Hollow Men of Economics

Left unaddressed during the past 3 years in most of the debates between economists has been the problem of energy. The reason is simple: post-war economists don’t do energy, except as an ever-expanding resource that the credit system and technology makes available. For the post-war economist, the supply curve of energy–save for brief lags–is always coming back into rough equilibrium with the economy. Accordingly, the ongoing dispute between Keynesians and Austrians (or Austerians if you like) is exceedingly boring in this regard. As late as 2008, for example, economist Paul Krugman was at least an infrastructure-and-engineering Keynesian. However, Paul quickly converted to becoming just a throw lots of money at the existing system Keynesian. The hollow nature of Krugman’s debate with Niall Ferguson meanwhile comes via their shared belief that the system will self-organize, if you follow their respective prescriptions. They are indeed the inheritors of Adam Smith. However, neither allowing the economy to deflate further from here via austerity, nor throwing more debt-marked stimulus will solve the present day problem. For the United States, along with the rest of the developed world, has reached a boundary in energy.

Only an economist could wonder in their leisure now, whether energy played a significant role in our current crisis. Indeed the public remarks of Ben Bernanke on the matter of energy, during the 2005-2010 period, were at least as clueless as his embarrassing commentary on the historic bubble in housing and credit. As the nation’s chief economist, Bernanke saw no problem with credit, with derivatives, with the fast inflation in housing prices, or with energy prices. And as an American economist, he was not alone.

As state’s see their budgets collapse and start a new round of layoffs, we should consider the fact that house price inflation masked the lack of wage growth in the United States. And now that house prices continue their descent for a 5th year, American workers are more fully exposed to the decade-long march higher in energy costs. They can experience this individually through energy prices, or more generally through the overall energy cost to the economy. Hence, the chart above.

Unlike many who were either shocked or angered at the ridiculous paper released by Richmond Fed Economist Kartik Athreya, Economic is Hard, I was delighted. For, the paper confirms that at the Federal Reserve, just as in the post-war economics profession, competency has been replaced with authority. Indeed, this was in fact Athreya’s central point: that only a PhD in economics conferred the proper access to discuss economic issues. The most beautiful rebuttal came from Ambrose Evans-Pritchard, who made a point dear to me and one that I have made for years: economics is a social science, not a science. In other words, economists are working down here, alongside the rest of us humanists. History, literature, psychology, and anthropology to mention a few disciplines are all equally competitive fields of knowledge to understand the system of behavior known as an economy. Accordingly, it behooves post-war economists to dislodge themselves of the view that their discipline neatly explains energy and energy supply. Lose the attitude. The problem of energy limits awaits you.

-Gregor

Chart: United States Energy Expenditure as a Percent of GDP 1999-2008. Data used is the latest available. GDP series comes from the US Department of Commerce, Bureau of Economic Analysis. Energy Expenditure data comes via EIA Washington’s SEDS series, for all states and also the country as a whole. I put these two data series together on my own, but, checked it against EIA Washington’s own calculation of Total Energy Expenditures vs GDP. 2009 is not omitted from the chart by choice, but rather, because expenditure data is not easily available yet for that year. Background photo is of a rooftop sculpture by Antony Gormley from his project  Event Horizon, which was displayed in both London and New York.

  • Brian Hayes

    Kudos to so brave a realist. Yes, competency is rare when authority moans among rank. That's tulip farming for ya.

  • rks987

    My take on this is that we need stimulus (else deflationary collapse) but we can't afford to do “shovel ready”, we need to take our time and direct the stimulus to uncoupling the economy from oil (i.e. build cheap electricity and electrify transport/etc). I've composed a message to our (Australia's) new PM along these lines at http://grampsgrumps.blogspot.com/2010/06/dear-j…. Comments welcome there or here or email to robert.kenneth.smart @t gmail.com.

  • http://economic-undertow.blogspot.com steve_from_virginia

    Kartik Athreya certainly played Inquisitor role very well, who will be Galileo? Indeed the sun does not revolve around the earth, but what does it really do, exactly?

