Saturday, January 23, 2010

Economic Production = Energy + Workers

Economic Production = Energy + Workers

We have recently been subjected to two overviews of economics that didn't mention energy.

Most recently Prime Minister Rudd has declared that production is what you get when you multiply workers by productivity. So all we need to do is improve productivity to get richer. This is what you get if you view the economy through the reverse telescope of bureaucratic statistics.

Before that we had Ross Gittens assess productive capacity as arising from workers and infrastructure. Yet both these pundits know that the rise in productivity that we have seen for two hundred years started with the Industrial Revolution which was built on fossil energy. Of course you need a lot of infrastructure to utilize that energy. Energy is subtle stuff, while infrastructure is big and obvious. So this is the common logical error of attributing cause to the most obvious change that precedes the effect.

The view that will lead to correct policy is that wealth creation comes from energy and expertise-weighted workers. Before cheap energy was available, production was limited by the cost of energy. This meant that wages were driven to the ground. When cheap energy became available then there was a shortage of workers to utilize the energy. This saw the rising power of workers and the rise of the general prosperity that has characterized 1st World economies. If the Green Left were to have its way and we moved to very low intensity energy sources then we would return to a world where energy is the the thing in short supply, and wages would be driven to the floor, as they used to be.

The most powerful and prosperous nations in the future will be those that have a lot of cheap energy. This can only be nuclear power after the coal runs out (or we decide to leave it in the ground). Currently it seems that China and India can build Nuclear power stations for 1/4 the cost in the West.

Even if we were to start today to switch to nuclear power and the electrification of the infrastructure, we won't have time to avoid an extended period of energy shortage and ongoing economic weakness.