The problem is not simply fossil fuel emissions, It's fossil fuels, period.

And then we're going to make sure that energy consumption is sufficient for everybody to survive in the economy...

We're going to swap out coal, and solar, or nuclear...

The importance of energy in modelling economic activity, mainstream economists have completely missed the boat on this topic. Sort of calculations economists never do...

What happens to the whole economy? Everybody in the energy industry here, just says, "Of course energy is

key

to the economy..." but they're not doing structured macroeconomic modeling... This blind spot in economic theory, they've left out the most important component... GDP is an accurate measure of the energy needed to do something. So GDP is a very inaccurate measure of welfare. We produce weapons and bomb the of each other. That's part of GDP. But in fact it's a very accurate measure of the amount of energy we're using. So again, it comes back to the importance of energy, economic activity and mainstream economists have completely missed the boat on this topic. Well, I'm here in Austin, Texas with Carey King, who's been a colleague for what, about 10 years now? something like that. Yeah. Yeah. Almost 10 years, You're someone who did a degree in mechanical engineering and is now modeling economics from the point of view of energy consumption. He's published a book on the topic with a provocative title. Right. of the Economic Superorganism. Beyond the Competing Narratives of Energy Growth and Policy. The book is structured around trying to explain there are these things we hear in the world when people talk about energy and I'm calling these the narratives. For example, why fossil fuels are the best or why renewable energy is the best. That's on the energy narratives and on the economic narratives. I pose the ideas of Techno-Optimism and Techno-Realism. So Techno- Optimism is sort of the infinite substitutability idea, infinite growth and Techno-Realism is saying, nope, there's some idea of finite growth and some physical ways of thinking about the economy. And if we put these physical types of relationships into models, we're probably going to do a lot better with our economic models. And the crazy thing is, if you read the original neoclassicals again Marshall and Jevons were the two best examples. Marshall is famous for a claim saying that the mecca of the economists lies in economic biology. By which he basically meant evolution. And what we get out of it, power laws are a phenomenon we see in evolutionary systems. So, and that dynamic systems with feedback as well. So things like the number of earthquakes follows a power law. The scaling of animals follows a power law, but it's a power law with a scale exponent of less than one. So we're doing what Marshall and Jevons saw as being necessary, basing it upon dynamics and evolutionary forces. Meanwhile, the Neoclassicals are trapped in bloody equilibrium. And they've completely lost sight of these processes that Marshall and Co. thought they would be doing. So there's an ironic sense in which if you bring Marshall back to life, what he would see would be extremely familiar with what he actually did, but he'd be equally disappointed because he wanted to go on to evolutionary, and they've never done it. So, you know, in that sense, the true Children of Marshall and Jevons as they intended it to be. And the neoclassicals are the bastard sons and they've taken over the system. We want to get it back. My journey started, when I got back into working at The University of Texas, where I still work now. So you're doing a PhD there? I did a PhD at the University of Texas. Then I graduated and I worked for a start up company trying to make a new kind of flat panel display. But before I went to work for them, I had become interested in just kind of the energy system broadly and understanding how everything fits together from an energy technology standpoint. Quit that after a couple of years, to get into academic research again, and to focus on hopefully energy systems and understanding that. And so my interest started effectively with, Understanding Net Energy Analysis. Like how much energy it takes to produce energy and the whole concept. Energy Return On Investment (EROI). And so I was kind of curious and intrigued about how we have this kind of idea of profitability, if you will, of the energy system. And we have the ideas of cost of energy or dollars per kilowatt hour or dollars per barrel and how people were arguing. You know, how do you compare these? Or are they comparable metrics? What's the cost of wind and solar in the early 2000s or mid 2000s? You know, what's the subsidies are hiding the cost and all these kinds of questions. And I thought, well, shouldn't we be able to understand something fairly fundamental? If we look at the energy flows and what we would call the life cycle assessment or industrial ecology. Eventually, after 4 or so years of kind of doing this and learning that energy analysis and the kind of techniques behind it. You know, people are trying to translate these ideas into what happens to the whole economy. What