This article focusses on one of the assumptions of the theory of enerconics which is whether innovation drives economic growth or whether we innovate as a result of economic growth.

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In the Value of Fish I considered two societies where the only difference was the rate at which they could secure life’s necessities (9 fish a day). In this article I want to generalise that concept.

Let:

• d = average number of hours a day
• n = quantity of necessities that are needed
• r_n =the rate of acquiring necessities
• r_i =  the rate of producing consumer good i

The time taken to produce the day’s necessities is = n/r_n

The available “luxury time” is given by (d – n/r_n) where d > n/r_n

The number of consumer good i that can be produced in a day is  ( d – n/r_n) . r_i

The quantity of necessities which can be produced in a day is  ( d – n/r_n) . r_n

Therefore if we take that a day’s work is equal then:

1 day’s available goods = ( d – n/r_n) . r_i  . good_i = ( d – n/r_n) . r_n . necessity

Thus the ratio between consumer value of item i and necessities is given by:

( d – n/r_n) . r_i / (( d – n/r_n) . r_n ) =  r_i / r_n

Or to put it another way, the value of a necessity in terms of consumer item i is given by:

v_n = r_i / r_n  v_i

Thus if the rate of producing a consumer good (shell necklaces) remains the same, but the rate at which the necessities of life doubles (from 1 fish/hour to 2fish/hour), then this means the value of fish relative to shell necklaces halves.

Because energy is a necessity in a modern economy, this also implies that the cost of energy is directly proportional to the economic activity (here given as hours of work) required to provide that energy. It also implies that if a quarter of the GDP is tied up in producing necessities like energy, then the economic activity involved in producing energy is 1/4 of the total activity and that if the price of energy doubles, then the economic activity used to produce energy will double to 1/2 the economy meaning that there will be a reduction from 3/4 of the economy producing consumer (luxury) goods to 1/2. It also means that if 1/4 of the economy is currently involved in producing necessities, then if the cost of necessities like energy (and food which is closely linked to energy costs) were to quadruple – as I think is necessary to get “zero carbon”, then basically there will be no other economy other than necessities and our modern economy will basically catastrophically collapse.

In other words, if energy costs were 4x their present value, it would be IMPOSSIBLE to run anything like our present economy and e.g. the number of hours worked by an average person would need to MASSIVELY increase. That means the effective end of free time, which in turn means the end of any opportunity for almost all individuals to engage in political campaigning such as these “climate action”. It also means, there will be next to no TV, next to no press, next to no cinema, so the wholesale wipe out of the present media, present groups like Greenpeace, Friends of the Earth. Not quite the stone-age but certainly a lot more like Dickensian London in terms of economics, culture, politics and free time.

Enerconics

But, more importantly than the mere total collapse of the economy as we know it, what about the idea that economies can be measured in terms of energy rather than money? Contrary to my earlier belief, there is not a direct relationship between the two, rather the availability of energy and economic activity are proportional to each other with that proportionality being determined by the ratio of the rate of production of energy and the rate of production of consumer goods.

If both rely on the same technology, then the relative value of energy and consumer goods will remain. If however, there are fundamental changes in the way we obtain energy, that significantly reduce the cost of energy, or as is being proposed now, that the cost of energy should dramatically rise, then the value of energy relative to consumer goods will dramatically change. A reduction in energy costs relative to consumer goods expands the economy, an increase retracts the economy. As such changing energy costs explain the rise in the scale of the economy, but the key to using energy as an economic unit of value, is in knowing the relative cost of producing energy compared to producing consumer goods.

In general, considering all of human history we can very roughly categorise the time a person spends into two:

1. Working to provide the necessities of life – without which that person will die.
2. Time after having provided for the necessities of life during which we can create “luxuries”.

A necessity of life, is something that without which we would die: air, water, food. However, being a necessity of life, they don’t have much other use other than to keep us alive. So having sated our need, their value falls dramatically and in most cases like water (flood), air (wind) or food (being fat), in great excess they have negative value.

In contrast, a luxury item is by definition unnecessary. If we do not have it, it has value, but it is something we would quickly sacrifice in order to have a necessity of life. But whereas the necessities of life tend to be mundane and of little value when in excess, luxuries often retain their value as we get more and more of them. For example the value of each gold ornament would be seen as having the same value, if two were held rather than one.

We can also divide our time between providing the necessities of life and the luxuries. However, because necessities are extremely valuable when in deficit and of little value when in excess, the value of time spent providing necessities and luxuries is not equivalent.

So how do we value 1 hour’s worth of time producing luxuries compared to an hour producing essentials? Continue reading →

Previously:

• Enerconics: The Relationship between Energy and GDP

• Enerconics II

• The Enerconic or society energy multiplier (III)

Summary

As most people will be aware, if energy prices rise, the price of raw materials like iron also rises and that in turn means the price of energy will rise. But, also indirect costs like school teachers will also rise as they require higher pay to pay for higher energy and goods manufactured with higher energy costs, so that the effect of raising energy has both direct and indirect costs.

Because the price of energy has been very closely linked historically to (inflation adjusted) GDP there is very good reason to believe that as energy costs raise, the amount of energy going into producing energy also raises, so there must be a point where if the cost is too high, so that the energy going into producing energy becomes too high, that there is no net production of energy.

For a while I’ve been trying to use an approach I call “enerconics” which uses energy value as a unit of economic activity rather than money to work out the effect of changing from low cost energy sources to high cost ones and also by implication to work out when an energy source is no longer a net contributor to an economy.

After getting stuck on how to interpret the energy value of energy, I’ve finally found a way round that issue which tentatively allows me to start making predictions about the effect on the economy of higher energy prices. It turns out that in a modern economy where about 25% of the economic activity is involved in producing energy and food-energy, that the effective limit on the cost of energy is that if “stable” energy costs rise to 4x the present cost, then the economy suffers irreversible hyper-inflation leading to a total collapse.

However a note of caution: I was tempted to start with a normal warming “not being an expert”, but I can’t pretend to not be an expert – because I am the only person I know to have written about this subject – instead I’ll just say this is work in progress.

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