Monday, December 05, 2005

Money and Energy: The Map Is Not The Territory

The map is not the territory. To any thinking person this statement is axiomatic. But, an important corollary is more difficult to discern, namely: Money is nothing more than the right to command energy to do what you want it to do.

To understand how the two statements above go together you need first to understand that money and credit make up what's called the symbolic economy. The symbolic economy merely represents what is happening in the real economy of goods and services including energy goods. Second, it is useful to know that only a fraction of one percent of all energy which goes into the products and services of an industrial economy comes from physical human labor. All the rest comes from a mix of fossil fuels (86%), nuclear power (7%), hydro power (6%) and alternative sources (1%). Since nothing gets mined, grown, harvested, processed, manufactured or delivered without energy, it follows that energy is the true currency of modern civilization. And, without energy sources that go beyond human and animal labor, we would revert to a pre-industrial lifestyle.

But some very smart people who should know better insist that money has a life of its own dancing through the hands of merchants, miners and manufacturers and able to conjure goods and even energy resources out of thin air. Such people treat energy as just another item in the marketplace. A recent commentary took that line of thinking as outlined in the linked article above to its logical conclusion by proposing that we run our entire economy on AAA batteries.

Yet, even the most noted cornucopian of our times, Julian Simon, recognized that energy is the "master resource." If energy is in short supply, that is, if it is costly, then our standard of living cannot be high. If it is plentiful and cheap, we can theoretically use it to transform everything else on earth into what we need and want. In his book, "The Ultimate Resource," Simon essentially admits that without cheap energy modern industrial civilization wouldn't be possible. His main argument on energy is that in the long run human ingenuity will always allow us to find whatever amounts and types of energy we need.

That is the real point of contention between energy pessimists and cornucopians. Intellectually honest cornucopians will recognize that no amount of money will elicit movement from a tractor, flight from an airplane, or the flow of electricity from generator, if there is no energy to make it happen. The quest for profit may motivate people to find and extract new energy resources, but no prospector in his right mind would build oil derricks on top of maps.

What we truly need is to start spending much greater sums of public money--that is, energy allocated for public purposes--to jumpstart the creation of a sustainable, renewable energy society. We don't have much time to prepare.

[Thanks to James Howard Kunstler in his November 28 commentary for pointing out the pieces cited above.]

2 comments:

Robert Sczech said...

"Money is nothing more than the right to command energy to do what you want it to do."

Two comments: 1) Money does not command energy. Money commands people. Without people, money would not command or buy anything. It is true however, that people deliver energy for money.

2) There is more money around than there is energy or any other real form of wealth avaiable for trade. This means that most of the money in circulation is a claim on future production of goods and services (including energy). The faith of the market participants into the value of money is based on the belief that the economy will produce even more in the future than it is producing today. The value of retirement accounts depends ultimately on the economy being able to deliver all these implied goods and services in the future. Unfortunately, that assumption could turn out to be a problem in a economy permanently deprived of energy.

Byron King said...

This is the mirror image of Karl Marx's "Labor Theory" of value. It is interesting that Marx was living at the beginning of the Industrial Revolution, just as energy use from coal was beginning to supplant larg amounts of what was formerly required from human energy.

So-called "money" (really, it is just currency unless it is gold or silver -- another discussion) does give its owner the ability to hire labor, either directly or indirectly.

Directly, one man can ask another to, say, dig a ditch. That is direct labor for hire. No labor, no ditch.

Indirectly, a man can hire a machine and operatorto dig that ditch. And using stored energy, in the form of diesel fuel or whatever, the machine can put out the equivalent of hundreds or thousands of units of work, far in excess of the productivity of the man with the shovel.

Post Peak Oil, mankind will be reverting to its historical mean of the amount of energy at its disposal.


When (as is now the case) there is excess currency in circulation, due to governments just minting & printing the stuff, it means that mankind is artificially accelerating resource consumption, and using current accounts to capture future production. It works for a while, but then the wheels all fall off.

The nominal price of energy rises, and mankind gets closer and closer to driving off the eventual cliff.