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In this updated edition of a groundbreaking text, concepts such as energy return on investment (EROI) provide powerful insights into the real balance sheets that drive our “petroleum economy.” Hall and Klitgaard explore the relation between energy and the wealth explosion of the 20th century, and the interaction of internal limits to growth found in the investment process and rising inequality with the biophysical limits posed by finite energy resources. The authors focus attention on the failure of markets to recognize or efficiently allocate diminishing resources, the economic consequences of peak oil, the high cost and relatively low EROI of finding and exploiting new oil fields, including the much ballyhooed shale plays and oil sands, and whether alternative energy technologies such as wind and solar power can meet the minimum EROI requirements needed to run society as we know it.
For the past 150 years, economics has been treated as a social science in which economies are modeled as a circular flow of income between producers and consumers. In this “perpetual motion” of interactions between firms that produce and households that consume, little or no accounting is given of the flow of energy and materials from the environment and back again. In the standard economic model, energy and matter are completely recycled in these transactions, and economic activity is seemingly exempt from the Second Law of Thermodynamics. As we enter the second half of the age of oil, when energy supplies and the environmental impacts of energy production and consumption are likely to constrain economic growth, this exemption should be considered illusory at best. This book is an essential read for all scientists and economists who have recognized the urgent need for a more scientific, empirical, and unified approach to economics in an energy-constrained world, and serves as an ideal teaching text for the growing number of courses, such as the authors’ own, on the role of energy in society.

Inhaltsverzeichnis

Frontmatter

I

Frontmatter

1. How We Do Economics Today

Abstract
We start with a definition of economics: it is derived from the Greek oikos, meaning pertaining to the household, so economics is the study of household management Aristotle wrote of this in his Politics. Wise household management, even if the household comprises the entire state, is part of natural law. But for Aristotle, and those who followed his philosophical lead long into the medieval period, chrematistics, or producing and lending money for profit, was unnatural. Economic thought has changed a great deal since ancient and medieval times! Curiously ecology starts there too, although the ecologist’s household can often be much larger. If you think about economics in your day-to-day life, you are probably thinking about providing yourself with the necessities of life (and hopefully a few amenities), that is, the basic stuff you need to survive and, hopefully, be happy. Often you need to think about the trade-offs that exist between the choices you have, a hamburger and no movie vs. Ramen soup and a movie, tuition vs. rent or a vacation, or how to budget whatever financial resources that you have to meet your needs and wants. Many elderly people of limited means must consider the trade-off between food and health care. Hence in very basic perspective, economics is about choice: how much we have and how we should decide among alternatives. Of course, economics pays a lot of attention to money, and a basic starting point for economic thought is that almost everything of concern to humans has a price and can be bought or sold for money. A starting assumption of mainstream economics is that the value of something is represented by its price.
Charles A. S. Hall, Kent Klitgaard

2. How We Got to Where We Are Today: A Brief History of Economic Thought and Its Paradoxes

Abstract
This chapter assesses earlier economic theories from an energy perspective, where that is possible. We also make the case that although economics has not dealt with energy very explicitly, the discipline has addressed many other important issues that help us today to understand just how energy operates within economies as well as provide a number of interesting and important perspectives on economies that are not related to energy. The purpose of this chapter and the next three is to utilize the insights and the methods of prior economic schools of thought to build a new theory that explains actual economies much better while addressing energy and biophysical limits to human activity far more explicitly than does mainstream theory.
Charles A. S. Hall, Kent Klitgaard

