Energy price: the effect on the ratio of tangible/intangible

Introduction: tangible versus intangible

In my last three articles on this subject:

I developed a way to value “fish”, meaning goods which had to be obtained using work in terms of human time. Here fish represents anything which requires a (on average) fixed effort to produce. So, for example, a shell necklace requires a certain effort which whilst it may vary slightly doesn’t change dramatically. In this article I will be using a slightly differing distinction in which I refer to goods that are or are not “tangible goods”. Tangible goods have a value reflecting the energy used in their production, in contrast, intangibles are goods whose value is largely unconnected with the energy use to make them.

A classic intangible is a hour of free time, or indeed an hour of life. Another is the value of a branded good versus the same product without a brand. The value of a branded training shoe as opposed to the same training show made at the same factory, but sold without a brand name, or indeed a perfume sold in a simple unlabelled bottle compared to the same perfume in a branded bottle (assuming each can be tested first).

However, rather than effort, what I will use to define the difference is that an intangible good is one where the value is subjective to the user and independent of the energy used to produce or make available the good. In contrast a tangible good, is one whose value is reliant on the energy used in its production or making it available. So, in common with the theme of enerconincs, tangible goods are those whose value is dependent on the energy (including food) required to produce them, and intangibles are not. In reality most goods are a mixture, but for simplicity I will assume for now there are only two distinct types of goods.

The problem of traditional economics

The problem with trying to work out the effects of the insane energy policy, is that conventional economics has never ever considered such a situation. To use an analogy, it is rather like going to your local builder and asking them for a quote to build a house in zero gravity. The same elements are present: roof, walls, floor, but … all the ideas of how buildings stay together (largely the weight of materials holding down lower material), just literally falls apart. Traditional economics relies on energy prices adapting to market conditions and not the wholesale abandonment of energy usage which will be caused by the vicious cycle of energy costs.

Thus any economist can work out what happens if (given the costs) they build a windmill, because a single windmill has negligible effect on the price of energy and therefore negligible effect on the price of the windmill. But if most of your power comes from wind, and the price of energy quadruples as a result, then because energy costs are the main costs of raw materials, then their costs nearly quadruple, and because raw material costs are the main cost of manufacturing, the costs of manufacturing are similarly much higher, and because manufacturing and transport (energy) costs are the main costs of windmills, their costs go up and so does the cost of their energy which then causes a further increase in costs. The result is a vicious cycle of price rise where I estimate anything more than a 4x increase in energy costs may lead to a runaway escalating costs and economic collapse.

Such an issue has never been part of traditional economics, because traditional economics worked in a free market for energy where people naturally chose the lowest cost energy. As such whilst energy costs varied, they never got anywhere near the costs as which there is a vicious cycle of economic collapse. And because in modern economies, energy is fairly easily tradeable, the cost of energy was very similar in most economies. But the insane energy policy is the imposition of a massive price hike in energy costs intended to stop one form of economic activity (burning Carbon). As such it does push us close, or even beyond the point of runaway price increases and economic collapse which is beyond the scope of traditional economics.

In traditional economic terms, the insane energy policy will make the cost of burning even 1kg of carbon infinite. It will be argued it’s about offsetting – but creating this artificial “infinite” price for carbon has a similar impact on the economy as drilling a hole in a boat: the assumption that most of the boat will continue to operate entirely normally and the hole can be dealt with independently of the rest of the boat, is completely bonkers. Likewise the idea that all the rest of the economy will function normally when carbon has an infinite price, is also completely bonkers.

However, because the insane energy policy goes way beyond traditional economics, we need to dig a lot deeper than traditional economics. And one of the key aspects is the question of what is meant by the “price” or “value” of fossil fuels. The problem here is that if we increase the price of fossil fuels, this raises energy costs and then these costs raise the costs of manufactured goods and goods in the shops, and then the cost of a large part of the economy increases. Traditionally this would be seen as a case of simple “inflation”. Meaning that what was assumed to have changed is that there has been across the board price increase which was equivalent to a drop in value of money. It is then assumed that wages simply increase so that wages and prices keep match so that people can afford very much the same as what they could before.

However, if that was the effect of rising prices of fossil fuels, then we’d all just keep using the same amount of fossil fuel! In order for there to be a reduction, people have to afford less fossil fuels. But if energy costs are intrinsic to “tangible” goods, and they rise in line with the cost of energy, where does raising the cost of energy cause a reduction in energy use?

The meaning of value

Usually, we use “cost” as a monetary indication of “value”, which then begs the question what is “monetary value”. Because what does it mean if someone says that the “value of energy is rising”? Because surely 1kwh of energy (available in the same way – like main electric) intrinsically has the same “value”. So, before understanding what happens when the cost/value of energy rises, we first have to find some meaning of “value” which is independent of energy. But because energy is used to produce all goods and most services, there is very little whose “value” isn’t in some way dependent on energy. How can we value energy in terms of other things in the economy when the cost of most other things is dependent on energy?