if we shift to If energy return and energy invested falls. Yeah. And people would, you know, so the premise was, yes, you can't go to biofuels too much because they have low energy return and energy invested. And then all these other things in the economy. Was it Charles A.S Hall who was the first person to develop that concept? So Charle claims to be the person who invented the term. EROI, so energy return on investment. Yeah, yeah, yeah. So definitely, I guess it wasn't the first person to come up with the idea of doing a net energy analysis, which sort of came out, after the 1973-74 oil crisis. That's when some efforts started going into first trying to map energy flows in the economy, just like people would already be mapping monetary flows between sectors. So most of the early methods were using input output tables, but sort of adding energy. into the input output tables economic tables. That was kind of the first methods. So once I kind of became familiar with these methods and then thinking, how do people translate this to the overall economy? If wind and solar or who knows what, you know, people argue whether they do and don't have higher energy return on investment. I started understanding ideas, conceptualizing them. The difference between energy and power became really important. And of course, Charlie and I had many discussions on how I think a lot of times the field is not distinguishing between energy and power enough. In the strict definition of the sense, right? Energy is power integrated over time. So energy equals roughly power times time and power equals energy divided by time. So if we say, yeah, the United States generates something like 4000 terawatt hours of electricity, terawatt hours is a metric of energy. So it's how much electricity is coming out every instant, added up over the entire year. And you get quantity of energy, which is different than to say how much is being generated instantaneously right now, which would be, you know, how many terawatts of power are being generated at any given instant, there would be hundreds of gigawatts of power. Electricity being generated in the U. S. And to take the biofuels, for example, people would say, Oh, you know, some energy for farming, and there's some energy for building the ethanol refinery, and there's some energy for building the tractor at the farm. These kinds of things. And if we say how much energy did the United States consume in a year? Let's just say it's roughly a hundred exajoules now. But it's really kind of like you could say a hundred exajoules per year. The estimates I've seen is that you've got to get at least five times as much energy out as energy in to sustain anything resembling an industrial society. Right. And so Charlie's written a kind of paper on the transportation system there. Let me go back to power and energy. So my point on the oil and gas analysis is, it's essentially a flow, a power divided by power. That's energy per time divided by energy per time. What's happening this year. Whereas the ethanol analysis I described is energy divided by energy. Okay. So there's a question of, should you actually compare these two numbers? This is demonstrably more accurate describing history or future considerations. At some point you just win by demonstration. So that's what I'm Yeah, well the funny thing is, I mean, that's why I like Ty's work so much because he's actually doing it with stuff where they pay money for that, which is the finance sector. Yeah, yeah, yeah. So, yeah, that's, we're not going to make any money out of finance with our stuff yet. the fact that we can actually beat them hands down in simulating what they believe is their province. So that's the one hope we have. So we want to understand effectively, well, what happens if for one reason or another we shift to energy technologies that have lower energy return on investment. Since it's. Energy out over energy in the cost of energy, like dollars per kilowatt hour in some sense, by definition, the inverse. It's the dollar inputs divided by the energy outputs. So, energy outputs of the numerator of cost and energy output is in the denominator of cost, and it's in the numerator of EROI. So that's it. You'd expect there to be an inverse relationship. So that's the one paper I've published with Charles A.S Hall is just kind of doing this for the oil and gas sector in a power sense, and it's sort of a tautology, but I guess it's also useful to go through to see if the pattern matches. And in my opinion, the pattern matched decently well, and it was kind of interesting. But yes, people will pontificate or discuss. Well, what's the minimum EROI of society that will keep it functioning as it is? And, you know, the more you get into it, there's not maybe just one number. and they'll say, well, the structure of society will have to change. And you're like, okay, but how would you know, or how would you be able to describe that? So these kinds of questions led me to come to the conclusion that nobody actually had a structured way to answer this question. Yeah, yeah. And this, this is, in a sense, it's crazy because, when you understand the role of