3. Problems with How We Do Economics Today

Abstract
The first chapter of this book summarized how we undertake economics, and our explanation for that approach in the modern Western world. The second chapter introduced the idea that this contemporary view of understanding economics is just one of many ways that humans have understood how the economy operates. The last century has seen the ascendancy, indeed intellectual dominance, of neoclassical economics (NCE, also known as Walrasian economics). The basic NCE model represents the economy as a self-maintaining circular flow among firms and households, driven by the psychological assumptions that humans act principally in a materialistic, self-regarding, and predictable way. Unfortunately, the NCE model violates a number of physical laws and is inconsistent actual human behavior, rendering it to be an unrealistic and a poor predictor of people’s actions. Recently, an array of experimental and physical evidence and theoretical breakthroughs demonstrate the disconnect between evidence and neoclassical theory. Despite the abundance and validity of these critiques, few economists seriously question the neoclassical paradigm that forms the foundation of their applied work. This is a problem because policy makers, scientists, and others turn to economists for answers to important questions. The supposed virtues of «privatization,» «free markets,» «consumer choice,» and «cost-benefit analysis» are considered to be self-evident by most practicing economists, as well as many in business and government. In fact, the evidence that these concepts are correct is rather slim and contradictory. Thus, this chapter is a strong critique of economic theory, in this case NCE.
Charles A. S. Hall, Kent Klitgaard

4. Biophysical Economics: The Material Basis

Abstract
In our first chapter, we provided a review of how modern (neoclassical) economics operates as a social science-based means of allocating «scarce» resources, including the philosophy behind the assumptions that govern the operation of that model of how economies work. In this approach markets are seen as especially important as a means of making economic decisions and guiding the allocation of productive resources.
Charles A. S. Hall, Kent Klitgaard

5. Biophysical Economics: The Economics Perspective

Abstract
From its inception, biophysical economics has been dedicated to the unity of the approaches of natural and social science as a way to understand the interaction of humans and nature. This chapter explores methods of better accomplishing this goal. We believe that such a unity of methods of inquiry will produce a deeper understanding of the present and future problems that face us in a potentially energy-short and climate-compromised world. Usually the study of natural and social sciences is approached separately. Ecology and biophysics are studied as natural science while economics and social history as social sciences. Upon what grounds can we unify them?
Charles A. S. Hall, Kent Klitgaard

II

Frontmatter

6. The Evolution of Humans and Their Economies

Abstract
The first four chapters focused mostly on economics, that is, the procedures by which we study our economies. This chapter focuses more about the economies themselves, including their historical and biophysical basis.
Charles A. S. Hall, Kent Klitgaard

7. Energy, Wealth, and the American Dream

Abstract
The Americas were the last major liveable continents to be settled by humans. When first Asians («Native Americans» or «Indians») and then Europeans (and those they brought from Africa and Asia as slaves or laborers) settled in the Americas, they found enormous lands empty (or empty-able) of other humans with incredibly rich resources. Having emigrated from relatively densely populated and socially and economically stratified Asia and Europe, the Americas represented enormous resources power capita and the freedom to exploit those resources and hence generate wealth. This of course is a well-known story told to most American children with a focus on the various heroic activities of our ancestors. But it is also a story about energy.
Charles A. S. Hall, Kent Klitgaard

8. The Petroleum Revolution and the First Half of the Age of Oil

Abstract
This chapter will focus on the importance of fossil fuels (coal, gas, and oil) and especially petroleum (meaning natural gas and oil, or sometimes just oil). First we want to ask why petroleum and especially oil. Why has petroleum been so important, and why is it so hard to unhook ourselves from it? To do that we need to look more broadly for a moment at the energy situation that has faced, and that faces, humanity. Solar energy, either directly or as captured by plants, was and is the principal energy available to run the world or the human economy. It is enormous in quantity but diffuse in quality. As we have developed in the previous chapter, the history of human culture can be viewed as the progressive development of new was to exploit that solar energy using various conversion technologies, from spear points to fire to agriculture to, now, the concentrated ancient energy of fossil fuels. Until the past few hundred years, human activity was greatly limited by the diffuse nature of sunlight and its immediate products and because that energy was hard to capture and hard to store. Now fossil fuels are cheap and abundant, and they have increased the comfort, longevity, and affluence of most humans, as well as their population numbers.
Charles A. S. Hall, Kent Klitgaard

