EC The World’s Weird Self-Organizing Economy

US regulators now want to raise interest rates by raising short-term interest rate and by selling QE securities. They don’t understand that they are playing with fire. They feel that they will have more power if they can raise interest rates now, they will have the flexibility to lower them later if the economy should later slow excessively. They don’t understand how much of the world’s economy may really be a bubble, created by the decline in interest rates since 1981.

[10] The adverse economic outcome we should be concerned about is collapse, as encountered by prior civilizations when their economies hit limits. 

The stories in the press have been so focused on oil “running out” and finding alternatives to oil that few have stopped to ask whether this is really the correct story. Instead of creating a new story, it might have been better to look more closely at history. Based on the historical record, collapse seems to have be associated with situations where populations have outgrown their resource bases. In other words, collapse can be considered an energy consumption per capita problem. The oil problem (and other fuel problem) we are facing today can be viewed as an energy consumption per capita problem, as well.

We know from research that has been done by Peter TurchinJoseph Tainter, and others how collapse has played out in the past. The situation is different this time, however, because the world economy is very interconnected. Oil consumption depends on electricity consumption and vice versa. Our financial system is also extraordinarily important. For these reasons, a collapse may occur more quickly than in the past.

Differences Between My View and the Standard View

One of the big differences between the way I see the economy and the standard view of the economy is the answer to the question of “Who is in charge?” The standard view is that politicians and economists are in charge. They have all of the answers. The dire collapse outcomes that afflicted early civilizations could not possibly affect us. We are too smart. We know how to adjust interest rates correctly. We can even make QE available to lower long-term interest rates. We can also add more technology and other complexity than has ever been added in the past.

The answer I see to the question, “Who is in charge?” is, “The laws of physics are in charge.” Politicians play a fairly minor role in directing the fate of economies. If there is not enough energy available of the type needed (inexpensive and matching the current infrastructure), the economy may very well collapse. It is nature and the laws of physics that call most of the shots.

Another big difference between my view and the standard view is the observation that a decrease in oil supply (or total energy supply) affects both the supply and demand of energy. Because both supply and demand are affected, we don’t know which direction oil and other energy prices will move. They may move erratically, as interest rates are adjusted by regulators. A more complex model is needed.

Climate change becomes less of an issue in my view of the future, for several reasons. First, humans don’t really have very much control over the direction of the economy, so talking about anthropogenic climate change doesn’t make a whole lot of sense. The laws of physics that allowed human population to rise are also allowing climate change to happen. Second, we seem to be limited in our ability to use renewables to fix the situation. Furthermore, the possibility of collapse in the near future makes the various scenarios that hypothesize the use of large amounts of fossil fuels over many years in the future seem very unrealistic. Perhaps efforts to fix climate change should be focused in new directions, such as planting trees.

Help from Others

The subject matter of this post requires the knowledge of information from a wide range of academic areas. I could not have figured out all of this information on my own. I have been fortunate to have been able to learn from of a wide range of experts. Quite a number of academic groups have seen may articles, and invited me to speak at their conferences. In particular, I have had a long-term involvement with the BioPhysical Economics organization and have spoken at many of their conferences. I have learned much from Dr. Charles Hall, although at times I don’t 100% agree with him.

I have also learned from the many commenters on OurFiniteWorld.com. They form a self-organizing system of people from a wide range of backgrounds. Earlier, my involvement at TheOilDrum.com as “Gail the Actuary” allowed me to get acquainted with a range of researchers, looking at different aspect of the energy problem.

In future posts, I intend to expand further on the ideas presented in this post.

*Here I am using the term afford loosely. What borrowers can actually afford is the current required monthly payments.

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Vivian Lewis 8 months ago Contributor's comment

in energy statistics the past is prologue but doesn't determine outcomes. as technology improves developing countries CAN get electricity without carbon, for example in countries with lots of sun. We have a pick in India. And in western countries too even with oil prices falling it is not hard to fine alterrnative energy plays.

Moon Kil Woong 1 year ago Contributor's comment

Actually the world needs a cheap, dense, and hopefully safe electric energy storage system more than anything else. This would solve a lot. For energy production, the big hope is geothermal and/or fusion although modern nuclear power plants are much safer as well. Solar helps as does wind energy, but it won't solve our growing energy needs, especially without a dense efficient way of storing it.

Gary Anderson 1 year ago Contributor's comment

I would not feel comfortable having nuclear power close to earthquake faults. Maybe it is just me. But there are other alternatives, but as the author says they are not necessarily enough to bridge the gap. So, energy affordability and proper pricing is very important to the economy. Americans are buying expensive large vehicles more and more. This could squeeze energy in the future.

Vivian Lewis 1 year ago Contributor's comment

there are circumstances in hot developing countries where solar energy off the grid doesn't require subsidies. Where the background is right the same is true of wind power or tidal energy. In places like Iceland and Kenya geothermal power makes sense. It is wrong to assume that these alternatives to oil and gas won't grow more important. And I happen to think nuclear power also often is a suitable option.

Gary Anderson 1 year ago Contributor's comment

Yes, nuclear may have its place. I just happened to be on the middle of a major earthquake out west and on the edge of another one. I think they should be avoided where the ground won't stay still.

Vivian Lewis 1 year ago Contributor's comment

Moon Kil Woong is right about the need to have a storage system for intermittant power like solar or wind. The sun doesn't shine for 24 hours and the wind doesn't always blow. I have a stock for this but it is a long-shot, a geothermal company from Nevada which also is developing storage systems, Ormat, ORA. It is not a global-investing.com pick because it is a US firm, and moreover its share has been beaten down over the volcanic eruption in Hawaii just down the road from its shut-in geothermal power plant. I take a long view.