energy. But then my little cliche about, Labor without energy is a corpse. Capital without energy is a sculpture. You can't do anything at all without energy input. And yet economic theory hasn't even considered it yet. So what you're trying to do is to bring in an energy based approach to economics. Right. To explicitly incorporate the concept of energy, at least the first and second law of thermodynamics, at least very directly. So we're here in, Texas, in Austin at the moment. And, you know, everybody in the industry, energy industry here is, just says, of course, energy is key to the economy. No, they understand this cause let's just say a lot of people work in that industry. But they're not doing structured macroeconomic modeling, how to demonstrate that to them. It's not that interesting. Okay, great. Yeah. Let me just go get some more oil and gas out of the ground. The interest academically, the question was how do you go about understanding this, structuring this problem to actually understand it? and if we want to decarbonize, if we make machines less efficient, by definition the energy return on invested of the sort of energy system overall, or those technologies, will go down. And so I published two papers on a basic toy model of harmony, which blend the ideas of basic thermodynamic ideas. You have capital. Capital is a physical thing like mass. if you want to operate the capital, you need fuel input. So we track that. If you want to build more capital, you need materials. So there's a material that becomes the capital. and there's ways to dictate how much people get paid in wages tracks the debt change as you go through a growth cycle. So it has all the basic components that you want to have. At least in my view of an economic model, and it's a system dynamics approach. It's stock flow consistent in terms of the accounting. So I spent, you know, during 2016 until the first paper was published in 2020 was me learning stock flow, consistent accounting and understanding how to make sure I keep track of that. I was like, okay, great. I'll just I'll do that. I'll learn that. So lot of terminology to learn in economics, like engineering or anything. But I spent that time and now I'm trying to calibrate this model framework to the United States. Something that could model, the United States and its real total mass flows, or at least an approximation of the major mass flows, all the energy flows and all the monetary flows. To my knowledge, it might be the first model that does that. I have a long draft paper describing these methods. And how many At the moment is a dual sector model? Yeah, it's a toy model, with two sectors, you have an energy sector and a material sector? no, it's kind of a, generically, Maybe a resource sector. The published paper, the resource is akin to a forest. It has, it can kind of grow back. A resource extraction sector. Job output is the extraction of resources. And then there is a "good sector." The output of that sector is making capital or it's making goods. so you need capital in each sector. You need capital to extract resources and you need capital to make more capital. those are the two sectors. I've done similar work with Matheus Grasselli and Tim Garrett. And I initially wanted to do at least a two sectoral model. And Matheus insisted we had to produce one sectoral model, first of all. And that was an intriguing exercise because, you have energy as the input. Well, energy's got to be the output as well. Okay. And what that meant was that, we ended up with, of course with the concept of EROI automatically coming out of the system. But then the question was, well, how much does, how accurate does that track the global system? And can you really? Abstract from materials and just imagine that what we're doing is consuming energy converted into a more useful form for humanity than we get it in raw form. And the crazy thing was the answer was yes. Because when I looked at the data on global energy consumption, which you get from the OECD has a database on that. And look at the data on global. Gross World Product, GWP, and the World Bank has that. You fit the two together and, you know, the correlation of the two between 1960 and 2020 roughly, for 60 years of data, it was 99 blah blah blah, but that alone, you know, you've got two increasing trends so they're likely to rise. When we do the change in global gross world product and the change in world energy consumption correlation is 86 or that converted to is the efficiency of converting energy from its initial form into a useful form was 0. 