Labour without energy is a corpse; capital without energy is a sculpture. Steve Keen applies this 'simple insight' to how he thinks the global economy actually works

Labour without energy is a corpse; capital without energy is a sculpture. Steve Keen applies this 'simple insight' to how he thinks the global economy actually works

With the simple insight that “labour without energy is a corpse, and capital without energy is a sculpture”, I realised why economists have failed to properly incorporate the role of energy in production for so long.

All previous attempts had treated energy as a third “factor of production”, on an equal footing with Labour and Capital.

But that treatment is simply unrealistic.

Adding energy on its own to a production process is like letting off a bomb in a factory: it will produce mayhem, not output.

Equally, both Labour and Capital are “sterile”, to use the old Physiocratic term: without energy, they can’t produce anything.

Figure 1: The incorrect way to show energy as a factor of production

The correct way to incorporate energy into economic models of production, therefore, is to see energy as an input to both Labour and Capital (in vastly different forms, of course), which enable them to perform useful work.

By the Second Law of Thermodynamics, this useful work necessarily results in disorder (waste energy, mainly in the form of waste matter, including CO2). Also by the Second Law, entropy increases globally, even though it can be reduced locally by the application of energy; so the increase in disorder in the waste from production necessarily exceeds the reduction in disorder manifest in output itself (raw materials turned into finished products).

Figure 2: The correct way: Energy as an input to labour and capital, output as necessarily generating waste

This useful work is what we call GDP, though we currently erroneously measure this as the inflation-adjusted sum of all monetary output - which means we add the cost of traffic accidents to GDP.

Instead, the true measure of GDP is the sum of all the useful things we produce and consume: in transportation, that is moving a mass from one location to another in a given time, and traffic accidents (and congestion) subtract from it.

This insight transforms conventional economic models of production into models of the transformation of energy into useful work. When applied to the workhorse “Cobb-Douglas Production Function” used in most Neoclassical macroeconomic models, it increased the significance of energy dramatically. In a three-factor Cobb-Douglas model (Labour, Capital & Energy) following the “cost-share theorem” (where each factor’s share of GDP also indicates its contribution to GDP), an 80% fall in energy input would cause only a 10% fall in output.

The energy-based function makes the much more realistic assertion that only a 15% fall in energy inputs would cause a 10% fall in output (Keen, Ayres et al. 2019). The below diagram shows the relationship between GDP and energy input in both of these models.

Figure 3: Energy’s contribution to production is much higher than its share of GDP

“Matter to Gain, Energy to Maintain”

Working directly from thermodynamics, collaborator Tim Garrett realised that the economy could be treated like a growing child: a child needs a large energy input just to maintain bodily circulations within its current size and shape as it has grown from past production of body mass. Child development and growth requires using the energy in food to turn it into added body mass. This production then requires higher amounts of energy consumption.

He found an incredibly tight fixed relationship between GDP and the change in energy consumption each year: each $1 of global GDP (in year 2005 dollars) between 1970 and 2015 required adding to existing primary energy consumption capacity an additional 7.1 milliwatts (Garrett 2012; Garrett 2014; Garrett 2015).

Figure 4: Garrett’s generalized analogy between thermodynamic and economic systems. This shows economic production as an expansion of an interface between civilization and its accessible energy reserves and a fixed relationship, ? between historically accumulated production, C and current energy consumption, a.

The third collaborator, applied mathematician Matheus Grasselli, is an expert in developing stock-flow consistent financial-economic and ecological models (Grasselli and Costa Lima 2012; Bovari, Giraudet al. 2018)

This project will allow these three researchers from very different fields—economics, atmospheric physics and applied mathematics—to work together to integrate their approaches, and to derive production functions that can be used by economists from all schools of economic thought. They will also extend and explore the implications of these two approaches for economics:

