A renewable energy engineer tries to make sense of economics

With all the talk of recession in the mainstream press these days, I have been attempting with very limited success to concoct a defensible narrative on how economies work from an engineering perspective. In part this is motivated by what seems to be a reflexive sense on the part of many in the left/environmentalist/social justice set that something about the economy is fundamentally unsustainable in an acute way; that “it’s all bound to come crashing down, any day now”; that consumption of fossil fuel along with widespread affronts to social justice and ecological vitality are bound to bring Business as Usual to a screeching halt, and (some will admit) “the sooner the better”. I recall even hearing a few people who’ve never taken a thermo class claim that the Second Law of Thermodynamics dictates that the profligacy of the modern age will soon be a distant memory. All of this accompanied at times by a sort of gleeful anticipation, to the effect that “the greedy bastards will finally get what’s coming to them; pretty soon they’ll be scratching gravel just like the poor folks”.

Now, I will freely admit that I have a lot in common with the folks who promote this sort of thinking. I live in a small house heated mostly with wood, I drive an efficient car, and I grow organic vegetables where my front lawn used to be. I spend my days working for a renewable energy startup dedicated to producing cheap, efficient solar cells, and I am freaked out about global warming and petroleum scarcity. But, I’ve read enough evolutionary biology to understand that we aren’t going to reprogram our human nature in historical time, and I am painfully aware that when times get hard, it is the downtrodden who suffer first and most deeply. Besides, as an empiricist, I want to understand how things actually work, and I’d like to get a realistic sense for what’s actually going to happen, separate from what I wish would happen, or what might be imagined to happen were there a global spontaneous enlightenment that overthrew human instinct and the laws of physics.

So, how does this whole economy thing work? I could start by imagining that an economy is a technological system for turning raw materials (including energy sources) and human effort into stuff that people need or want. That seems to be a pretty good start; places that have plentiful resources and efficient technology have a lot of material stuff, while places that have relatively poor resources (like the arctic) or crummy systems (like Africa) get diddly. I don’t mean in any sense that it’s really as simple as that; I recognize that there is a lot of history behind what kind of systems a place has got; the white man has been screwing the indigenous peoples for several centuries, and all that. I’m reasonably satisfied with the story that comes out in a great book called Guns, Germs, and Steel, by Jared Diamond. And there’s surely interesting stuff to be learned from his critics, who say (as best I can tell) that he gives short shrift to the impact of the various cultural systems and political structures that developed in different parts of the world. Nor does this say much about distribution; for a given level of production of stuff, you could have a relatively egalitarian arrangement or a highly stratified society. But, from an engineering perspective, you have a model that exhibits roughly the behavior that we observe.

The first thing that I would note is that the Second Law of Thermo doesn’t do nearly the work that some seem to think. While it’s true that the disorder in a closed system is doomed to increase with time, it’s also true that energy input into a system can be used to create all kinds of order, and enough solar energy hits the planet in a day to run civilization for well over a year. Surely there are important practical limitations, but entropy is not one of them, no matter its power as a rhetorical device.

So, what can hose the economy? It seems that broadly speaking, three things could happen:

  • People could be unwilling or unable to work, or for some reason find themselves wanting less stuff
  • You could run short of raw materials or usable energy supplies, making it difficult to make so much stuff
  • The technology (defined broadly) could go on the fritz, become less efficient, resulting in less stuff being turned out per unit input

I don’t seem much evidence for the first possibility. Humans being status-seeking critters, no matter how much crap they have, they seem to compare themselves not to their grandparents but rather to their neighbors, and so march out and buy a swimming pool, an Escalade, or what-have-you; with credit if necessary. Also, it seems that as soon as a society (say India, China, Viet Nam, etc) gets their systems figured out and stuff starts to be available, there’s no lack of demand for it. The Tata Nano, a $2500 car for modest-income people in India, and the incredible growth of China would seem to be two cases in point.
The second possibility is definitely more possible. Not so much on the raw materials side; with the growth in developing economies prices of just about everything have shot up, but they are still ridiculously low in absolute terms. A pound of steel (enough to make a hammer) can be had for less than 50 cents (bulk commodity prices); a pound of aluminum (probably enough to make a tennis racket, if anybody made aluminum tennis rackets anymore) is a bit over a buck, and a pound of copper (enough to make a good-sized motor) is 3 or 4 bucks. A pound of wheat, ridiculously expensive compared to recent history, is less than 25 cents. Man cannot live by bread alone, but if he could, the wheat would cost him less than 50 cents per day; half of that if he settled for cornbread. Of course, agribusiness takes its pound of flesh, and one could launch into any one of several diatribes about subsidies/pollution/erosion etc; if you’re in the mood try Omnivore’s Dilemma by Michael Pollan or Animal, Vegetable, Miracle by Barbara Kingsolver; both recently borrowed and enjoyed thanks to Brandon and Sharon. But, the point is, at least in America, stuff is pretty cheap, which is why we can have so much of it, why TVs keep getting bigger and even the lower classes can afford to eat too much. To be fair, I should add that there are some legitimate near-term resource concerns; water is the one that comes most immediately to mind. Global climate change, population growth, and economic development are hosing water supplies; my grandparents in California grow ~70 acres of oranges, and they’ve recently had to cut down 1/3 of their trees due to water restrictions. There’s been a lot of squalk in the last few years about how the next wars will be fought over water; we’ll see.

