By Tim Garrett: Thermodynamics of the Economy (interviews and papers)

Tim Garrett recently published a FAQ on his blog that answers many common questions about his theory.

http://nephologue.blogspot.com/2019/11/frequently-asked-questions-about.html

Frequently Asked Questions about the Nephologue theory of economic growth!

The theory of economic growth I’ve tried to explain is pretty foreign to many. There’s a lot of questions that get repeated. This post aims to clarify what are probably understandable concerns. Any others?

Do you conclude, that global energy consumption and global GDP has been practically perfectly coupled in the past? This would seem at odds with the data
No they are not coupled. The relationship between energy consumption and GDP tends to change with time as civilization becomes more or less energy efficient. What is coupled is global energy consumption and the time integral (or summation) of GDP since the beginning of civilization.

Can we have a “steady-state” (non-growing) economy?
In general, no, as nothing in the universe is independent from its environment. Everything constantly evolves. Steady-states are only useful fictions that can be imagined to apply when things are evolving slowly compared to some other phenomenon of interest. With respect to our economy, we simultaneously discover and deplete energy resources. Maintaining steady-state wealth would require we discover and deplete these resources at precisely the same rate for a long period of time. Maintaining a steady-state GDP requires that net resources are never depleted.

From where comes the statement that we would need to build approximately 1 nuclear power plant (1 GW?) every day in order to (just) stabilize CO2 emissions?
The current annual rate of growth of global energy consumption is 2.3%, or a few hundred GW. In a fossil fuel economy, CO2 emissions rise with energy consumption. It is often advocated that increasing energy efficiency can stall energy consumption growth. What I have shown is that this is only true locally. Globally increasing energy efficiency accelerates growth through a generalized version of Jevon’s Paradox. This leaves switching to non-carbon fuel sources as the only option for meeting the goal of stabilizing emissions while growing the economy. Divide a few hundred GW annual growth by the number of days in a year and one obtains the figure of 1GW of non-carbon energy per day. That’s roughly one nuclear power plant per day.

Can we meet a 2 degrees C warming target and maintain a healthy economy?
No. At least it is very hard to see how. Civilization health is predicated on consuming energy, and at least for the foreseeable future the energy source is primarily carbon based. Economic health is based on consuming energy at ever faster rates. Maintaining this energy growth would seem incompatible with achieving lower carbon dioxide emissions, especially to levels that would prevent the world from exceeding a 2 degree warming target.

Evidence shows that Jevons’ Paradox is wrong. Rebound effects that counteract efficiency gains are small.
Studies showing “rebound” rather than “backfire” have focused on particular technological sectors (e.g. lighting) without considering knock-on effects on the entirely of the rest of the global economy. Making such a calculation would be extremely difficult. If the economy is only considered as a whole, then the problem becomes tractable, and global efficiency gains lead ultimately to global acceleration of energy consumption.

GDP numbers are unreliable. They should not be used to calculate any relationship between wealth and energy.
Yes, GDP numbers are uncertain, although this is true of any measurement. Unfortunately, the magnitude of the uncertainty is not stated by reporting agencies like the United Nations. However, there are two things that are in the statistic’s favor. First, the countries that contribute the most to global GDP are likely always those with the greatest interest in having something at least close to a truthful number. Second, the calculation of Wealth discussed in this work is a summation of GDP over all of history. Unless there is a constant bias in the global GDP statistics one way or another, errors from one year to the next will have a tendency to average out towards zero. Further, the most recent statistics, which contribute most to total wealth due to their comparative size, should be the most accurate. Admittedly there is some faith in this statement, but GDP statistics are probably the most robust macroeconomic statistic we have.

Isn’t population growth the fundamental driver of increasing energy consumption?
The physics (and perhaps history) suggests that a better perspective is that population growth is rather a symptom. When civilization consumes energy with sufficient efficiency that it is able to experience net growth into new resources, then some combination of increasing standard of living and increasing population follows. It may sound odd to say it, but people are physical objects, and it takes massive amounts of energy consumption and matter to create and sustain an adult human. Without increasing access to reserves of energy and matter, population growth cannot be sustained.

GDP is only a measure of the part of human activity that is monetized. Even now, GDP doesn’t include the work of self-sufficient farmers, or the work of unpaid housewives or retired people.
Yes, and that is entirely the point. At the moment of engagement, the vast majority of our activities do not require a financial transaction. We do not pay to have conversation, enjoy a meal, or clean the kitchen. We may pay to acquire access to conversation (e.g. by purchasing gasoline so we can drive to a friend’s house), to have a dish on the table (e.g. by buying food), or to live in a house (by buying real estate). But I believe that financial transactions themselves are instantaneous affairs whose value is a representation of their capacity to increase our ability to do things in the future. This is a subtle but very important distinction. The GDP is a tally of the instantaneous monetary exchanges that increase the right to access something in the future. Wealth is about what we can do now. GDP adds to our Wealth, but only Wealth can directly be linked to activities that consume energy. At any given instant, human activity and the GDP are two totally separate things.

