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.
The definition of economics is that it is:
the study of the production, distribution, and consumption of goods and services … as measured by monetary value.
That last constraint I have added, because the assumption that economies are measured by money is an implicit assumption that is seldom questioned by economists. Thus the definition of enerconics in a modern human economy is that it is:
the study of the production, distribution, and consumption of goods and services … as measured by energy value.
The relationship between enerconics and economics is even contained in a single word:
Work, is both a description of economic activity, but also a description of energy. However, because energy is present far more universally that money in many different systems, not necessarily all involving humans, the full definition of enerconics is that it is:
the study of the consumption, production and distribution, of all items by living creatures** as measured by energy value.
(** indeed, if we desire, the definition could be used for a robot enerconomy!)
As such, we can use enerconics to compare systems as diverse as a food pyramid and
And we can equate the various parts of the enerconomy with an economy:
- Raw material producers = Plants
- Manufacturers = those that consume raw material =herbivores
- Retailers = those that consume manufacturers = predators
- Bankers = those that live off everyone else = parasites
Why does Enerconics work?
The main reason enerconics works is because in any complex system there are usually only a very few things that are so irreplaceable that almost the whole system could not function without them. In a modern economy, one of the key things that is critical for the system to work is money: because if all the banks closed, then very few economic transactions would continue. That does not mean everything would stop, as a barter economy already exists to some extent and it would rapidly grow without money. But because almost the entire economy uses money to make it easier to trade, then the amount of money in transactions is a very good measure of the economy.
However, there are other arguably as good measures of an economy. An obvious one, is the amount of work being done. Thus if there are 20million workers doing 40 hours a week or approximately 2000 hours a year, then there are 40billion man-hours per year of work being done, but also being paid for. So, we can assign a unit of value to convert between money and work, which we’d assume was:
Money value = average pay / (average time worked)
However, not all work is paid for. Many people work in charity shops, Scout leaders work for free child-minding other people’s children and even parents work looking after their own children. So, in a “work-onomy”, the total value of the economy could be measured, not only in the paid work, but also in terms of the unpaid work as well. This immediately, shows that whilst they are similar in their nature there can be differences. So, we expect them to roughly scale so that we would expect in a country with twice as many people and twice the GDP, that the “work-onomy” was also likely to be (about) twice the size. But it is also quite possible that cultural differences, may mean that in some work-onomies that the amount of charitable work being done was far greater than in another.
Optimised production technology
It is one of the tenants of the theory of optimised production technology, that a production system is constrained by a few select “pinch points”, and therefore it can be controlled by controlling these pinch points. For example, I heard a story that in WWII, it was believed that bearings were so essential to the German war effort, that if the production of ball bearings could be stopped, then the German war machine and economic machinery would literally grid to a halt. If this is true, then it would mean that the economy is constrained bearings and therefore, by inference, the number of bearings being consumed is in some sense a measure of economic activity. However, there is an obvious problem. What if someone invents a frictionless surface that doesn’t need bearings (i.e. the shaft rotates on a “non-stick” surface). If a considerable number of people start using the frictionless surface technique instead of bearings, then the number of bearings is no longer directly related to economic turnover, although if we counted both bearings and frictionless surfaces, we’d expect the same rough relationship to hold. But, what if, instead a bearing each end of a shaft, it were found that only one were needed at one end?
Thus, whilst we can use anything that is critical to an economy to give an indication of that economy (and like a work-onomy it can reveal facets such as unpaid employment which are not revealed by money), such measures can only function if there is no simple alternative. The three basic requirements to use something as a measure of economic activity must be:
- That it is essential to the economy so that if there is none, economic activity tends toward zero (or at least close enough that it produces a very low margin of error)
- That it is irreplaceable, so that there is no simple means to use an alternative.
- That it is measured in a way that it is fully utilised. So, we can use energy being mined as a measure of economic activity because it will get used. However, energy in the ground or ungrazed grass is not a measure of economic activity because either isn’t being used.