  • Most economic models work with the abstraction of an aggregate good called GDP, but in reality GDP consists of multiple different commodities, each of which has different waste impacts upon the biosphere. We will produce mathematical extensions of our simple aggregate models that acknowledge this;
  • One of the vexed issues in economics is measuring the amount of capital. It’s easy to add units of unskilled labour, since their work is easily measured in terms of hours of labour. But doing the same thing for different machines is problematic, because machines are so different: how do you add together a truck and a blast furnace (Harcourt 1972)? Our work implies one way this can be done, using energy, since all machines use energy to generate useful work; and by focusing on connections that dissipate energy along economic networks.
  • Our approach implies that the GDP could be measured in units of megawatts expressing the rate at which useful work is done. This would include stating human consumption needs in terms of different functions—food, clothing, shelter, transport, entertainment, etc.—and quantifying the amount of energy involved in each at different points in time;
  • Economic models today are generally divorced from the ecological impact of production and consumption. We will produce models in which the economy and the ecology are necessarily integrated via the dependence of the former on energy consumption, and the impact of that consumption on the latter;

Finally, this energy-based model of production has implications for theories of income distribution that relate incomes to the contribution of labour and capital to production - both Marxian and Neoclassical.

The Marxian argument that labour is the source of surplus value fails because the energy input of unskilled labour is far below the energy-equivalent of the wage.

The Neoclassical argument that the real wage is the marginal products of labour fails for the same reason. Theories based on the relative bargaining power of workers and capitalists are more sustainable.

To read more about this project, click here.


Steve Keen is a Distinguished Research Fellow, Institute for Strategy, Resilience & Security (ISRS) at UCL. Also, see here. This is a repost from here and is used with permission. H/T Murray Grimwood.

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Energy, land and labour are the fundamentals.

There's a pressure battle between those three. Currently, any time energy or labour give some ground, the surplus goes into land values. Petrol falls? Rents (and land values) go up. Wages increase? Rents go up.

It's not zero sum as our overall productivity per capita increases, however the landholders have the most leverage and the least competitive environment, with land being entirely fixed in supply, and a vital component of basic human necessities like shelter.

One wonders whether any 'mainstream economists' read this and think? Like the folk on the RBNZ board or in Treasury......

https://www.odt.co.nz/opinion/hard-times-here-stay

Questions that do not seem to be considered;

1. it appears that there is an assumption that the available energy to input is infinite. what if it isn't and the cost to produce more skyrockets?

2. What happens if the total energy reserves is finite, and we are past the halfway point? I.E. the fuel tank is becoming empty? The implication is that we use up all available energy and cannot replenish it, or the rate of recharge is so slow as to essentially produce the same result?

Once the energy is gone, so are we. What was/is created wasn't meant to last forever. It is physical & therefore has a beginning & an end. How do we know that? Well everything on this planet including life itself, has a beginning (birth) & an end (death). So do trees. And so does the land masses themselves if we are to believe the geo-historians. Planet Earth is energy. Energy so good it sustained life itself. It was the way it was designed. It is the way it (still) functions. You can come up with as many theories or formulas as you like but what was & is created physically/materially will not last forever. Physical life is finite. If you want more life than that, then a transition to a more longer-lasting platform is recommended.

There are things we can do, though.

Politically, we could run a mandatory test: Will the seventh generation hence, thank us for this?

Energy-wise, we need to go renewable full-noise, current technology (or simpler) and get it in place now.

Biologically, we need to reduce our population (or it will reduce itself far less pleasantly). We need leadership brave enough to raise the topic.

Ecologically, we need to do the full-circle thing - including organic wastes back to farmland. And we need to do that using renewable energy.

Efficiencies are a valid goal in themselves. We'll never have enough (though they aren't an answer to depletion, they're a necessary part.

Economics. Ah, well. The accounting system has to fit the biospheric/energy/entropy system. Methinks usury is out, probably so are banks (as we know them anyway). Maybe they can morph, but I can't see the margins, ex interest. Oddly enough, they're being forced there anyway by the physical limits of the planet - even though they don't have the training to recognise that this is the driver. Keen is on the right track - as Henry Ford suggested and as Soddy realised a long time ago - energy is probably the basis for currency-referencing. I did slip 'entropy' into the 'StatsNZ' list of 'things to measure' recently.... They hadn't heard of it..... And betting on the future has to be better reckoned - re risk and discounting.

