“The economy is about stuff,” says systems ecology professor, Charles A.S. Hall, who, along with economics professor Kent A. Klitgaard, wrote: Energy and the Wealth of Nations: Understanding the Biophysical Economy, published by Springer in November 2011. Hall and Klitgaard postulate that the economy begins with the earth’s natural resources such as trees, rocks, water, fossil fuels, etc. which are creatively transformed using human ingenuity, labor, machines, and large amounts of energy into usable products and services that people consume. Therefore, they argue, economics must be more than just a social science but also “completely beholden to the basic laws and principles of (natural) science.”
Hall received a Ph.D. in Zoology in 1970 from the University of North Carolina, studying under ecological engineering professor, Howard Odum, and since 1987 has taught in the department of environment, science and forestry at the State University of New York in Syracuse. Hall's principal focus has been the examination of how organisms and societies invest energy in resource exploitation, and how such investments change as the quality of resources changes. While doing research work on the feeding habits of fish, Hall originated the concept of Energy Return on Energy Invested (EROI), where investments and returns are measured in energy units instead of money.
Klitgaard received his Ph.D. in Economics from the University of New Hampshire in 1987, and teaches economics at Wells College in Aurora, N.Y. Klitgaard's primary teaching and research interest is ecological economics: conceptualizing the economy as a subsystem of a larger biophysical system. He is also interested in the history of economic analysis, economic history, political economy and the interrelation of technological change and the organization of work.
Biophysical economics refers to a material world, which is usually, but not completely, covered by scientific knowledge and physical laws emanating from such areas as physics, chemistry, geology, biology, hydrology, meteorology and the like. Scientists often think of these natural laws as imposing constraints on a system, even an economic system. Traditional economics, on the other hand, is mostly studied and taught as a social science with very little connection to the natural sciences. It depends upon people just getting social policies right, the passage of time and the results of new technologies coming to fruition.
Energy and the Wealth of Nations is divided into five parts. Part I begins with a discussion about energy and its critical relationship to economic wealth production throughout history. Part II provides examples of the limits of conventional economic models, such as neo-classical economics, in understanding and predicting economic changes. These weaknesses have become especially evident with the near collapse of world financial markets in 2008. Part III describes critical laws of nature such as thermodynamic laws, Newton’s Laws of Motion, the work-energy theorem, etc., that are needed to understand the relationship of energy to economics and the relatively simple mathematics needed to understand biophysical economics. Part IV explains peak oil, the economic cost of energy using EROI methodology, and includes data on the EROI levels for various primary energy sources. The authors cite a related and important work by Nobel Laureate in Chemistry, Fredrick Soddy, from his 1926 book Wealth, Virtual Wealth and Debt. Soddy writes that the ability to control the flows of useful (low entropic) energy and embodied energy are the true economic wealth, not money. In Part V, Hall and Klitgaard discuss how it is false to believe that traditional economies work because of clever technologies, substitution and intelligent investments. They argue that these only work because we also have “huge amounts of cheap energy to throw at the problem.” A quick check of the BP Statistical Review 2011 shows that the world indeed consumes huge amounts of energy, 476 Quads (quadrillion BTU’s) in 2010, 87 percent of which came from non-renewable fossil fuels. (One Quad of nuclear fuel can power more than twelve 1000-Megawatt nuclear power plants.)
It was difficult to put this book down because it offers such a compelling story about how our world economy is so completely empowered by the ability to find, extract and consume energy. While the authors point out there are still significant amounts of energy-dense fossil fuels available, they claim that much of what is in the ground will eventually become uneconomic to extract. Hall and Klitgaard conclude that the fossil fuel EROI trend line has shown a long history of decline because we have used up the easiest- and cheapest-to-extract resources first. They discuss how EROI principles also apply to the development of potential renewable energy substitutes.
Concerns about the future availability of cheap energy have been well documented over the past 40 years, in such works as the Scientific American report, Energy and Power (1971); The Entropy Law and Economic Process (1971) by Nicholas Georgescu-Roegen; Energy Conversion and Utilization (1976) by Jerrold Krenz; A Special Report on Energy by National Geographic magazine (February 1981); Environment Power and Society for the Twenty-First Century (2007) by Howard Odum; and more recently in the International Energy Agency’s IEA 2011 World Energy Outlook. None of these, however, has utilized EROI methodology as a tool to help quantify the useful energy that could potentially be available to power our economies.
Energy and the Wealth of Nations is worthwhile read for anyone who is interested in gaining a deeper understanding of the ‘science’ behind economic growth and the critical yet often misunderstood role that energy plays in our world economy. Engineers involved in the electric power industry may be especially interested in the influence of biophysical economic principles and, especially EROI, on future electric power supply and transport options.
Jim MacInnes worked as a power engineer for the company that designed and construction managed the 1872 MW Ludington pumped storage facility in Michigan. He has testified on energy issues before the Michigan House and Senate Energy Policy Committees. He is a member of the IEEE Power and Energy Society and the International Society for Ecological Economics. He is a licensed professional engineer and holds BSEE and MBA degrees from the University of California, Irvine.