- It must be scaleable. That is, if we add two economies together then the total usage of the item must be the sum total of the usage in each economy. So, e.g. politicians are not a measure of economic activity, because although politicians think the economy would collapse if they were not there, that they are irreplaceable and fully utilised, if we combine two countries together, we don’t need twice the number of politicians. Indeed, most would argue, that if we cut the number of politicians, economic activity would go up!
Thus, energy is also a metric for an economy. However, it only functions if we measure it in such a way that there is no simple alternative. So, for example, if we measure coal consumption, this is not a measure of the “enerconomy” because gas, petroleum can often easily replace coal. However, what if we are looking at early 20th century economies when at that time many vehicles did not use petrol, but instead used horse power? And indeed, many other people had to use “shanks pony” (their own legs). Energy cannot be a measure of economic activity if it is simply replaced. So, it stands to reason that we should also include the food given to horses as being equivalent to the fuel given to vehicles, but we must also consider the food given to people who walk.
Fortunately, the science of energy is well researched and we can relatively easily convert between different energy forms as diverse as nuclear and carrots. So, we can (in theory) calculate the total energy usage of an “enerconomy” in all forms.
The consumption of economic value
At this point, one of the problems people may face is that whilst money is supposedly “fixed” and doesn’t get consumed, but instead is passed on through an economy, that energy and work are consumed. However, is that different as distinct as might be supposed?
When I was a child, I used to be given money to go and buy sweets. And, I’d go down to the shop and try to decide what I could afford. That took so long, that I eventually decided to keep the wrappers and put them in a scrap book, so that I could work out what I was going to buy before I went.
I still have that scrap book, and the price of crisps was 2.5p … but quavers (a crisp like snack) were only 2p!!! Today the same size of crisps sell for around 85p Or to put it another way, the value of a pound in terms of crisp buying ability is around 3% of what it was when I was a kid. In other words, 97% of the value of money has disappeared.
In contrast, I recently opened a jar of marmalade from my Grandmother (who died when I was at University). I can’t say the flavour had been retained, but it still had the same sugar content (I think?) as when made. So, whilst monetary value is consumed by inflation, energy value of marmalade remains! Indeed, grain has been found that is 1000s of years old and has been grown. So, presumably it too retained most of its energy value.
However, in terms of cost of energy. The value of a kilogram of wheat at the time of the Pharaoh’s of Egypt is still very much the same as it is today. So, whilst monetary value is very quickly eroded, in contrast, energy value can and does retain very much the same value of huge periods of time. I say “very much” the same value, because today we have a much more varied diet and for example potatoes or Yams provide can and do replace wheat in a diet. So strictly speaking the value of wheat is not the same, nor indeed, with our more sedentary lifestyle is the value of a calorie the same. But, whereas money can and has lost almost all its value within a lifetime, the calorific value of food may have varied slightly between our time and the Pharaohs’ but in no way imaginable does the value of a calorie from food disappear within a lifetime like money. The food itself may perish, but the value of fresh food remains fairly steady.
The idea that a measure of economic value cannot be consumed, doesn’t work, because money is in a real sense “consumed” by inflation and energy is not.
Every time there is an injection of new demand into an economy, because there is a circular flow so that more money for one person usually means more money for others, there is likely to be a multiplier effect. The multiplier effect refers to the increase in final income arising from any new injection of spending. This is measured in monetary value, but other economic multipliers exist.
