Sunday , June 26 2022
Home / Video / Correcting the Economic Blindspot on Energy

Correcting the Economic Blindspot on Energy

Summary:
This is a talk I gave to the INET (Institute for New Economic Thinking) group at Oxford University, which is headed by Eric Beinhocker. The Abstract of the talk is below. I open with a dilemma--how do economists derive such limited damages from climate change? The answer is--they made those number up, without taking account of the much more serious warnings by scientists. One of the reasons that economists could not understand how global warming would damage the economy is that they do not understand the role of energy in production. In particular, the dominant "model of production" that economists use, the Cobb Douglas Production Function, has no inherent role for energy, and when economists attempt to incorporate energy, they treat it as a third "factor of production", which

Topics:
Steve Keen considers the following as important:

This could be interesting, too:

NewDealdemocrat writes New home sales rebound, but downtrend in sales intact; prices continue to climb

Barkley Rosser writes Chaos Theory and The End of Roe V Wade

Robert Vienneau writes My Great-Great-Great-Great-Great-Great-Great-Great-Granduncle Babbitt Murdered a Native-American

run75441 writes There is a proper response to this travesty

This is a talk I gave to the INET (Institute for New Economic Thinking) group at Oxford University, which is headed by Eric Beinhocker. The Abstract of the talk is below.



I open with a dilemma--how do economists derive such limited damages from climate change? The answer is--they made those number up, without taking account of the much more serious warnings by scientists. One of the reasons that economists could not understand how global warming would damage the economy is that they do not understand the role of energy in production.



In particular, the dominant "model of production" that economists use, the Cobb Douglas Production Function, has no inherent role for energy, and when economists attempt to incorporate energy, they treat it as a third "factor of production", which trivialises its role.



However, once you acknowledge the reality that "labour without energy is a corpse, capital without energy is a sculpture" (Keen et al 2019), and the empirical fact that, to fit cross-country data, the capital coefficient in the Cobb Douglas Production Function is 0.8 rather than the customary 0.3 (Mankiw 1995), then by Occam's Razor, the Leontief constant coefficients model is the most appropriate and parsimonious production function. This consequently portrays GDP as the transformation of energy into useful work. This realisation indicated that an energy-based production economy could be modelled. The result was an energy-based version of the Goodwin model (Goodwin 1967).



The next stage--of acknowledging that raw materials as well as energy were essential non-produced inputs to production--meant modelling an economy with a one commodity production function with two primary inputs, energy and raw materials, and two primary outputs, a consumption good and an investment good.



This raised a key realist problem with such an abstract model: how can you imagine a consumption good which is not one like corn (a corn economy model isn't a model of manufacturing, because corn can be a consumption--eat it--savings--store it--or investment--plant it--in its raw state) but which somehow feels realistic?



John Hicks was faced with this dilemma when he tried (and failed) to build a model of a sequential production economy (Hicks 1935). He imagined a "bread economy" in which the only output was bread--but where the inputs necessarily involved both wheat and bread ovens. How does one make an oven out of bread? The impossibility of imagining how led Hicks to abandon this gallant quest, and dump on us instead the IS/LM model.



Despite this tragic outcome, we genuinely felt Hicks's key imaginative dilemma ourselves, when we tried to imagine a consumption good that can also be manufactured--transformed by labour, capital, energy, and previous generations of itself--into a realistic investment good?



The solution came from imagination, in the form of the animated movie The Iron Giant (https://www.imdb.com/title/tt0129167/). Rather than trying to imagine a realistic consumption good that can also be turned into an investment good and hence capital on Earth, we imagined another world, The Planet of the Iron Giants. There, the workers are Iron Giants, the consumption good is iron, and the investment good is iron. Iron Ore and Coal are the raw material/energy pair. They are converted in and into blast furnaces, iron mills, coal mining equipment, iron ore mining equipment, and food for the Iron Giants. We had our causal chain, and the derivation of a single commodity model, where the essential inputs are non-produced energy and minerals, followed naturally. Technically, it recreated the Goodwin model (Goodwin 1967) again, with the added capability of modelling waste creation and its negative environmental feedback on production.



Chapters

00:00 Introduction

00:40 My talk starts

00:48 The crazy low damage estimates from Neoclassical economists

04:00 No role for energy in Neoclassical economics

05:40 Labor without energy is a corpse, capital is a sculpture

09:30 Leontief model is superior to Cobb-Douglas by Occam's Razor

13:37 Modelling energy properly: the basic Goodwin cyclical growth model

16:39 Introducing energy into Goodwin

18:30 Minsky model of Goodwin with energy

19:15 The Big Kahuna, Matter as well as Energy

19:40 Hicks's 1935 attempt that gave us the IS-LM model

21:18 The Planet of the Iron Giants

26:00 Minsky model of matter and energy in production

28:57 I blame Adam Smith

30:34 Discussion starts with Eric Beinhocker and colleagues
Steve Keen
Steve Keen (born 28 March 1953) is an Australian-born, British-based economist and author. He considers himself a post-Keynesian, criticising neoclassical economics as inconsistent, unscientific and empirically unsupported. The major influences on Keen's thinking about economics include John Maynard Keynes, Karl Marx, Hyman Minsky, Piero Sraffa, Augusto Graziani, Joseph Alois Schumpeter, Thorstein Veblen, and François Quesnay.

7 comments

  1. Thomas Schroeder

    STEVE, WEATHER WARFARE/CLIMATE CONTROL is a go. The planet is COOLING from government, military and private sources using climate control technologies, 132 weather control patents in public information. Question, how many secret patents are their? For info on what's really gong on visit Agwn, Mike Morales on u tu be and Elana Freeland. WARMING INSANITY is about EUGENICS and Central Bank control. it's that simple. WAKE UP!!!!!!!!! and grow up. Grow a pair. Respectfully, Tom.

    • Respectfully Tom, you've drunk the Q-Anon Kool Aid.

      What throws me is how intelligent the Guvmint would need to be for these sort of fantasies to be true. I've met far more government leaders than you've had hot breakfasts, and with barely an exception, they're idiots.

  2. What about the economic blind spot of the depreciation of durable consumer goods?
    How many cars have Americans trashed each year since Sputnik?

  3. The work of Steve and others has been in the public realm for the last couple of years. Why does the latest IPCC report still embrace the Nordhaus rubbish?

  4. Stopping use of fossil.fuels is not going to affect global warming. What about the aerosol masking effect??

  5. UnhingedBecauseLucid

    Sound cutting off at the most inopportune timings during the Q&A conversations at the end…
    Anyway … PLEASE DO coordinate things to arrange a seminar with Simon Michaux. Perhaps Mr. Jancovici could free up some time to give the necessary preliminary exposé on the fundamentals of energy in modern civilization via web. 😉
    Arrange for a vast orthodoxically indoctrinated audience … so I get to wear my smuggiest of smiles for 2 hours straight while drinking wine and eating tasty hors-d'oeuvres… lol
    Preaching to the choir is not enough; you need to cause more disturbances Steve …

Leave a Reply

Your email address will not be published. Required fields are marked *