Local - my guessing is that we will become much more local, much more concerned with local food, much more community-minded and less dog-eat-dog (it'll be the only way to prosper). And we have or culture, our music, our art, our learning, our stories, sports, fun. It'll be a tad diffenent, though.

For those still reading, my book on all this will be out by Xmas. Figured we needed a starting-point for the discussion.

Make sure to leave us plenty of clues as to how to find your book, when it becomes available, I would be interested to read it, as I am of a similar mind to you.

There is a billion-fold increase in renewable energy available outside the biosphere. Any accounting system with a 100billion% growth potential is not doing away with usury.

Non-local - I suspect we will become extremely non-local as the result of depleting easily accessible local energy.

Great comments PDK. However I'm not so sure we will become "community minded" as things run out. There is a strong possibility we will just thieve from each other and worse.

Getting the world population down to 500 million or less would solve most of the problem.

The expected date for the death of the sun is in 7.5 billion years.

The problem with the analysis they propose is they seem (if I understand the approach correctly) to attempt to measure the energy quantum of every input to every product for every manufacturer for every country.

This runs slap bang into the BOM explosion issue: a finished product like a car (or rock truck or blast furnace...) is composed of thousands of individual components, each conceivably with a very different energy input. It's no use, for example, using (say) the weight of Fe in a product as a proxy for energy. The component might be cast straight from the furnace with little to no added work, or might be highly refined via the addition of Mo, Va, Cr etc, machined, tempered, CNC'ed, transported around the world, re-worked etc.

I get the overall picture: but averaging things, using proxies, and trying to project outcomes, has the awful example of the General Circulation Models for climate to contend with. Essentially, the models have zero forecasting skill.

Plus Keen rather neglects the currently haram energy sources such as nuclear (filtered from the sea, even)....and he also neglects the human reaction of large populations facing conventional energy shortages - gas in 7-9 years for Godzone...).

Which is, to hell with the religious proscriptions, we are gonna deem the currently Haram sources Halal, and use 'em. In NZ's case, that might mean switching Tiwai off, and using the electrons to dig up Southland with large electric draglines, and run a lignite-to-liquid-fuels plant to power a Transition. For a few hundred years - them great-grandkids are safe.

I think Tiwai's gone. I think we'll attempt to divert the power to transport (it about equated, in 2008/9, to the domestic car fleet).

But by the time you take the EROEI of lignite, percentage it by the power losses, then use more energy to turn it into liquids - don't expect much surplus energy. Corn-too-ethanol os a zero-sum game, hydrogen (current tech) nearly so. I suspect we'll want to run chainsaws, locomotives and a dwindling array of distributional transport, though - maybe we'll be desperate enough.

It's a pity Shane Jones is more like the last of the dinosaurs - we could be using that 'fund' to install wind, solar and (at least micro) hydro. We'd still be late starting now.

lol...energy and growth...here is our future,...watch and weep

https://youtu.be/M9YRNqewGIY

she has a pretty good idea of the energy side - but she doesn't really have a great handle on the financial side of the problem. We cant just be more efficient - To use less is to lower economic activity - And less economic activity is a deflationary spiral. Our 40 year debt binge has taken us well past a soft landing.

Our whole (financial) economy is built on turning stuff into waste ever faster - Most jobs exist because we added ever more complexity into our "waste maximization machine"we call industrial civilization. Think inspectors and committees and more reports and guides and safety rules and etc etc
And now we are faced with falling EROEIs.
Even worse ( as Tim Morgan points out) "environmental degradation is linked to gross energy use, but prosperity is linked to surplus energy". So we must stuff the environment faster just to tread water.

Growth is dead, ecological systems are degrading/ed past sustainable limits and financial collapse is baked in.