What is the value of a job? How many jobs is a single job worth? Well paradoxically, according to economists (U.S. Bureau of Economic Analysis), they list the value of a single job as being between 0.8 (retail) to 6.9 (oil and gas) other jobs. That is to say, if you create 1000 retail jobs, the result is that after a few years, the economy only has 800 more jobs than before the retail jobs were created. In contrast, if you create 1000 jobs in oil and gas, then you end up with around 6900 new jobs. However, some jobs actually cause unemployment. An obvious example is a heroin seller. Each one of these “jobs” created, probably causes the effective end of economy use of many others. But even apparently benign jobs are destroyers if they result in increased costs, such as rising energy costs. The US bureau of economic analysis doesn’t
For example research suggests that wind jobs are net destroyers (link). The scale of this loss is suggested to be as high as 3.7 jobs lost for each one gained(Link), something underlined by the loss of manufacturing jobs Scotland has experienced as wind jobs were “created” (link)
The Enerconic Multiplier
A while back (link) I introduced what I called the enerconic multiplier which could be measured by:
n = (GDP per capita) / (Cost per KWh * KWh per capita)
In modern society n is about 4. Meaning that about a 1/4 of all the things being bought in a society is energy. Or in other words, the cost of energy is about a quarter of all costs. The phase was chosen as an echo of “economic multiplier”, but upon reflection it turns out it is not the same. I have finally realised that it isn’t something to do with multiplying energy as I had first thought, but instead it is a divergence in the way an economy an an enerconomy is measured: it is a conversion factor between an energy and economic viewpoint.
Looking at figure 2, I have drawn a theoretical economy which contains three layers (four if we count those creating energy).
I have assumed that each layer is 100% efficient and that they only consume and produce something equivalent to energy. It may help to think about it as a coal mining company, a coal wholesaler and a coal retailer, all of whom are 100% efficient (the energy out equals the energy in). Obviously this is impossible, but it simplifies the explanation.
The same energy (bag of coal) goes through the system, but there are three economic units. But, because energy only goes into the system once, the energy input is only measured once, but the value of that energy is measured as inputs to three economic units (or if you prefer as outputs from three economic units). So, the monetary value of this economy is three times the energy input, because the economic activity is being measured at many different economic boundaries.
But what would happen if one of the units were split down the middle as in figure 3. As an example, if a wholesaler decided it made accounting sense to split their business into “national distribution” and “local wholesale”. They are still doing the same work, there is still the same energy throughput in terms of coal being traded. But now unit 2 has become two separate work units so that there is one extra output and input to be counted in the economy. Now there are four economic units and for no actual practical change except for accounting, suddenly the size of the mini-economy has grown. This is what the Enerconic multiple of 4 means. That the measured economic activity in terms of money is 4 times the energy usage cost. So, whilst we can convert energy to cost and back again using a standard cost of energy, we have to be careful to make sure we measure the enerconomy as the TOTAL exchange of energy VALUE at all economic/enerconic units (not just the energy consumed) with the total economy.
In other words, whilst you can create economic “activity” merely by changing the way you account for economic activity in your economy and therefore you can apparently create “economic activity” by accounting practices, because energy is a fixed item that cannot be created, it does not get double counted as we tend to only count energy when it is actually doing some use in the economy.
Thus the “enerconic multiplier”, is the unit of conversation between enerconic activity (which has a direct relationship to a unit of energy that can only be measured once) and total economic activity (where the same activity can, and is, double, triple and quadruple counted and indeed, the monetary value varies dramatically as inflation takes hold). Thus the enerconic multiplier of “4” is the average number of units that live of the same enerconic value. In simple terms: it is the conversion between real value of tangible objects as measured in terms of energy used to create them and the intangible concept of total “economic turnover”.
This is easier to understand if we return to fig 1 showing the pyramid of life in the natural environment
A common figure quoted for the pyramid is that 10% of the energy from one layer goes to the next. But whilst oft quoted, I couldn’t find any credible data to support it. Fortunately, it’s just illustrative. If we assume there are actually an infinite number of layers, then for every unit of energy input the total energy being consumed if we count all layers is 1 + 0.1 + 0.01 +0.001 etc. or 1.11111.. or 10/9. So in this case the enerconic multiplier is 10/9.
For every 9 joules of energy collected by grass and similar plants, there is a total energy turnover of 10 joules.
If we compare the non-primary energy collection areas, humans are doing 3/(1/9) or 27x better than nature!! That is absolutely incredible. Usually we find that after billions of years of evolution, nature is often not far from what is physically possible in many systems so that humans usually struggle to do better. So, to be doing an order of magnitude better than nature is incredible.