III

Frontmatter

9. The Petroleum Revolution II: Concentrated Power and Concentrated Industries

Abstract
In earlier chapters, we developed the link between the historical development of energy sources and the development of human society. More energy has allowed humans to do more work, including that of producing more wealth and more humans. We use the joule, for those not steeped in physical science, as the standard measure of energy. One joule is the amount of energy needed to lift a mass of 1 kg a distance of 1 m on the surface of the earth. A joule is equal to about one-quarter of a calorie. Our more familiar unit is the kilocalorie (often written as calorie) and is found, for example, on the back of food packages. One kilocalorie is 1000 calories, equal to about 4 kJ. Thus, if you consume a drink that says it has 100 cal, you will have consumed 418 kJ. Later, in ► Chap. 8, we explore the relation between energy and power from a scientific perspective. Power is the rate of doing work and is commonly measured in watts. From the standpoint of physics, power is energy used or expended per unit of time or the work that power causes or allows to be done. The most common unit of power is the watt, where 1 W = 1 J/s.
Charles A. S. Hall, Kent Klitgaard

10. Twentieth Century: Growth and the Hydrocarbon Economy

Abstract
The economy of the early twenty-first century is not just a larger version of the economy of the nineteenth century. It is fundamentally different. This chapter views the development of the American economy from the middle of the twentieth century through the financial crisis and recession of 2008. In 2008, Barack Obama was elected president of the United States with a great deal of optimism. But 2010 saw a conservative resurgence based on poor economic growth and by 2016 the election of a right-wing «populist» Donald Trump. We pose a question: can the pro-growth agenda that dominated the twentieth century withstand the biophysical limits that will be imposed by peak oil and climate change? To answer this crucial question, we need to look carefully at the patterns of history as well as carefully examine the scientific data, which we do with the remainder of this chapter.
Charles A. S. Hall, Kent Klitgaard

11. Globalization, Development, and Energy

Abstract
Young adults today have grown up in a world where globalization is a massive reality and where most of our politicians accept its supposed virtues or did so until recently. There are fierce discussions, or more often positions, about whether or how globalization is losing (or gaining) us jobs, or whether we have globalized too much or not enough, but for most people it is just a fact represented by the labels on their clothes or electronic devices indicating production or manufacture from all around the world. This was not the case when the authors of this book were young—at that time nearly everything we ate, wore, or drove was «made in America.» Anything from overseas—except specialized luxury goods—was normally viewed with great suspicion. Thus globalization, at least at the scale we see it today, is a relatively recent phenomenon. That makes it useful and important to understand why globalization has become so important, what are the perceived and actual gains and costs and how these are related to energy use ► [1].
Charles A. S. Hall, Kent Klitgaard

12. Are There Limits to Growth? Examining the Evidence

Abstract
In recent decades there has been considerable discussion in academia and the media about the environmental impacts of human activity, especially those related to climate change and biodiversity. Far less attention has been paid to the diminishing resource base for humans. Due to our inattention, resource depletion and population growth have been continuing relentlessly. The most immediate of these issues appears to be a decline in oil production, a phenomenon commonly referred to as «peak oil,» because global production of conventional oil appears to have reached a maximum and may now be declining. However, a set of related resource and economic issues are continuing to come home to roost in ever greater numbers and impacts—water, wood, soil, fish, gold, and copper—so much so that author Richard Heinberg [1, 2] speaks of «peak everything.» We believe that these issues were set out well and basically accurately by a series of scientists in the middle of the last century and that events are demonstrating that their original ideas were mostly sound. Many of these ideas were spelled out explicitly in a landmark book called The Limits to Growth, published in 1972 [3]. In the 1960s and 1970s, during our formative years in graduate school, our curricula and our thoughts were strongly influenced by the writings of ecologists and computer scientists who spoke clearly and eloquently about the growing collision between increasing numbers of people—and their enormously increasing material needs—and the finite resources of the planet. The oil-price shocks and long lines at gasoline stations in the 1970s confirmed in the minds of many that the basic arguments of these researchers were correct and that humans were facing some sort of limits to growth. It was extremely clear to us in 1970 that the growth culture of the American economy had limits imposed by nature, such that, for example, the first author made very conservative retirement plans based on his estimate that we would be experiencing the effects of peak oil just about the time of his expected retirement in 2008. In fact it was a wise decision, as many less conservative plans lost one third to one half of their value in the crash of 2008.
Charles A. S. Hall, Kent Klitgaard

