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.
But first another quick intro to enerconics. Because economists have little idea about energy or engineering, they view energy as just being another item like apples or beds within the economy and as such, they think of the effect of changing energy prices as being very limited to a few products “derived” from energy.
In contrast, having worked in industry, I know how much energy is inherent in all production, and all services. And that, together with the historical match between GDP and energy usage strongly indicates that GDP is directly controlled by energy supply. So, I take the view, that (for all reasonable purposes) that the scale of the economy is SOLELY determined by energy availability and that (the inverse of) the price of energy is an indicator of availability and therefore the available economic activity.
The original drive when developing the theory of “enerconics” is that energy could be used as an alternative measure of economic activity similar to money. Following my last article (The Value of fish II) I have worked out that the value of goods as we usually measure in terms of money, and that of energy depart from each other by the ratio of the rate of energy production over the rate of consumer good production. Given the correlation between energy and GDP, it seems likely that historically this can for reasonably purposes be considered a fixed ratio. However, we are now entering a period of economic insanity where there is an attempt to intentionally change the supply of energy and make it more expensive. As such it seems likely this fixed ratio will change.
However, there is another implicit assumption that I have realised that I have included in the theory. Having studied how technology has been innovated since the dawn of humanity, it has struck me that almost at no point in that history is there any evidence of inventions occurring in isolation. Instead, usually as many as half a dozen people are all coming up with ideas like telephones, room lights, radio, etc. at the same time.
That however, is not how the development of innovation is presented by academics. Instead of a ruthless competitive market in which the winner usually gets the prize through shear dumb luck, academia has presented innovation as a series of people each totally unique and irreplaceable. And they are portrayed as developing their ideas on their own by some mystical process which I call “spontaneous innovation”, which is akin to the old idea of “spontaneous live”, whereby it was believed (so academics tell us – like they say people used to believe in a flat earth) that life could appear from certain substances totally spontaneously.
So, it is understandable, that if economists have had this idea that innovation is a stumbling block holding back economic growth and that the solution for economic growth is to fund “research” (always meaning academics doing research), then it is inevitable, if they follow that model, that they will believe that innovation is limited by the availability of (academic) research funds.
In contrast, I take the view, that when the market conditions are right and when the necessary technological pre-conditions are in place, that innovation is inevitable. It does not need funding, it does not need nurturing, instead, when there is a market opportunity, innovators will appear to combine already available technology to fulfil that opportunity.
And what limits the availability of technology? It is the cost of suitable technology, which in itself is reduced by the learning curve as that technology is used – which in turn means people need to money to buy present money. So, the fundamental limit on innovation, isn’t the appearance of “spontaneous innovation” from great (academic) researchers, but instead the economic use of already available technology and the slow creeping cost reduction of engineers, which eventually brings the cost and maturity of already available technology to a stage where it is viable to be used for the next form of technology on the inevitable small step by step innovation that is what happens in the real world far from the ivory towers of academia.
Thus rather than seeing “research” as a limit to economic growth, I know, because the evidence shows it, that energy supply controls economic growth. As such my views on economics diverge from the mainstream and to list a few areas where I diverge:
- I would assert that the main benefit of fossil fuels is that they were available in huge quantities and required little effort to be turned into a practical form and as such they brought down the cost of energy.
- That the lower cost of energy, being so key in EVERY product, then brought down the cost of all products and services.
- Thus the result, is that the average person could afford to have much more.
- Thus the scale of the economy is determined by energy availability which is in turn is indicated by the cost of energy (energy availability to the economy determines the cost of energy).
- I also reject the view of “spontaneous innovation”, which is that technology change is limited by our ability to innovate. Instead I see that that technological development arises inevitably when the market conditions are right and as such, over the long term, the growth of the economy is not limited by technology but by energy.
- As such, from a science and engineering viewpoint, the main benefit of cheaper energy was that THE LOW COST energy drove innovation both directly as for example, it became feasible to use technology like the internal combustion engine when energy costs are low enough, but also indirectly as the economic prosperity that arose through the innovation driven by cheap energy gave us the economic prosperity to invest in a host of research areas.
- That when (if) we end the era of cheap energy, the economy will begin to shrink and that shrinkage will be directly related to the cost/supply of cheap energy.
- That whilst we won’t unlearn the many things we learnt as a result of the period of low-cost energy, much of what we think as “normal” within modern society (cars, foreign holidays, large houses, plenty of free time) requires cheap energy and as such they will disappear when energy costs rise/availability reduces.
To put it simply, academics believe the economy is constrained by (their) research (funding). As such they reject the reality that the economy is constrained by energy supply. As such they have no concerns about reducing energy supply (akin to forcing us to use higher cost energy sources).
However, if we do head toward the economic suicide of rising energy (in real terms), it raises some really interesting questions.
The modern world has never experienced any sustained period when this occurred. The economy will shrink, the number of goods each of us gains over a lifetime will diminish, and the general feeling of being “well off” will disappear as people begin looking back at the wealth of previous generations. But we simply do not have the necessary experience from the modern world to understand what that really means in practice. Instead, we have to try to draw parallels to very ancient societies (end of Roman empire?) when the technology was very different. And to put it simply: whilst economists are pretty inept in understanding the importance of energy, historians are TOTALLY clueless. So, I find almost no useful research in the area. So, if you thought forecasting climate was difficult, then forecasting what will happen to society as we commit economic suicide is extremely difficult.