    You are right about the 'invisible energy factor' that never once appears in academic papers or news media articles. Nobody is ever the wiser as the poor dead horse gets beaten more and more …

    http://economic-undertow.blogspot.com/2010/06/d

  • Arania32

    Apparently Kartek, et, al. can't see the forest for the trees.

  • http://blog.competitivefutures.com/ ericgarland

    Gregor, there's a whole ton that economists don't do: SOCIAL TRENDS like Boomer retirements, a culture of hiring and firing people every four minutes, TECH TRENDS such as ubiquitous wireless communication flattening hierarchies and enabling global collaboration, ECOLOGICAL TRENDS such as water shortage and the end of cheap energy, POLITICAL TRENDS such as the removal of primacy of states and even European nations in favor of central bank currency manipulation and fiat economic activity. Uh, sort of everything except their incredibly narrow abstraction of the universe.

    I'm going to just say it – neoclassical economics is basically worthless. Its ludicrous curves and CIGS, its absurd Keynesian Katfight, its outmoded and ignorant concept of “gross domestic product” – their intellectual output simply is useless in the real world. Their performance in response to the last two years make the moniker “The Dismal Science” an incredibly optimistic assessment.

    We need top-down analysis of economic activity in our complex world. We are not receiving it from those who claim to provide it. What shall we do?

  • http://joybricks.com/blog/ vruz

    very educative. thanks for your great work.

  • Bsmith

    You have a good point at one level. But remember that new sources of energy require large investments with long lead times before the energy comes to market. I expect continuing surprises on the upside in oil and gas production, in nuclear energy (especially mini and micro nuclear power plants) and maybe even in solar or wind.

  • http://www.brightstarsolar.net Solar Installer

    This is a very interesting perspective. I've never really thought about why the so-called great economists of modern times have not addressed the issue of energy.

  • The Ghost of Enron

    Every economist should be required now to earn a full fledged degree in atmospheric science such as meteorology or climatology (since this discipline is rooted in physics, dynamics, fluid mechanics, thermodynamics, chemistry, Earth science and ENERGY — a PhD in Physics once said recently at an academic institution that Meteorology was MORE difficult than rocket science). Paul Krugman, Niall Ferguson, Alan Greenspan, Ben Bernanke and all of them would be swiftly HUMBLED by sweating through a degree in meteorology and it would be the ultimate of Curly from the 3 Stooges waving the Curly sign at these economic imbeciles who don't understand the scale and complexity of of energy and physics. Oh and by the way, Curly can also wave his hands and give a “woob woob woobt” to Bill Gates who thinks he can control the weather with his and Nathan Myhrvold's new patents. What a crock of bunk (actually its worse, its megalomania)!

  • Dougdillon1956

    Nice piece. Would love to see the chart data point for 2009. I suspect it would indicate a deviation from the trend.

    MontyHigh, http://www.worldofwallstreet

  • Sam Penrose

    Good stuff; thanks for writing. I note that you focus on issues of professional status rather than a specific critique of core arguments. Your chart is of course a critique of their central thesis, and a good one, but you are in effect issuing a challenge to meet in your arena, and declaring victory when they don't show up. I'd love to see Krugman respond to you, but I doubt he will without your walking carefully through one of his pieces. (To be fair, he likely wouldn't even then — he's got LOTs of critics.)

  • http://professorpinch.wordpress.com/ Professor Pinch

    Outstanding stuff, Gregor. Truly outstanding. And to echo ericgarland's remarks, the bigger waterfront of sociological & demographic analysis is so under-researched and so little is understood. The dismal science, indeed. Ironically I have a degree in it.

    To paraphrase “The Empire Strikes Back” it's mostly because economists don't believe in it and what we collectively, are telling them – in the words of Yoda – “that is why you fail.”

  • http://twitter.com/mika2k1 mika.

    Gregor,
    As long as the petrodollar survives, that is, as long as oil is traded in US dollars and the US can print as much as of them paper dollars as it wants, the “cost of energy” is indeed irrelevant, because the cost of oil for the US gov is essentially zero.