Are you stating that value is tied to the amount of energy that goes into producing an item, what some call the “emergy”?
No, not at all. Consider that judgement of the current value is usually totally agnostic to its past. It’s pretty hard to know all what went into bringing a salmon all the way from a river in Alaska to the dinner table. And ultimately what drives the price is the usual mix of current market forces. Of course the present emerges from the past, so it’s not totally crazy to imagine that past energy consumption can be related to current prices — after all why would people consume energy without some expectation that it might eventually support a future financial exchange? Nonetheless, there is a much more direct link between current value and current rates of energy consumption than between current value and past rates. The universe at any given time only knows the present.

Has any one else tried to reproduce your result of the constant λ relating wealth to energy consumption?
The most detailed investigation I am aware of is by Richard Nolthenius, a professor at Cabrillo College. His independent examination obtains a similar result.

Energy is just one factor of production among many, including labor and capital.
This argument ignores that the dissipation of potential energy is fundamental to any process in the universe. Energy is not just one factor among many. It is the motivating force that enables anything to happen. People cannot be sustained or do labor without energy. Physical capital has no meaning or value without energy to connect its elements through physical flows of, e.g. people, raw materials, and information. In an effort towards simplicity, one can focus on energy alone.

Wealth is a stock and GDP is a flow. You cannot compare energy consumption (a flow) to a stock.
That wealth is best characterized as a stock may be the standard perception. Certainly it is the most obvious. But I don’t believe it is necessarily the best. Civilization is an open thermodynamic system. What that means is that it dissipates energy and consumes matter, and it gives off waste heat and exhales CO2 and garbage. Thermodynamically, one could represent the size of this open system in two ways, both related. One is as the potential difference, or gradient, required to drive these flows. The other is the flows themselves. They are both two sides of the same coin. Wealth is an abstract financial representation of either. GDP on the other hand is a measure of the increase in the potential and associated flows due to a net convergence of matter in civilization. A measurable GDP occurs only when we consume more matter than we get rid of as waste.

It is inappropriate to use market exchange rate (MER) measures of GDP. Purchasing power parity (PPP) measures should be used instead.
PPP measures of GDP adjust MER measures to account for relative price differences of baskets of goods between nations. A well-known illustration of this is that the MER price for a Big Mac can vary widely from, say, Norway to India. From a personal perspective, making such adjustments makes sense. It helps us better compare relative standards of living. But from a thermodynamic standpoint that considers the world as an aggregate whole, with people mixed in with everything else that dissipates energy, PPP has less obvious utility. If the calculations are done right, positive and negative PPP adjustments from one nation to another should add up to zero. A basket of goods for the world as a whole can’t be compared to any other world.

Do your energy consumption estimations include the energy captured by photosynthesis of crops?
No they don’t, at least not directly. But my feeling is that they shouldn’t, although for reasons that are subtle. Sunlight is all around us, but some other energy resource is required to make the sunlight accessible to civilization through crop production. Combustion energy is required to clear grassland and forests, either by burning them or mechanical extraction. Burning further fixes the nitrogen that is required as fertilizer, and where there is nothing left to burn we manufacture free nitrogen with fossil fuels. Deserts are bathed in sunlight but have little crop energy of value until we burn other fuels to irrigate and fertilize. Accessible energy and total energy are not the same.

Energy is not value. A country like Switzerland has no energy resources of its own at all, but its currency is strong.
The relationship between energy consumption and wealth applies to the world as a whole. Unlike the global economy, which has no connection to any other world, Switzerland is not an isolated system. It maintains its wealth through energy consumption just as any other location, but much of the primary energy consumption is done elsewhere in places to which Switzerland is connected, through such things as its banking system. As long as the world as a whole has access to sufficient access to primary energy supplies, and Switzerland is deeply connected to the rest of the world, its economy will be fine.

The correlation between energy and wealth you find means nothing. Correlation does not mean causation.
Sure, except it is not a simple correlation, but rather a scalar transformation. Normally, where there is a linear correlation between two quantities, the ratio of the two quantities is variable unless the two quantities pass through the origin (0,0) instead of having an intercept. GDP and energy consumption are an example of two correlated quantities, where the ratio is changing with time even though the two quantities generally are linearly related for periods of a decade or two. I would agree that GDP and energy consumption are not causally related (at least not without considering a couple other things). Wealth and energy consumption are not the same. They have a fixed ratio within reasonable observational uncertainty. Terming this ratio λ as an eigenvalue describing the system may be more mathematically appropriate.

Your work omits consideration of the role of debt.
When considering the global economy, where wealth includes all aspects of civilization, who is the debt to? It appears to be me, that when everything is properly accounted for, global debt must add to zero because any remainder cannot be to anyone or thing that is not already part of the global financial system. Perhaps some day we will have debts to our Alien Overlords. But until then, for answering global questions at least, debt seems like a red herring.

By considering wealth as an accumulation of all past production you fail to consider depreciation.
It might at first seem so, but no, this is not the case. Depreciation (or more physically, decay) is very much a part of the model. A particularly elegant result (IMHO) that comes out of the framework is that inflation and decay are two sides of the same coin. Wealth is not the sum of past nominal GDP but instead the sum of real GDP. This difference is calculated through the standard economic quantity called the GDP deflator. There are some subtleties: for example in the very general framework I consider a closer measure of this depreciation or decay might include things like unemployment, as absent retooling we forget and our skills become less needed.