13. The Petroleum Revolution III: What About Technology?

Abstract
A main concern of this book has been that—given the extreme dependence of most contemporary societies and economies on energy and the finite nature of fossil fuels—what kind of a future can the young readers of this book expect if our economic needs and expectations face severe constraints in the future availability of fossil fuels. As we have developed previously in this book (► Chap. 8) and frequently elsewhere, the two principle concerns we have about future availability and affordability of fossil fuels have been absolute supplies (e.g., «peak oil,» the idea that oil will reach a peak in production and then inevitably decline) and declining EROI. But what if these issues were not to occur or to do so only so far in the future that they would have no meaning to anyone alive today? Certainly there have been economists who have argued that technology and substitutions will indefinitely hold off the effects of depletion [e.g., ► 1]. Could they be right?
Charles A. S. Hall, Kent Klitgaard

IV

Frontmatter

14. What Is Energy and How Is It Related to Wealth Production?

Abstract
Energy is, at best, an abstract entity for most contemporary people. Only rarely does it enter our collective consciousness, generally in those relatively rare times when there are particular shortages or sharp price increases in electricity or gasoline. In fact, as this book will demonstrate, energy and its effects are pervasive, relentless, all-encompassing, and responsible for not only each process and entity in nature and our own economic life but also for many aspects of the basic nature of our psyches and many of the ways that world history has unfolded. Few understand or acknowledge this because the pervasive impact in energy shown in this book does not usually enter into our collective training and education, and it does not enter into our educational curricula. Why is this so? If energy is as important as we believe then why is that not more generally known and appreciated? The answers are complex. One important reason is that the energy that is used to support ourselves, our families, or our economic activity generally is used at some other location and by other people, often in order to reduce environmental impacts on people, or by quiet, automatic machines whose fuel tends to be relatively cheap. After all, coal oil and gas, our principal sources of energy, are basically messy, smelly, dangerous, and unpleasant materials. The energy from food that we need to fuel ourselves surrounds most of us abundantly and is available readily and relatively cheaply. Society has gone to great lengths to isolate most of us physically and intellectually from the energy sources upon which our food, our comfort, our transportation, and our economy depend. It is convenient to ignore energy because many facts about it are uncomfortable to know.
Charles A. S. Hall, Kent Klitgaard

15. The Basic Science Needed to Understand the Relation of Energy to Economics

Abstract
«The trouble with the world is that the stupid are cocksure and the intelligent are full of doubt. The whole problem with the world is that fools and fanatics are always so certain of themselves, and wiser people so full of doubts.» (Bertrand Russell).
Charles A. S. Hall, Kent Klitgaard