I think one way to get around this issue is to view energy as having a value because it is something that can make or produce tangible things.  Changing the way we source energy and its “cost” or value, isn’t a change in its value with respect to other tangible goods. We still need 1kwh of “value” to produce something. Instead the cost of energy has an impact on the relationship between the value of tangible things in the economy (things we can make using energy), and intangible (things like a person’s time).

In the previous articles I used “fish” and “shell necklaces” as symbols of tangible goods, and I was exploring how their value changed as compared to the intangible of “human time”. I would like to now suggest that we can divide the economy into tangible and intangibles, and what happens when energy prices change is that there is a change in the relative value of tangibles (manufactured goods) compared to intangibles (human time)

The effect of rising energy prices

So, what does it mean that the value of energy rises by 4x? It really means that the relationship between the value of tangible and intangibles change, so that intangibles may be worth only 1/4 of what they were once worth. In simple terms that suggests that if energy prices rise 4x, then we may all have to work 4x as hard (sacrifice 4x as much time) to earn enough to pay for the same tangible goods.

The reason I’m not saying the relationship is fixed, is because in reality there are no pure tangible or intangible goods. The value of an hour of human time, is largely intangible, but it is also dependent on tangibles like food and shelter.

So, whilst the cost of the energy content of goods will rise by 4x if energy costs rise, the cost of the “intangible” content of goods will not rise. And the fraction of tangible to intangible changes between different goods. The price of a raw material like steel is largely determined by tangible value. In contrast, the value of some branded goods is almost entirely intangible. Indeed, the value of a CD is almost exclusively intangible because the cost of manufacture is so low.

So, if you raise the cost of energy by 4x, then the cost of all tangible content of all goods will rise by 4x, but the intangible will not. Put it another way, the relative worth of “intangibles” like human time will decrease.

The actual cost of the insane energy policy

This is why I fundamentally disagree with the treasury’s recent assertion that the cost of achieving “zero carbon” will be about £1trillion or one year’s GDP. In reality, the cost is likely to be many times higher and is better stated in terms of the size of the economy. I would suggest as a guestimate, that the cost will be of the order of 30% of GDP EACH AND EVERY YEAR. The treasury estimate is only £30,000 per household, my own guestimate for an average person is of the order of £200,000 … which for most people means that they will be working much longer hours and even then most will not be able to afford to buy a home, and instead will have to live in a much smaller rented home where children sharing bedrooms with be normal. In simple terms, the effect will be similar to wartime austerity and the reaction of the populace to the necessary draconian price-rises, rationing & curtailment of democracy, must surely be violent revolution.

Partial versus fool world adoption of insane policy

My model, presupposes the whole world adopts this insane energy policy so that globally every country is forced to go for “zero carbon”. But, in practice, this policy is being pushed by the Chinese and others to force a massive contraction of the west and social and political collapse thereof.

So, the policy is not the whole world but merely a part. The result, as we have already seen, has been the mass transfer of the production of tangible (energy using) goods to China an similar low-cost energy regions. This has (almost?) ZERO impact on energy usage and CO2 emission (the cost of tangible goods rise meaning we buy less, but that which we do buy uses more energy when being transported).

That then raises the question of what on earth do these mad politicians think they mean by “zero carbon”. If as seems likely they only think in terms of fossil fuels burnt in the UK and they don’t care a damn about all the fossil fuels burnt elsewhere, then in theory we can reach “zero carbon”, simply be shipping almost all the production of tangible goods to areas that are not under the stupid “zero-carbon” energy policy. That will undoubtedly hit our economy and make us all worse off, but not nearly as badly as a true “zero-carbon” economy.

I believe the intention is to go for a “out of sight out of mind”, type policy where we burn as much fossil fuels, but do it out of sight in places like China.

But, if as seems inevitable, the Climate Cult try to impose an actual “zero-carbon” … “economy” (not sure it will still count as one) … on us where they account for all the extra fossil fuels burnt elsewhere, then …. we are up an actual shit creek and we will see such dire consequences that it will make Stalin’s 5 year economic plan look sane.

Revolution

I’m not sure what level of intentional destruction an economy necessarily leads to revolution, nor what level leads to armed struggle and bloodshed. However, I do remember the huge political upset caused by a 1p increase in petrol price. I would therefore expect that when people realise that the next generation haven’t a hope in hell of owning their own home, and most couldn’t afford a car, and foreign holidays become a luxury only the rich can afford, I suspect that if imposed over a few decades (as will occur because politicians will dither and dither in fear of the consequences), then we will literally see armed rebellion in the UK.

Note: I’m not saying that people will revolt against the Energy policy, it may be quite the reverse! For, the same groups who are now pushing for the insane energy policy, will almost certainly be leading the revolt and may paradoxically cite the need for “Greening the economy” as a major reason for armed revolt. Instead, the collapsing economy will be a common factor fermenting unrest and revolt And it will be the climate of unrest due to the collapsing economy, which will then be used by groups to push their extreme politics.

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