Thursday, October 9, 2014

Infinite Exponential Growth: The religion of modern "economics" and blowing steam up your ass

Perhaps one of the most difficult aspects of writing about the obvious limits to growth we're encountering is trying to clearly describe the difference between infinite exponential growth, and limited linear growth. True believers in the infinite growth model supposedly fuelled by infinite fiat currency often try to use linear models to justify their claims which might sound good until you fully examine exactly what it is they're saying, and exactly what it is they're claiming often to discover that the evidence provided doesn't back the claim.

The other day I came across an article by Paul Krugman where he uses an example of "slow steaming", a process enacted by cargo ships following the spike in oil prices in 2008, to attempt to show that you can indeed "produce" more for less. His example sounds great taken out of the context of the larger macro economic implications and ignoring externalities. Let's take a look:
After 2008, when oil prices rose sharply, shipping companies — which send massive container ships on regular “pendulum routes”, taking stuff (say) from Rotterdam to China and back again — responded by reducing the speed of their ships. It turns out that steaming more slowly reduces fuel consumption more than proportionately to the reduction in speed.

So what happens when you switch to slow steaming? Any one ship will carry less freight over the course of a year, because it can do fewer swings of the pendulum (although the number of trips won’t fall as much as the reduction in speed, because the time spent loading and unloading doesn’t change.) But you can still carry as much freight as before, simply by using more ships — that is, by supplying more labor and capital. If you do that, output — the number of tons shipped — hasn’t changed; but fuel consumption has fallen.

And of course by using still more ships, you can combine higher output with less fuel consumption. There is, despite what some people who think they’re being sophisticated somehow believe, no reason at all that you can’t produce more while using less energy. It’s not a free lunch — it requires more of other inputs — but that’s just ordinary economics. Energy is just an input like other inputs.
Interesting isn't it? I tell you, this is a doozy and for someone not versed in energy economics it probably sounds pretty convincing but let's take a closer look.
 
First of all, notice the huge jump in language: Here he is talking about shipping product - not producing product - yet his conclusion is "no reason at all that you can’t produce more while using less energy" yet examining the energy used in the actual production of the product being shipped is mysteriously missing. How exactly do you produce more without utilizing more resources to do it? It's pretty simple, you don't. But when it comes to his argument and the glaring holes in it this is just the tip of the ice berg and you don't have to be very "sophisticated" to figure this stuff out.
 
His second big glaring hole in his argument is where he then goes to say: "But you can still carry as much freight as before, simply by using more ships — that is, by supplying more labor and capital. If you do that, output — the number of tons shipped — hasn’t changed; but fuel consumption has fallen.". So you get that folks? If you go a little bit slower but deploy more ships, more capital, and more labour, you can carry the same amount of cargo. So three "mores" to get the "same" and supposedly this proves you can do "more" with "less"? Perhaps in terms of the energy consumption of each individual ship itself but when you aggregate all of the additional inputs required (such as the energy and materials to build even more ships to ship the same amount of cargo) you're not really doing more with less at all now are you?
 
Krugman dismisses this inconvenient truth by saying "It’s not a free lunch — it requires more of other inputs — but that’s just ordinary economics. Energy is just an input like other inputs.". Of course what he doesn't say is that all of those other additional inputs also require energy, at the end of every point in the supply chain is energy and resources so to say other inputs are like energy isn't very accurate as those other inputs likewise have their own inputs and at the very tip of all of them is energy. You must aggregate the energy demand from the entire supply chain to prove a gain. More capital, more labour, more materials translates to more energy required just simply coming from different places. As we discuss often on this blog, and as my readers should know, capital or currency simply represents spent energy. Your paycheque represents the energy you exerted during your working hours. All capital represents energy and all transactions are an exchange of energy thus "more capital" is directly equivalent to more energy that's either been already spent or has been borrowed from the future.
 