However, nature is based on the digestion of other creatures. In contrast, most of human activity is based on the consumption of goods and services. So, it is very likely that the difference is due to the different nature of the items being “transacted”.
Humans are not cannibals, but we can see that in a human system, there are economic units which are akin to animals and cannot be split by an accountant’s hand into subunits like organisations. These economic units are people. If we define it purely in terms of paid work and paid for items, a human has a measurable income and energy (food) intake and they have a measurable output. They are discrete units and whilst people are not eating people as in the natural environment, they are “consuming” or at least holding the products of others produced using their own “work” or energy. So we are consuming the “energy” or “work” of those who produce things for us.
In reality the issue is more complex that the unit of production being a single person, because much of human life is spent in a family where some people (children) are not active producers of economic “work”. So, it might be more appropriate to consider the whole family as an enerconic/economic unit, but that doesn’t change the thrust of the argument.
The main difference between using energy and money as a measure of an economy, is that energy is only measured once when it is consumed into the economy, but money is not consumed (at least if we ignore inflation) and therefore the same money goes around and around and is counted many times and not just once like energy. To use an analogy, if we take food energy as the input to a living entity, then money, which flows around the economy without being consumed is akin to the bloodflow. The harder we work, the more calories we need, but also the more blood that needs to be pumped around. So, food consumption and blood flow are both indicators of work being undertaken, but food energy is consumed whilst blood flow is not.
The value of energy
What then is the value of energy? If we can buy a kwh of electricity at £0.03 (a rough wholesale price) then surely that is the price? But as we have discussed above, the economic activity produced by that kwh is likely on average to be about 4x the direct energy cost or £0.12. So, £0.03 of kwh is creating £0.12 worth of transactions, or in other words, that 1kwh of energy on average creates 4 lots of transactions with an equivalent enerconic value of 1kWh.
Or to look at it another way, if the total current fraction of the GDP spent on energy is 0.25 then in relative terms if an energy source is twice the price, then that means twice as much economic activity goes into its production. So if the standard is that 1 economic unit in 4 is spent on producing energy. If a new energy form is twice as expensive then relatively 2 economic units (in 4) would be spent in producing it. In contrast, if a new form of energy became available which was half the price of conventional energy sources, then only 0.5 economic units in 4 would be used producing it.
Going back to the food pyramid, we found that the enerconic multiplier there was only 10/9. That means 90% of the natural enerconic activity is energy collection, whereas we humans sit in the relatively insignificant 10%. In contrast, in the human economy, primary energy producers occupy 25% of the activity and the activity of the rest of us is the majority 75% of the activity.
What then happens if we start using a fuel that uses twice as much economic activity to produce it? Then we go from 25% to 50% of the economic activity involved simply in obtaining energy.
What does that actually mean?
(Note: I am now reasonably confident I have understood the enerconic principle up to now, but from here on is my first attempt to work this section out)
It is easy to say “there’s a doubling of activity used to obtain energy”. However, that has an impact on prices and wages and it needs to be translated into something I (and hopefully others) can understand.
At the simplest level, it must be apparent, that if fewer people are not tied up in obtaining energy, then we move backward toward a more primitive enerconomy where the majority of effort was spent purely trying to obtain enough energy (food) to live. That is an easier system to understand, so I will start with that.
If the majority of time (9/10) is spent on obtaining energy (food and heat) that means that things like shell necklaces, that today are trinkets, in very ancient enerconomies where there was little time available for anything but obtaining energy, they would be extremely highly prized objects. For this example I will neglect the effort involved in making string & making holes. Thus for this example the amount of work involved in searching for an obtaining the shells, may not have changed much. But because perhaps 90% of the time was spent obtaining energy to live, then the time available to make shell necklaces was in short supply, so that the relative value of that time was much higher. In other words, sacrificing 1hour to spend on making a shell necklace in an enerconomy where 90% of the time was spent obtaining food, is equivalent to sacrificing 9hours of time for obtaining energy. For every 9 hours spent obtaining energy, only 1 hour is available for other activities.