25 So rather than being arbitrary, we're now showing there's actually a legitimate foundation for the capital output ratio as the efficiency with which machinery turns energy into useful work. And equally, the one thing I find people. forever saying GDP is a shithouse measure of wealth, but GDP is an accurate measure of the energy needed to do something. So the classic example people give is, you know, if you have a car accident, that adds to GDP because an ambulance has to come and take the person off to a hospital and the car off to be rebuilt, yada, yada, yada. Well, in fact, okay, it might be a bad measure of welfare, but it's a very accurate measure of energy concern because you've got to have energy for the ambulance to get to the site. Energy for the tow truck driver to drag the, chassis off to be repaired, energy to rework it and so on. So GDP is a very inaccurate measure of welfare. What we actually use, you know, we produce weapons and bomb the shit out of each other. That's part of GDP. but in fact it's a very accurate measure of the amount of energy we're using. So again, it comes back to the importance of energy. In modeling economic activity and mainstream economists have completely missed the boat on this topic. And did you realize that yourself before you met up with me and Bob and stuff like that? I think I had some hints. I don't really remember the history of what I was thinking that well in terms of economic growth. But it became, you know, I was reading critiques and seeing the sort of general. Cobb-Douglas or Solow Growth Model I was thinking, well, I'm not sure what do I do here to put an energy and then everybody would add an energy piece to it. And, as a factor of production and so your capital ,labor and energy is independent factors of production. And of course, Bob Ayers did some of that and he put in useful work as the factor. And, some of the work from, Tiago Domingo. has investigated this further, and it's got his opinions on, what's an input and what's an output, to the factor of production. My sort of conclusion was that, well, what makes sense to me, at least, is I want to have at least a two sector model. And at any given instant, there's a factory, it's got a certain set of machines in it, these machines are meant to run on electricity or natural gas. So, at this instant, There is no other choice for them. If they went to run, they need to take this fuel inputs at their, designed rate of input. and so over time, yes, you could change, you could put in a new machine, you could change the fuel or something. But at this given instant, you have no choice. This ratio of how much energy for this unit of capital is like, well, that's what I'm simulating. I'm simulating each instant in time dynamically, and I could change the parameter for how much of this type of fuel. Is needed to run this machine as you know, if that makes sense for understanding some transformation of the economy, but that transformation can only occur if I invest in a new machine and that's a separate part of the model, right? Do you invest in new machines or not? Okay, typically you do. And pretty much anybody's macro model, I guess. So that's the way to make technology change and to talk about it. Substitution is to change the, the coefficients of the Leontief not to change some sort of not to assume that there's this substitution between labor and capital and energy, but to be a little bit more specific. Well, most economists would know Jevons and think of him as a founding father of neoclassical economics, but he's also polymath of sorts. And he noticed this relationship that when you had a new source of energy, rather than replacing an old source of energy, it was added to it. And therefore the energy consumption went up. I just recently used the coal question, in a critique of a modern neoclassical. This is a sign of the extent to which the The discipline has failed over time because Jevons, when he was trying to explain why growth UK, his instant answer was coal. We had lots of coal, we learned how to burn it, and that's what gave us growing GDP. Fast forward to a modern neoclassical, a guy called Daniel Suskim at, King's College, he has a book called Growth A Reckoning. And coal, I think, turns up about a hundred pages in. And everything, his explanation of why we've had more growth is ideas. We've had more ideas. And in fact, it was almost like a reverse of Hitchhiker's Guide to the Galaxy. Because he said, back in the old days, we used to ask the big questions about life, the universe, and everything, you know. And that was interesting philosophical stuff, but it didn't really improve people's lifestyles. And then we got to the 1700s, we asked ourselves questions about, how do we make more stuff in factories? And that's what's caused growth. And he's completely ignoring the role of coal. You know, and so if you look at the founding father of neoclassical economics, who's absolutely aware of the need to include energy to explain what had happened with economic growth, was this guy, you know, one and a half centuries later, it's ideas, it's all up here, you know, it's in their heads. I suppose the difficulty is that some combination of both in my process, I think. Yeah, well you have to, it wasn't ideas in general. It was ideas about how to get energy out of coal. Yeah, yeah. and the make work out of burning coal. Who was the first, I've forgotten the name of the first steam engine, the The Newcomen engine. Yeah. And that basically did the, Expansion and condensation in one cylinder, and then what worked out was by having a separate cylinder to condense condensation, you could dramatically improve the efficiency with which you generated the steam. so about 40 or 50 years of