16. The Required Quantitative Skills

Abstract
If you glance at an advanced economics journal, you will see that many of the pages are filled with dense mathematical equations. Quite often these equations are presented as «proofs» of some economic idea. It is really quite an intimidating experience, even for those of us with a fairly good background in quantitative analysis! How can you, aspiring perhaps to become an economist, or at least to be able to understand others’ economic conclusions, do so if your skills in mathematics are limited? We are not sure, but there may be some hope for you. This is because although we believe in the critical importance of a good quantitative understanding of economic systems, we are not so sure as to the utility of very strong mathematical analysis and skills except perhaps to understand others’ work that uses them, including that, as the wonderful economist Joan Robinson said, we are not bamboozled by those who are hiding their simple or even ludicrous ideas behind impenetrable mathematics. If you are confused by this sentence, quantitative means referring to the use of numbers and basic, although well thought out, arithmetic usually relating to some kind of data and the relations among data. Mathematical has many meanings but in this context generally means the ability to use advanced paper and pencil mathematics, often called «mathematical analysis,» «analysis,» or «deriving closed form solutions,» often for theoretical work related only loosely to quantitative analysis. We believe that economics has suffered from the excessive use of complex mathematics, sometimes linked to poorly formulated problems—and sometimes under the misleading assumption that the basic understanding of economics as given in most economics textbooks is always an accurate representation of real economies. We think far too many good minds have spent far too much time undertaking such «mental masturbation» when instead we should be examining much more carefully our basic assumptions of what it is that economists should be doing and how—empirically—actual economies operate. We are not alone in this view. For example, Paul Krugman, a Nobel Prize winner in economics and a very thoughtful and productive economist, said in 2009 while referring to the enormous financial crash of 2008 (and alluding to the famous poem by John Keats «Ode to a Grecian urn»):
Charles A. S. Hall, Kent Klitgaard

17. Is Economics a Science? Social or Biophysical?

Abstract
We start with a review of the basic ideas of some important economists as given in Chap. 2. Economies exist independently of how we perceive or choose to study them. For more or less accidental reasons, we have chosen over the past 140 years to consider and study economics as a social science. The present social science focus, however, was not particularly the case with earlier economists, before, say, 1880, who were more likely to ask «where does wealth come from?» than are most mainstream economists today. In general, these earlier economists started their economic analysis with the natural biophysical world, probably simply because they had common sense but also because they deemed inadequate the perspective of earlier mercantilists who had emphasized sources of wealth as «treasure» (e.g., precious metals) derived from mining or trade or plunder. In the first formal school of economics, the French physiocrats (e.g., Quesnay 1758; see Christensen [1, 2]) focused on land as the basis for generating wealth.
Charles A. S. Hall, Kent Klitgaard

V

Frontmatter

18. Energy Return on Investment

Abstract
Please confirm inserted citation for Ref. [1] is okay.
Charles A. S. Hall, Kent Klitgaard

19. Peak Oil, EROI, Investments, and Our Financial Future

Abstract
The enormous expansion of the human population and the economies of the United States and many other nations in the past 100 years have been facilitated by a commensurate expansion in the use of fossil fuels ► [1]. To many energy analysts, that expansion of cheap fuel energy has been far more important than business acumen, economic policy, or ideology, although they too may be important ► [1–15]. While we are used to thinking about the economy in monetary terms, those of us trained in the natural sciences consider it equally valid to think about the economy and economics from the perspective of the energy required to make it run. When one spends a dollar, we do not think just about the dollar bill leaving our wallet and passing to someone else’s. Rather, we think that to enable that transaction, that is, to generate the good or service being purchased, an average of about 5000 kJ of energy (roughly half the amount of oil that would fill a standard coffee cup) must be extracted and turned into roughly a half kilogram of carbon dioxide. Take the money out of the economy and it could continue to function through barter, albeit in an extremely awkward, limited, and inefficient way. Take the energy out and the economy would immediately contract or stop. Cuba found this out in 1991 when the Soviet Union, facing its own oil production and political problems, cut off Cuba’s subsidized oil supply. Both Cuba’s energy use and its GDP declined immediately by about one-third, almost overnight groceries disappeared from market shelves within a week, and soon the average Cuban lost 20 pounds ► [16]. Cuba subsequently learned to live, in some ways well, on about half the oil as previously, but the impacts were enormous. While the United States has become more efficient in using energy in recent decades, most of this is due to using higher-quality fuels, exporting heavy industry, and switching what we call economic activity (e.g., ► [17]), and many other countries, including efficiency leader Japan, are becoming substantially less efficient ► [18–20].
Charles A. S. Hall, Kent Klitgaard