In contrast, in a modern enerconomy, obtaining energy is only 1 hour in 4 of the activity, so that for every 1 hour spent making a shell necklace, only 20mins of activity is needed to produce our energy requirements (food and warmth). Thus, the value in enerconic terms of that shell necklace has changed from 9hours to 20mins or it is now worth 1/27 of what it would have been in the most simplest “animalistic” enerconomy.
What then happens if we now use energy that is twice as expensive. We go from 1 hour in 4 of enerconomic activity being spent in obtaining energy to 2 hours in 4. Now the spare time we have for doing things other than obtaining energy changes from 1 hour being equivalent to 20mins in obtaining energy to 1 hour being equivalent to 1hour obtaining energy. In other words, the value of time spent on non-energy obtaining activity increases by three fold relative to the time spent obtaining energy. And because the time spent obtaining energy is valued in an enerconomy by the amount of energy obtained, then the enerconomic value of non-energy obtaining time is 1/3 of what it was.
Because other economies like China are not going to commit this economic suicide, then their goods will remain the same … in enerconic terms being valued by the energy used in production. But the value of non-energy obtaining time in the UK has reduced by 1/3 which means that wages have reduced to 1/3 of their current value. In reality people do not accept wage cuts, which means that the pound will fall, that will raise the price of goods from abroad and effectively treble the cost of goods, so that we get an extremely high dose of inflation.
However, doubling the price of energy is not what the UK government plans to do. In reality it is intent on using energy sources like offshore wind, which are around 4x the price of conventional energy sources.
What then happens if 4x the enerconic activity goes into obtaining energy? We start with 25% of the enerconic activity being producing energy and end up with 100%. And with 0% of the available activity left to do anything else but obtain that energy … there is no economy. In other words, we will have no ability to produce goods to sell abroad and the economy will shut down. That doesn’t happen overnight (as we still have lower-cost value in machinery and infrastructure), but it does mean hyper inflation will set in followed by civil unrest, etc. until eventually we find a new political “consensus” which doesn’t involve economic suicide.
The Green Utopia: Slum living
Realistically, if energy prices quadrupled, people would not continue working a nominal “40hour” week. There are around 84 hours of daylight available each week, so as prices soared, people would start working longer hours. If energy prices quadrupled, then on average each current worker needs to spend 40hours a week working to produce energy (to pay to produce energy & to produce food to live) and if people worked 60hours a week, then 2 in 3 hours would be spent obtaining energy. So every hour of non-energy obtaining time would now be worth 2hours, or 6x the present value. That means things produced in non-energy obtaining occupations would be worth 6x their present value (equivalent to wages being 1/6 of their current value).
What would this mean in practice? A car worth today £10,000 would be worth £60,000, certainly outside the reach of most people. A shirt costing £20 would be worth £120. And a house worth today £200,000 would cost £1.2million. In other words, what we might now consider to be a throw away luxury bought by the dozen, would become a precious object which we could not afford to replace, and whereas today we might live in houses of around 100m2 total floor space, in that new high cost energy world, the average house would have to be nearer 20m2. Bearing in mind that this is the average family house and that young single people would have much smaller accommodation, if If we assume a small bedroom is 2 x 2.5m, then the average family house has enough space for 2 bedrooms, 1 living room, and the other split: chalet kitchen (2m x 1.2m) & bathroom (2m x 1.2m). Given that the Green cult already forces people to allocate perhaps 1m2 to “recycling”, there’s barely enough room in that kitchen for a cooker. So, realistically, people will have to go back to the “good old days” of working 60hours a week and then having to wash in a shared bathroom.
That is of course, for the average reasonably well off members of this great green utopian society. Realistically many people now in council houses, will be simply turfed out and whole families will either live in single rooms, or on the street (or the cost of living will be too high as it was in the past and they will die).
These conditions are not too hard to imagine as only a couple of centuries ago, we had very much the same conditions in Britain and many other places. So, not quite the end of the world, but at least during the 18th century people saw society getting better. The Green Utopian high energy price society would be one where people would very clearly understand that things were only going to get worse … unless they took action to stop the idiots in charge of society.