steam engines, but they're fairly inefficient. And what comes along, and it's just, he actually perfected it, I think, almost at the same time as the publication of the Wealth of Nations. What you've got, though, is economists look at division of labor as a source of increasing productivity. And what White found, what he did, was increasing energy as the source of greater productivity. So again, there's this blind spot in economic theory that have left out the most important component. Anybody says Jevons Paradox isn't a thing I really just pose the question to them. Okay, have we been making more energy efficient devices over the last 100 or 200 years since industrialization? And the answer is, of course, yes, because it's starkly obvious. Nobody, almost no one is selling a less efficient device. and say, okay, do we have a higher rate of energy consumption a hundred years ago or a lower rate? Yeah. And the answer is high. Do we have more capital and stuff or less? More. Do we have more people or less people? More. Okay, so if your economic model doesn't have that output by changing the efficiency of using energy, then your model is probably wrong. Yeah. Or you can't describe the way the world worked. And then they turn into homes and cars and buildings and roads. Physical life they're all, yeah. Actually the mass of the economy? The mass of the economy seems to scale pretty much one to one with GDP, which means that now it's even not so much an analogy between energy consumption and mass of animals. Now we can plot energy consumption and mass of the economy and they show the same thing. Wow. Yeah. So that's pretty, pretty interesting to me. Insight number three is I call it enhanced interpretation of decoupling resource consumption from GDP. So how do we understand the idea of decreasing? primary energy consumption per unit of GDP or relative decoupling. We say, we tell ourselves we're trying to do it. Yeah, consciously. It's a good bullshit story. Unconsciously. And that a lot of strategies for decarbonizing, for example, are just saying, well, what if we get, just get more efficient and we'll consume less energy? And then ceteris paribus, if we consume less energy, there'll be less greenhouse gas emissions. Of course, insight number one says that's not what happens. And the data. Unless we actually force it, which we're not doing. Well, you have to restrict. Yeah. Yeah. That's it. The normal people say, well, what would we do then? I was like, well, you actually have to restrict the profits that you get from the energy efficiency. And the, whatever you do with those profits have to go into something besides building another machine. Yeah. Well, you've got to say that, you know, there's a target energy consumption per head. We're going to swap out coal and swap in solar or nuclear and then maintain. And then we've got to make sure that energy consumption is sufficient for everybody. to survive in the economy. Sort of calculations economists never do, but we're going to be forced into. The question is, why would workers lose bargaining power when energy is no longer increasing? Like, is that a coincidence? Is there a causal factor? Yeah, and so that's a hypothesis, I don't know how to prove or disprove it, would be, once you reach this peak oil situation, and, for a little more history lesson, if you want to go into it, the Texas Railroad Commission. From the 30s until the 70s essentially, dictated the price of oil by, effectively prorating or having a command over the oil producers in Texas by, instructing them how much, at what rate they were allowed to extract oil. And actually the ministers of OPEC learned from the Texas Railroad Commission How to control the price of oil by controlling the rate of, okay. Yeah, so, and so, so effectively Texas and the Railroad Commission was dictating the price of oil. Once you get to the 1970s, early 1970s in peak oil, they're effectively telling people just produce as much as you can. You think you're getting the answer. We read the reports. They're informing the IPCC process, but the models actually aren't doing what people think they're doing. And so they said, okay, well, I said, I know some people that are getting pretty close and we're on the right track. So they funded some workshops for us to get together and start to think about how we can work as a group and keep some momentum going about making the model the sort of ideal type of model that we need to actually answer questions with real dynamics, real debt in the market to think about things like stranded assets, debt feedbacks and energy depletion feedbacks and real resource feedbacks on batteries and solar and wind technologies that we're going to need. All right, mate. I've had a lot of fun. Okay, If you're like many other trend seekers and want to learn 50 years of real economics from me in only 7 weeks, you'll love my new 7 week Rebel Economist Challenge as well. To apply, go to apply. stevecainfree. com. If you qualify, you can attend my lectures, ask me questions personally every week, and make friends with a great group of like minded people. 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