The third issue with his argument is he doesn't describe the scale of growth at all. His assertion is that should this shipping company want to continuously expand they will continuously find new energy efficiencies that either match or exceed the demand for growth which is of course a ludicrous assertion. The reality is you can only enact "slow steaming" once and once implemented the savings are made and all future demands for the company to grow will put more aggregate demand on their base energy usage thus for Krugman's assertion to be true for the company to scale infinitely larger their energy usage would have to scale infinitely smaller which is just pure insanity. Eventually the energy usage will be as efficient as efficient can be unless Krugman is also claiming that one day in the future we'll be able to ship many times the product we do today using no energy at all. At some point, even with energy savings, some energy must be spent to ship the product due purely to physics and when that point is reached any additional product the company would want to ship will add additional demand to energy usage and as mentioned before this example just covers the shipping of product already produced; for a shipping company to ship more product that product must exist which itself requires energy and resources to create.
 
The fourth issue with his argument is a little theory called "Jevon's Paradox".
In economics, the Jevons paradox (/ˈɛvənz/; sometimes Jevons effect) is the proposition that as technology progresses, the increase in efficiency with which a resource is used tends to increase (rather than decrease) the rate of consumption of that resource.[1] In 1865, the English economist William Stanley Jevons observed that technological improvements that increased the efficiency of coal-use led to the increased consumption of coal in a wide range of industries. He argued that, contrary to common intuition, technological improvements could not be relied upon to reduce fuel consumption.[2]

The issue has been re-examined by modern economists studying consumption rebound effects from improved energy efficiency. In addition to reducing the amount needed for a given use, improved efficiency lowers the relative cost of using a resource, which tends to increase the quantity of the resource demanded, potentially counteracting any savings from increased efficiency. Additionally, increased efficiency accelerates economic growth, further increasing the demand for resources. The Jevons paradox occurs when the effect from increased demand predominates, causing resource use to increase.[2]
So let's take the example of this shipping company and let's say you're in charge of it. Now that you have discovered slow steaming which (excluding the "other inputs") has reduced your operation costs, what do you do? Do you say "thanks for the savings we're going to keep shipping the same amount"? Or do you say "now that we can ship more for less we have gained additional capacity to ship more"? Well for the company, and economy, to have growth they're going to have to expand and thus any company interested in "growth" is going to redeploy those saved resources in their efforts to expand. If the company gets a 50% cost saving then they will have gained 100% more capacity now able to double the amount of product shipped with the same amount of inputs. Being that the economy demands expansion, which is growth, it is inevitable that any energy saved by increased efficiency will be spent by expansion.

This sort of example extends all the way down to households: let's say that out of nowhere the cost of food for you is cut in half, is it more likely that a household will cut its food budget in half, or is it more likely they will deploy the same amount of resources either on more food, or higher quality food? It's easy for a family to expand their lifestyle, not so easy to contract it, and expansion tends to be the default when the extra capacity for expansion is made available.

If you look at the last 100 years of human development this is very evident. We have gained incredibly in energy efficiency yet energy usage has never been higher, and the more efficient we become the more energy we use. Krugman's example doesn't examine the likely results of the energy gains simply assuming that the amount the company decides to ship will just stay the same forever (which isn't growth at all, now is it?).

The fifth problem in his argument is that claiming a little bit of energy efficiency translates to a justification of infinite growth ignores all of the other types of inputs required. It ignores the heavy droughts in California and Texas where entire towns no longer have drinking water and which is severely hindering agriculture and other industrial processes such as fracking. It ignores peak oil (and peak everything) where energy efficiencies being made come nowhere close to offsetting the rapidly rising cost of extracting the oil (and other resources) in the first place. It ignores the 99% fit between GDP growth and resource consumption as shown by Chris Martenson.

Finally, Krugman doesn't touch the exponential nature of GDP growth using an example of linear growth to justify it (increasing "production" directly relative to energy efficiencies gained). The nature of GDP growth is exponential, so when we say the economy grew "1%" last quarter it might not sound like much but that 1% is relative to the size of the economy. A multi-trillion dollar economy requires hundreds of billions to achieve even a small percentage increase in growth which can easily dwarf a multitude of total production from the previous years leading up to it.

I don't think you have to be very sophisticated to get this stuff as Krugman claims those who discuss limits to growth must be, you just have to have a very basic understanding that nothing in the history of the planet has ever grown forever so why on earth would we ever believe we can buck that trend now? It's a finite planet, with finite resources, claiming they won't run out (or more accurately that we will continue having the excess energy (aka. affordability) needed to extract them) is just stupidity. Krugman's "slow steaming" argument is just blowing steam up your ass.