The energy question is a good bit stickier. It seems increasingly likely that taken as a whole the planet is at or near the half-way point of consuming its oil resource, corresponding roughly to the peak in annual production rate, and that of natural gas will not be too many years behind. There’s substantially more coal around (decades or centuries worth, depending who you ask) but it’s singularly nasty as a source of greenhouse gas, so there’s some thought that international political structures may manage to curtail its use – if they don’t, they’d best find a higher place to rebuild Manhattan. Besides the obvious point that cheap gas and oil allow a remarkable degree of mobility for people and stuff, ample supplies of cheap energy are largely responsible for the availability of cheap commodities, and they power the technologically efficient production systems that produce boatloads of consumer goods at remarkably low cost. If oil and gas do peak and decline soon, that will certainly impact the ability to produce tons of stuff economically.

Trying to understand the economic impact of scarce energy is where it gets frustrating as an engineer, especially as one who works on clean energy. We certainly have the example of expensive energy blowing everything to hell in the seventies.  At my parents’ place there’s still a big steel drum left over from the oil crisis – at one point it filled with gas, so as to keep the tractor and rototiller running for a while if the spigot ever really turned off.  But from a purely technical standpoint, the remarkable wastefulness in energy use (as exemplified by McMansions in far-flung suburbs and giant single-passenger commuter SUVs) represents a useful buffer; a lot of inefficiency could be wrung out of the system with minimal impact to actual functionality. If everybody who gets less than 20mpg now bought 40mpg when they next switch vehicles, that likely covers near-term declines, and, as somebody who works from home about 3 days a week, I can see the potential for internet-powered telecommuting to take a substantial bite out of driving and flying miles in the years to come. There’s similarly a lot of mileage to be had in sealing and insulating houses, programmable thermostats, more efficient appliances and light bulbs, etc.

The frustration comes in realizing that there’s no guarantee that any of this stuff will actually be done, let alone the gee-whiz stuff that we could conceivably cook up, like electric freight trains and flying windmills. That brings us to the third point – the technology. In this context I mean the term extremely broadly, to include the economic and political machinery that somehow makes big decisions and allocates resources among competing propositions. While I think that if you set a bunch of talented engineers down to plan out a transition to an energy-constrained future, they could probably do a pretty decent job of it, especially if they were given the half-trillion dollars or so we’ve spent on the Iraq misadventure, that’s not what’s likely to happen. Rather, it seems that the economic technology is in the process of throwing a rod – reading wikipedia on the Great Depression brings up some eerily familiar talk of speculative bubbles and the like. We seem to be going into rough waters, and this before energy prices have even topped historical highs.

All in all, it seems that while we are in no way doomed to privation by energy scarcity, there’s no guarantee that the economic technology will respond well to to the stresses that it is just beginning to feel. Maybe we’ll get electric trains, plugin hybrids, and virtual reality telecommuting, or maybe we’ll get to experience the 1930s all over again, only this time with rising seas, monster hurricanes, and religious fanatics holding the world’s energy lifeblood. I’m hoping (and working) for the former, but sadly it’s not really in the hands of the engineers, and if it comes to the latter, I hope I’ll at least have some cider to drink…

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3 Responses to “A renewable energy engineer tries to make sense of economics”

  1. brandonstafford Says:

    I owe you one for the phrase “commuter SUV” — brilliant. On the other hand, you owe me one for declaring my aluminum tennis racket obsolete.

  2. Nicole Says:

    Hello, Ben Polito! How are you?
    I googled your name (a pasttime at work when it’s slow) and came upon your site.
    Cheers to you!
    Nicole Chvatal

  3. Economic Tehcnology « Five Islands Orchard Says:

    […] Nine months ago I wrote a post trying to understand how economies work from an engineering perspective. The basic idea was that an […]

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