Thoughts on the week

This is how I have spent the bulk of my time this week:-

1. Coppicing (see my previous post)

2. Transition Horsham – a productive meeting with two of my colleagues, Bilal and Andrew, some work to overhaul the website (my main role in Transition Horsham is Webmaster) and production of the latest draft of the constitution (very boring but necessary).

3. Getting to grips with the economics of Peak Oil – which is what I want to talk about first.

As I explained in a previous post (January 15), I was rather bowled over by Chris Martenson’s Crash Course. What impressed was its eloquence and clarity and the way it brought several strands of thinking together to create a compelling message. I reserved judgement on its soundness, needing time to examine in more detail what he was saying and to reconcile it to my current understanding of economics.

This week I started the reconciliation process. I like to study things using spreadsheet models – I spent the last twenty or so years of my working life mainly creating and working with spreadsheet models and I feel as if I can't live without them. The model I (rather presumptively) started to set up is of the world economy. It will be a grossly oversimplified model working with very broad aggregates but sometimes very simple models can be informative. I haven’t got far enough for it to be informative as yet but I can at least say what I’m trying to test.

The main argument of Martenson, as I understand it, is that economic growth cannot continue indefinitely because natural resources are finite. Technically, this is not necessarily true.

Firstly, it depends on how people want to spend their money. Suppose there developed a fashion for people to pay large sums of money to attend live readings by poets and these readings normally took place with small audiences in village halls and other neighbourhood premises. This sort of activity would hardly consume any resources but would contribute to GDP because people were paying for the privilege of attending. So a big switch in people’s preferences away from goods and travel towards non resource-crunching services, such as poetry readings, would allow economic growth to continue while the use of energy and natural resources declined.

Secondly, GDP isn’t just household consumption as we would normally understand it – it’s investment as well. Suppose that, as oil prices rose following Peak Oil, there was massive investment in renewable energy, paid for either out of taxation or from huge increases in the prices paid for energy by consumers. Higher tax or domestic energy prices would reduce household consumption in real terms unless, again, there was a big switch in preferences. However, the investment in renewable energy would create jobs and if this had the effect of reducing unemployment, this could mean economic growth. In other words, after Peak Oil, or after we start taking global warming seriously, everyday life might feel very different, and we might feel materially poorer, but economic growth, as measured by GDP, might continue.

There, in words, are the arguments I want to examine in the context of the Martenson thesis. However, economists are never happy to work in words alone – we feel compelled to back things up with some maths and this is what I am trying to do – specify a mathematical model and try running different sets of input data through it.

Now for some other thoughts on the week.

In my opening blog post I mentioned James Lovelock. This week’s New Scientist has an interesting feature on him. It suggests that in my opening blog post I slightly under-estimated the scale of the apocalypse that Lovelock is predicting – he puts the scale of the cull of the human population at 90% rather than 80% I mentioned.

Nicholas Stern, the economist, of Stern Review fame, also features in this week’s New Scientist.
If you read Stern’s article and the Lovelock interview together, you might get the feeling that economists and scientists live on different planets. I think Stern must take much of the credit for getting people to take climate change seriously – mainly with his argument that the economic cost of doing something about climate change is likely to be a lot less than the cost of doing nothing. However, I have always felt that what he offered in the Stern Review was some soothing mood music – yes, we need to do something about global warming but it won’t cost us all that much – think of it like the insurance premium you pay in case your house burns down. The Stern Review came out a few months after Lovelock’s The revenge of Gaia. Having read The revenge of Gaia first, I found the arguments around the Stern Review rather surreal – how on earth do you put a price on the risk of a 90% wipe-out of humanity?

However, I don’t know of any scientist who has come out explicitly in support of Lovelock’s prediction. As far as I could see, Stern was in line with the IPCC. I think James Hansen (Director of NASA’s Goddard Institute, also mentioned in my opening blog post) comes close. As it happens, this week I got to read a piece by him (and in this case his wife) that I hadn’t seen before, though it was published in The Guardian on January 1st.

Some of the ideas got a re-run in the The Observer last Sunday.

The letter reinforces my feeling that economists and scientists are living in different worlds. This open letter to Michelle and Barack Obama is rich in ideas and one of them is the denunciation of the notion, dear to economists, of cap-and-trade schemes. Economists like them because, in theory, they are an economically efficient way of capping things – those who value and are prepared to pay most for what is being capped get to consume it. Others, who value it less, do without. However, Hansen maintains that in practice cap-and-trade systems aren’t working and are mere “greenwash”. His alternative is “tax and dividend” – a hefty carbon tax which, instead of going into government coffers, is simply redistributed to the population.

It’s an interesting idea which chimes with some of my own half-formed thoughts about life in a post-growth economy. Many people in the past (such as the Canadian Social Credit movement of the 1930s) have put forward the idea that every household should receive a substantial basic income as of right and that earnings from work should be in addition. It’s an attractive idea in principle, particularly at times of economic recession when earning a living from work for many people isn’t an option. However it’s very difficult to get the figures to stack up without what look like impossibly high rates of taxation. I would like to find time to generate a few scenarios to see if there were any way the idea could work – but don’t hold your breath.

Sorry – again not very much about my personal energy descent – the big picture interests me too much.