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Richard Fantin is a self-taught software developer who has mostly throughout his career focused on financial applications and high frequency trading. He currently works for eQube gaming systems.

Nazayh Zanidean is a Project Coordinator for a mid-sized construction contractor in Calgary, Alberta. He enjoys writing as a hobby on topics that include foreign policy, international human rights, security and systemic media bias.

5 comments:

  1. Well done Richard. Krugman really did not think this through. Krugman has never quite grasped the notion of perpetual, exponential growth in a finite world.

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    1. The notion of exponential growth is taught in high school. Not difficult to grasp. Krugman won a Nobel Prize for his work on international trade (obviously more heady stuff.)

      GDP-per-capita was about $2500 150 years ago. Today it is about $45,000. How many centuries before this "infinite" growth spirals out of control?

      GDP growth is not the problem facing us now. It is a lack or green regulations. It's also bad economics: right-wing free-market ideology based on low taxes and deregulation. It concentrates wealth and limits GDP growth, making people poorer and more indebted. This prevents us from making the necessary government investments to produce a green energy economy.

      We need practical solutions for the present. Worrying about what would happen if GDP per capita is over a $1-million or a $1-billion is not a pressing issue.

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  2. The anti-growthers are barking up the wrong tree. Whether or not a society has a sustainable economy based on renewable energy and recyclable materials depends entirely on regulations, not economic growth. The focus needs to be on convincing people to support green regulations and a green-energy economy.

    Fact is we will create GDP growth transforming to a green economy whether we want to or not. Some ways to go greener: build mass transit systems; subsidize broadband internet (wired and wireless) to reduce need for high-energy-consumption travel; build green-energy power systems; change from combustible engine cars to electric cars; develop driverless cars which will change the nature of transportation; etc. All these activities create economic growth.

    So like evolution in electronics (smart phones and TVs, for example,) there is a process of creative destruction going on that puts an emphasis on energy efficiency. As long as it's done responsibly (recycling materials) it is not only positive, but necessary. We need technological advancement to go green. For example, if we build arrays of wind turbines across the country and find ways to make them more efficient, we need to rebuild or upgrade them. Same with solar power arrays. Same with cars, homes and buildings.

    GDP (economic) growth means wealth creation. Wealth is created by people getting a return on their savings and investments (compound interest.) As long as all segments of society benefit from wealth creation, wealthier is always better. It provides the means by which a society can go greener. It provides the means by which people can realize their potential. Since health and education spending are measured as a percentage of GDP, GDP growth means we will have more money to invest in these and other areas.

    The real problem is free-market social Darwinism that allows a small minority of oligarchs (whether "democratic" or fascist) to hog up most of the wealth.

    The anti-growthers don't realize their alternative to economic growth is some form of communism (full government control over the economy.) Historically, the cause tends to get lost in the revolution and a totalitarian dictatorship is created.

    Another positive about GDP growth is that it created wealthy developed countries which have negative population growth. They only way to stop runaway population growth is to raise living standards across the globe and increase immigration to developed countries.

    In order to accomplish this we need to use the centrist mixed-market economy — which created modern living standards in the post-war era — on a global scale (it's a balance between free-market capitalism and communism.) Communism is not an option. Free-market ideology creates a balkanized globe and regulatory race to the bottom which is the cause of all our problems, economic and environmental.

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  3. "How exactly do you produce more without utilizing more resources to do it? It's pretty simple, you don't."

    Physical goods can be produced without using more resources if they are created using renewable energy and recyclable materials.

    Of course, many of the goods and services being created are information based, which use very few (potentially renewable) resources in their creation, reproduction and transportation.

    What we really need to focus on is uniting activists around the globe to demand action that representational governments are unwilling to take (because they represent oligarchs, not people.)

    Whether one believes in economic growth or not, the people need to unite to demand that: a) we put the right regulations in place to create a sustainable economy; b) we tax the rich (income taxes, wealth surtaxes, estate taxes, financial transaction taxes, etc.) so we can make the necessary investments to create a sustainable economy.

    I think its better to focus on what kind of regulations and investments are needed, because any which way you slice it, they are sorely needed.

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  4. Thank you for your comments Ron, here is my response: http://www.canadiantrendsblog.ca/2014/10/re-comments-on-infinite-exponential.html

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