English for Business Purposes: Intro to Ecological Macroeconomics

1. English for Business Purposes:Intro to Ecological Macroeconomics November 23, 2010 Karl Seeley, PhD Hartwick College

2. Outline • History of pasta • The economy in the world • Adding to the circular flow • Resources in the economy

3. History of pasta • A meal of spaghetti Bolognese • Wheat to flour to spaghetti to kitchen • Tomatoes to cannery to kitchen • Cow to feedlot to slaughterhouse to kitchen • Every step used labor, capital, technology • Every step used resources • Land, water, coal, oil, electricity • Every step generated waste

4. Basic growth process • Saving funds investment and innovation • Which lead to more and better capital • Which leads to increased production Consume Produce more Produce Save Invest More capital Innovate Better capital

5. The growth cycle Consumption A. Saving E. Increased output B. Investment Output C1. Innovation C2. Innovation D. More capital D. Better capital

6. Circular flow diagram Wages, capital rent ($) II. Including investment Labor, capital Firms Households (HH) Export expenditure Goods, services ($) Import expenditure Consumption expenditure Financial markets I S T G Government

7. Adding to the circular flow • The standard model ignores resources • Purchasing power circulating round and round • Basis in the physical world is ignored

8. Daly’s animal • “It is as if the preanalytic vision that biologists had of animals recognized only the circulatory system and abstracted completely from the digestive tract. • “A biology textbook’s index would then contain no entry under ‘assimilation’ or ‘liver.’ • “The dependence of the animal on its environment would not be evident. • “It would appear as a perpetual motion machine.” Herman E. Daly, “Towards an environmental macroeconomics,” Land Economics, May 1991 (67)2: 255-59, p. 256

9. Firms Households (HH) Energy, Raw materials Waste

10. Elements of the economy • Households • Firms • Government • Financial markets • Foreign sector • Resources

11. What an economy does • An economy takes stuff from the environment • Has people work on it • Using capital • With a government providing some structure • And produces waste

12. From Charles A.S. Hall, “Biophysical Economics: Definitions and Applications”

13. Foreign sector Capital Exports Waste Imports Capital services Invest- ment Stocks Extraction Production Consumption Exhaustibles Labor Renewables Labor input Govt Harvest Goods for Govt. Govern- ment Biosphere Damage

14. An economy is a system for taking the materials of the physical world and transforming them to suit our purposes

15. Energy and ecosystems • Ecosystems can be understood by the ways that energy flows through them • You can also track flows of biomass, complexity, biodiversity, reuse of energy • But an ecosystem has no purpose • It just evolves

16. Humans and energy flows • Human activity can be tracked in the same ways • Energy inputs and transformations • Originally solar (like ecosystems) • Now fossil • There’s a measure of “success”  How well we accomplish human purposes

17. Impacts of fossil fuels • Allow you to do more stuff • Concentrated energy source • Available in more flexible quantities • Leverage solar resources • Land provides food without also needing to provide traction, fertility • Release of solar resources • Land can be put to non-agricultural uses

18. Entropy • Low-entropy matter is ordered, useful • Wood is a collection of low entropy • Its usefulness as a building material or a fiber source depends on it being ordered • Without expenditure of effort on maintenance, returns to disorder • Combustion for heat is another use of wood • Which uses up its low entropy, returns the wood to high entropy

19. Thermodynamics • 1st Law: Energy can be neither created nor destroyed, only transformed • 2nd Law: When energy is transformed (to do work), some of it is turned into low-level heat • Not available for any useful purpose • “Lost” • Though not destroyed

20. Example: Making steel • Ore: high-entropy (disorganized) • Wood: low entropy (ordered, can release energy) • Make charcoal: some wood turned to high entropy (ash) to make other wood very low entropy • Make steel: turn ore into low-entropy (steel) by turning charcoal into high-entropy (ash)

21. Fossil fuels and entropy • Coal stores low-entropy • Collected over a much longer time • Not restored in humanly-useful time • Short-term: available in large quantities • Oil: like coal, only better • Except that there’s not as much of it

22. Entropy and other resources • Concentrated ores yield metal with less effort than dilute ores • Healthy ecosystems produce harvests with less effort than damaged ones • Liquid fuels are more flexible than solid • Coal can be turned into gas or liquid, but with more effort • Sources of low entropy enable production

23. Technology and resources Technology allows us to do more of what we consider useful Strong tendency to involve using more resources Use of coal saves wood and gets more done, but uses more energy Use of oil leads to internal combustion engine More powerful and flexible traction More energy use

24. Innovation and resources Some innovation is figuring out new ways of doing things using resources Depends on the availability of resources Some innovation actually involves accomplishing the same with fewer resources Resource-using innovation seems to be cheaper

25. Resources, investment, and innovation Motive for innovation and investment is profit, return Cheap, abundant resources make capital more profitable Stronger investment motive And make new technologies more profitable Stronger incentive to invent Innovation and investment increase availability of resources As long as the potential exists

26. The growth cycle Consumption A. Saving E. Increased output B. Investment C1. Innovation C2. Innovation D. More, better capital

27. The growth cycle, with resources Consumption A. Saving E. Increased output B. Investment Output C2. Innovation C1. Innovation D. Increased, improved capital Capital Available resources Potential resources

28. Renewable resources • Climatic/geological vs. biological • Wind, solar, hydro, geothermal depend on capital built to capture them • Others ultimately come from plants capturing the sun • Over-harvest or ecosystem damage reduces availability of biologically based renewables

29. The use of exhaustibles • In a sense, any use of exhaustible resources is unsustainable • By definition, you can’t keep up any rate of use forever • But they’re valuable • So not using them at all doesn’t seem like a good idea • How should they be used? • Hotelling, Hartwick, and Hubbert

30. Hotelling • An exhaustible resource is an asset • Its in situ price should rise at the same rate as other ways of storing wealth • Eventually, a steadily increasing price that rations the resource at the optimal rate

31. Hotelling path Price Time

32. Hotelling path Quantity Time

33. Assessing Hotelling • Conceptually elegant • Decentralized solution gets the same result as society would want • Very congenial to neoclassical economists • Empirical validity is not clear

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35. Global oil use, 1965-2007

36. Hartwick • Nonrenewables are particularly valuable resources, economically useful • Especially oil • Any use now implies less use in future • How to use them fairly?

37. The Hartwick Rule • (Assume that capital and resources are substitutes) • Use some of the wealth derived from nonrenewables to build capital that future generations can use • We’ll have lots of resources and small capital stock • Future has few resources and big capital stock  Everybody’s happy!

38. Problems with Hartwick • It’s not clear that capital and resources are generally substitutes • A wind turbine is a substitute for coal burned in an electric generating station • Cars, roads, airplanes, airports are all complements to oil • Biofuel capacity is a poor substitute for oil • We don’t even seem to be trying to follow the Hartwick Rule

39. Hubbert • Technology interacts with geology to produce a bell-shaped path • Discovery first • Extraction and use lag a few decades • More a geological story than economic • Good fit for global discovery, local production • Global implications are hard to foresee

40. Quantity Extraction and use Discovery Time

41. Revising Hotelling • The basic theory assumes that demand for the resource is exogenous • Not dependent on actions within the system • Yet it seems intuitive that past prices should influence future demand • If that’s true, keep prices low to encourage higher demand in the future

42. Revised Hotelling path Price Time

43. Hotelling path Extraction and use Quantity Time

44. Raise the issue of rate at which to use exh. • Hotelling solution • Data on price and production don’t fit • Introduce concept of peak oil • Hubbert curve • Selected Charlie slides • Coal slides • Gas production (get global data from EIA) • Shale gas issues