system depends. The New Economics Institute is helping people imagine the kind of economy that is designed to enhance human well-being and ecological health. To do this, it is forging a narrative and theory of such an economic system, showing how it is possible to get from here to there. It is setting out a new language for economics, which describes the world more effectively, and – using a combination of cutting edge economics and innovative communications – it is explaining how this new economics is already emerging.

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