  • Steven

    Yes, bad surprises…the problem is scale…and as you say time and money…So the impact on GDP to swap is not less than 5% per annum and probably 10%+ while we spend 5~10% per annum on fossil fuel to keep going…..so easily 15% of our economy so now no longer available…like I said its all bad.

  • Itzman

    Massive investment can't make energy out of nothing, and, even if we have the energy, other resource limits like agriculture and land surface await us.

    There is only one resource we have far too much of.

    Human beings.

    I will let the reader connect the dots…

  • V Bufalino

    The Inside Story on the Gold-for-Oil Deal that could Rock the World's Financial Centers- Another's Thoughts

    In October of 1997 at the internet's only gold discussion forum of the day (hosted by Kitco), a series of remarkable postings began appearing under the pseudonym “ANOTHER”. What followed in a seemingly incongruous stream of thought over many months was, in the fullness of time, seen to blend into a logical whole by many astute readers following the complete text. If you are not similarly moved to at least reassess your own view of the international financial scene after reading what's revealed below, then you are either firmly entrenched in your world view, or you've been numbed by too many hours of Wall Street's cheerleader (CNBC) and too many Friday nights with Louis Ruykeyser.

    What matters most to us here at USAGOLD is ANOTHER's educational value to all who would take the time to read and think through his (at times) arcane and cryptic commentary of international economic dealings behind-the-scenes. ANOTHER demonstrates a feel for and understanding of the gold and oil markets that indicates connections at the highest echelons of international finance, yet for reasons having to do with his “position,” as he has indicated, he wishes to remain anonymous.

    Another's Thoughts:
    http://www.usagold.com/goldtrail/archives/anoth

  • awb

    Read the article again

  • gregor.us

    I like your thinking. However, it can't be zero because even if the dollars are printed (and they are) the cost can at least be measured in lost opportunity cost to the government. I agree that the cost of oil to the government is very low per your suggestion. However, the cost to the individual is not low, because they must pay for oil out of their own labor. Even if they are paid for their labor in silly money, they still must pay for energy out of their labor. Meanwhile, the oil the government uses may or may not be of much benefit.

    I like your viewpoint though.

    G

  • gregor.us

    I'm not sure why this post was so popular. Perhaps because I said in 3 paragraphs what I sometimes say in 7. :-) I wrote a piece for the FT last Summer called “America's Oil Trap” and it got into some of the same issues. Perhaps I needed to be more explicit.

    Cheers.

    G

  • gregor.us

    Thanks Sam. I really like your construction about issuing a challenge, then declaring victory when they don't show up. I'm going to use that. :-) However, it really doesn't apply here, or to me. Economists have not been showing up for a decade. My writing on the matter of economists not paying sufficient attention to energy has been going on for quite some time. And I'm not the only one.

    G

  • gregor.us

    No question the 2009 energy use in the US is alot lower. GDP was of course lower too. But probably did not fall as much as energy use.

    FWIW: there is a ton, and I mean of a ton, of other important issues behind this brief post not least of which is the liklihood that much of what came to be known as GDP in the US is actually in the process of ebbing away.

    I will update when data comes in to be sure.

    G

  • gregor.us

    There are complicated answers, and there are simple answers. There are answers that take in the sweep of economic history back to 1750, and ones that take in the last 60 years. I will give an easy answer for now: contemporary economists understandably never dealt with energy much, because they came of age in the fat part of the supply curve, when the resource was richly available in both real and nominal terms.

    G

  • gregor.us

    There are not any new sources of energy coming, that have a higher energy-density of oil. The 300+ year migration from Wood, to Coal, and then to Oil was a bountiful walk up the energy-density ladder. We just exited the fat part of the oil supply curve. You expect continuing surprises in oil and gas production? Yeah, me too. As in: at best flat global production just like the last 6 years. That's been the surprise. That supply is no longer growing.

    G

  • gregor.us

    It would be OK as long as the economics profession did not dominate government policy so much. I just want the profession helpfuly led back to the sidewalk, where they can comment but not lead the parade. :-)

    G

  • gregor.us

    Steve you are doing really nice work at your blog. Keep it up. When I can, I have cited you in my StockTwits energy email, that goes out each morning.

