Book review: "Energy and the Wealth of Nations"

The book is based on the premise that the capture of excess energy supports all the functions of life....

Human civilization began when agriculture led to enough excess storable food (derived from solar energy, via plant life) to support non-producing groups of priests, soldiers, royalty, artists and others. Technology gradually allowed the capture of wind and water power (other forms of solar energy) for trading, simple manufacture and other purposes....

Something remarkable happened late in the 18th century – people discovered how to obtain and use vast new forms of stored solar energy, such that they were no longer dependent on the energy received in a single season or a few years. Those new energy sources – fossil fuels – came from vast new supplies of concentrated and portable energy – first coal, then oil, then natural gas. The challenge was on, both to find and extract more of these energy stores and to find new ways to use them....

Conventional economics and history texts rarely notice the essential role of cheap and plentiful resources on the massive changes of the past two centuries, preferring to focus on inventions, political changes, and new economic forms. While these were all important, it all started with energy.

Hall and Klitgaard show that the correlation between energy use and economic activity (and population levels) has been very high throughout this period. Most academic economics considers production to be a function of capital and labor alone, but including energy makes the analysis work much better. Cheap energy, more than anything else, has facilitated new technologies and fostered the creation of a true global economy.

This would be merely an interesting observation were it not for a nagging problem – energy (starting with oil, soon to be followed by coal and natural gas) has started becoming more expensive, harder to find, and absolutely scarce in many parts of the world. The authors say that the amount of net energy (the amount left after the energy cost of production) available has stopped growing, or is about to. Since economic growth depends on growing amounts of net energy (especially at the global level), flat energy supplies will lead to the end of economic growth and that will come sooner, not later. 

This is something for which no one is prepared.

The key analytic concept, which Hall developed over the last 40 years, is EROI – the energy return on energy invested – the best measure of net energy.....

Stated differently, it used to take 1% of the ultimate output to extract our energy supplies, but now it can take 6% to 20%. EROI is independent of the monetary cost or price of energy-- due to subsidies, something can make investment sense but not energy sense. Most EROI estimates for corn-based ethanol, for instance, are between 0.9 and 1.9, so energetically this supposedly renewable fuel barely breaks even. Since the economy is ultimately grounded in energy, not finance, Hall and Klitgaard argue, the energy return is more important than the financial return on an energy project and energy system....

That’s a brief overview of the book’s first theme: We have not paid adequate attention to the real drivers of economic activity and change, or to their future availability. The second theme explains why – the bankruptcy of economics....

These are handy assumptions for creating mathematical models, but not for creating something that reflects reality....

We are not surprised when answers in biology, geology, and physics turn out to be very complicated. But we expect economics, which combines the biophysical aspects of all three with the equally complicated issues of human behavior and intention to be easily explained by a few straightforward equations and understood by politicians when presented between market updates on CNBC. Hall and Klitgaard argue that, far from this forced simplicity, what economics needs is to be consistent with the real world, both in physical and behavioral terms. The book includes chapters on the science and mathematics needed to proceed with this work.

Read it at Energy Bulletin
Book review: "Energy and the Wealth of Nations"
by Richard Vodra, J.D., CFP® | President of Worldview Two Planning of McLean, VA