20. The Role of Models for Good and Evil

Abstract
The words «model» and «modeling» are found increasingly in economics and indeed in science in general. Therefore, it is important that we consider here some of the most important characteristics of these words and concepts and introduce the reader to how they are used in energy studies and in economics. Most generally the word «model» means a simplification. For example, we all work with models of human behavior that a person will act in a particular way because he or she is a teenager, a man, a woman, rich, poor, black, white, or whatever. Of course one of the important aspects of growing up is to realize that such models are wrong so often that they are essentially useless and that we need to meet and judge people one person at a time. So perhaps one of the most important things you can learn about models of any kind is that they are often wrong. But often they are correct, and usually, incorrect, they can be useful. So armed with a healthy skepticism we can go on to see what models really are. This chapter is in some respects a continuation of ► Chap. 16 on mathematical tools ► [1].
Charles A. S. Hall, Kent Klitgaard

21. Applying a Biophysical Economics Approach to Developing Countries

Abstract
It seems imperative that we as individuals who care about the human condition and about nature must create a new way to undertake developmental economics and perhaps economics in general. The reasons this is so important have been reviewed in previous chapters and include our dissatisfaction with the intellectual foundations of conventional economic models used in development and of the results that have occurred with their use, the general sense of many development economists themselves that conventional economics has failed, the need to do something that will work, the concern that most knowledgeable people have that the future, and especially the future of most developing nations, will be much more constrained by the «end of cheap oil,» and the need to protect whatever nature is left. We try to develop such a model in this chapter, summarizing certain approaches and even successes of the past, and use a biophysical basis to try to generate a synthesis to help the reader. We are not foolish enough to believe that we can in one fell swoop cure all the economic problems that generations of traditional economists have not been able to, but we believe that we do provide a useful basis here for beginning that process and for generating useful results now for field workers.
Charles A. S. Hall, Kent Klitgaard

VI

Frontmatter

22. Peak Oil, Secular Stagnation, and the Quest for Sustainability

Abstract
Please confirm if inserted reference citation for Ref. [1] is okay.
Charles A. S. Hall, Kent Klitgaard

23. Fossil Fuels, Planetary Boundaries, and the Earth System

Abstract
The decline in resource quality, measured in part by falling energy returns on investment, is a serious problem for our futures in and of itself. Access to fossil fuels has given many of us a far more comfortable life. Cellular phones are a ubiquitous possession, even among the world’s poor. Fossil-derived energy has lifted the burden of heavy manual labor. Most Americans now work in offices and access electronic media at will. These feats would be impossible in the absence of electricity. Many people complain vociferously about how difficult commercial airline travel is these days with late flights, extra baggage charges, no food, and cramped seating. But imagine crossing the country in a Conestoga wagon. As an exercise, try thinking about the energy that is embodied in your day-to-day consumption patterns. Not surprisingly, people are reluctant to do without the goods they have acquired and become used to. When environmental educator Ray Bowdish, speaking at a recent symposium, asked his students what they could simply not give up, a frequent answer was «my truck!»
Charles A. S. Hall, Kent Klitgaard

24. Is Living the Good Life Possible in a Lower EROI Future?

Abstract
We are often accused of being pessimists, probably because we do believe that the future will have at least less oil and perhaps less energy than it does now and we believe that the energy costs of getting whatever fuels we do use will become greater and greater. But, we do not see this automatically as a bad future, depending on how we deal with it. As boys, we both had a wonderful childhood on opposite coasts in the 1950s and 1960s during a period when the US energy use was only 20% of what it is now. We could go fishing and surfing (respectively) on our bicycles and had no need for soccer moms driving us around in an SUV. We played sports all the time with neighborhood friends and went camping and hiking to our heart’s content. Nature was abundant, everywhere, exciting, and fascinating. Even today’s perspective that there are dangerous people out there and children must be driven everywhere for protection was not valid—and even today youngsters are considerably more likely to die or be hurt in an automobile accident than be kidnapped!
Charles A. S. Hall, Kent Klitgaard

Backmatter

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