    G

  • http://blog.competitivefutures.com/ ericgarland

    Some of my best friends are economists!

  • Baba12

    Sir, I love your short thesis, wonder why you don't get on the round table with Professor Krugman on ABC & call him & other out on their misguided notions.
    Also I would request that you use a set of other terms to categorize countries such as the U.S. & Western Europe from those in Africa/Asia etc. Using the term Developed versus developing etc only makes the problems surrounding energy even more drastic. As the developing world has the same desires and on pace to consume as much as the developed world is. Consumption of limited resources in every sector be it energy or other areas is not sustainable.
    What we need is to redefine what it means to be developed & what it means to have growth.
    Capitalism is on a collision course with Nature rudely letting us know that growth is unsustainable by the present day unit of measure and I hope you can tie that in as we stare at the future of energy resources.

  • http://twitter.com/mika2k1 mika.

    “However, the cost to the individual is not low, because they must pay for oil out of their own labor.”
    ==

    You're beginning to understand what fascist corporatism and the central bank warfare model is all about. It's about monopoly money, zero cost extraction, slave labor. All done with a smile, and at the point of a gun, of-course. And with hefty dose of CIA/SIS/MSM/gov “education”, obfuscation, distraction, and imperialist propaganda programming.

    When right and wrong ceases to be relevant, society is dead. And the US has been dead for a long time now.

  • bigelow

    “We need top-down analysis of economic activity in our complex world. We are not receiving it from those who claim to provide it. What shall we do?”

    Martian Armstrong should do the analysis.

  • http://twitter.com/mika2k1 mika.

    ” And the US has been dead for a long time now.”
    ==

    Gregor,
    You might want to read this, to understand what's really going on:

    http://www.oftwominds.com/blogjun10/Eric-Andrew

    Morality is not a luxury, a pretty addition to life. Morality IS life.

  • http://economic-undertow.blogspot.com steve_from_virginia

    Hi,

    thanks for the support and kind words. I appreciate it!

    steve

  • Shades

    Les Johnson of Nasa has written a book – living off the land in space. Smart people are thinking about growing humanity far beyond the bounds of our planet.

  • 1Eco_Indigo_1

    First point – Pardon my cynicism, but i dont think energy is not considered by western economic thought, i think it is kept hidden to avoid the awkward issue of gunboat diplomacy with oil suppliers, which no-one in the west wants to believe as true. Would the saudis sell oil to the west if there werent an enormous military presence there? unfortunately, empires dont behave this way. Also, if energy were acknowledged as the primary driver of economies and human activity itself, joe sixpack would want a say in how it is distributed, given the finite nature of the current fossil fuel system. Allow the peasant to determine his own fate? certainly not, empires dont work that way.

    If energy were taugh to children at school, everyone would realise no-one has a right to monopolise it, and that the ultimate authority is god, and you wouldnt get groups of people trying to replace god with institutions that ultimately take entire societies to their ruin. So, if you are one of the people at the top, energy is totally off the menu. Shame it will be the thing that brings down the west.

    Second Point – If you used 10% of every US states land mass to grow industrial hemp, then converted it to ethanol, you create a home grown liquid fuel supply that is renewable and generates wealth for localities and the greater whole. Hemp has never been massively scaled up in the past hundred years on this planet, and is cheap to implement and convert to fuel. It wouldnt require millions of armed men and various floating airfields to obtain this fuel either. but, empires dont work that way.

    The western imperialist model has not only run out of friends around the world, its run out of places to exploit. We are now onto the bottom of the ocean, which appears to be one step away from hell itself, perhaps the devils wish to go home?

  • 1Eco_Indigo_1

    Sir

    Hemp scales up
    Hemp is cheap to implement
    Hemp is swift to implement
    Hemp repairs soil

    Hemp is a low input crop
    Hemp has 25,000 industrial uses
    Hemp does not destroy anything, it creates
    Hemp is gods plant, thats why the people at the top have tried to keep it down, because it is too good for the fossil fuel competition.

    If the word spreads, the USA can rejuvenate and evolve using hemp as the foundation of a truly sustainable modern economy.