Biophysical Economic Theory

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See the second part of George Mobus' overview.

For background see his overview of Theories of Value


George Mobus on constructing a Biophysical Economic Theory :

"A biophysical theory of value has to take into account three fundamental aspects. The first is that costs have to be complete and real. That is, all costs that accrue to a product or service have to be captured and accounted for. They have to be measured in some physical quantity that is universal and invariant across all domains of work. Current practices use money which is not tied to any real physical basis. And not all true costs are accounted for in the bookkeeping system of commerce. The cost category referred to as 'externalities' is generally ignored (although the accounting world has become increasingly aware of the problems associated with not accruing these costs in some fashion; see The Triple Bottom Line).

My recommendation, based on the thoughts of many who proceeded me in this line of thinking, is to develop an accounting system based on energy units consumed in the production of work. Howard T. Odum, a systems ecologist, was one of many deep thinkers who saw that energy was the real currency of any complex, dynamic system such as a living thing or an ecosystem (see my series on Systems Science, last section of the index). He likened money to what he called emergy or embodied energy. This is the energy required to accomplish a unit of work of any kind. It has the same units as energy, joules, but to differentiate it as the historical memory of energy consumed, he called them mjoules. Money, he claimed, was just an informational token that was used to regulate the flow of energy toward desired work. And, indeed, we can see readily enough that money is used in this fashion to buy resources that someone else produced by their work.

But there are two more components to value that need explication. These are the price that a buyer is willing to pay, and the profit that a seller makes as a result.

I've already mentioned the psychological factors involved in a buyer's decision to pay a price based on a perceived desire (want or need) for the object or service. Coupled with at lack of knowledge on the buyers part of what goes into the object or service, the buyer is in a predicament with respect to deciding if the price is fair. And, in any case, what does a 'fair' price mean? Clearly a buyer expects to pay the seller a price which reflects the seller's costs plus some nominal profit which is income to the seller. But what constitutes a fair, nominal profit. If the object were the ONLY item a seller would sell all year, then it is obvious that he would have to make a profit sufficient to support him and his family for the whole year (on the other hand, that one sale means he could relax for the rest of the year!) Since such objects are not common most sellers rely on volume of sales of smaller objects to make a small profit on each item that will aggregate to make up his income.

The price a buyer is willing to pay must somehow relate to how the object or service is going to improve the buyer's life. This is the tool value of an object mentioned above in the section on Objective Value theory. Will the purchase allow the buyer to do more work of other kinds by saving energy and time (which has an energy equivalence)? From a societal standpoint, the question would better be put as, does an individual's purchase save that individual energy that he or she no longer needs to consume so that there will be a net savings to society. The tendency for people in the developed world is not to think in terms of not consuming the saved energy, but to find other ways to expend it. It's their energy after all.

A biophysical theory of value has to account for buyer and seller psychology, obfuscation of intrinsic value and generate a model of pricing that relates to fair profit as well as energy savings from tool value. That is what I hope to develop here. But there is another more subtle factor that I need to cover first. Most economic theories have difficulty with the role of knowledge in work. In fact one major criticism of an energy-based theory of value is that it can't take into account the value of a product based on the knowledge that went into producing that product. The standard assumption is that knowledge is somehow ephemeral relative to energy and therefore adds something ineffable, beyond mere energy cost inputs, to the value of a product. The best that economists have been able to come up with is a vague notion of human capital. In this view, it is up to market forces to decide the worth of knowledge and skills because they cannot be determined in any objective way.

There is an element of truth to the idea that a market may indeed be the best mechanism for ascertaining the value of knowledge, as long as we are willing to accept some distortions from time to time (the knowledge of how to make buggy whips was valuable once, and probably will be again). But to conclude that there is no relation between energy investment and knowledge, and therefore investment in human capital, is completely wrong. Here are some thoughts on the matter.

Knowledge Theory

Suppose a naÏve individual sets out to learn to do a certain kind of work so as to earn a living doing that work in the future. The individual necessarily must expend much time and effort in learning the skills and knowledge needed to do the work with efficiency. The latter is needed to minimize the amount of time spent on each unit of the work in order to produce the end result (either product or service).

Knowledge is acquired over time by the receiving of information, for example from a teacher, and incorporating that information into one's brain. It also involves practice on subsets of the work problem to convert the explicit learning to tacit knowledge, whether implicit skills or consciously retrievable facts, such as formulas or procedures. This is often effortful requiring energy flows to support the individual during learning. Also, the brain itself increases its energy requirements during active learning. When someone says that learning something difficult is hard they are simply reflecting the fact that actual work is accomplished in the process and should be accounted for in the final tally of energy applied to future endeavors.

Knowledge, once bought with energy expenditures from an individual, is the basis for doing efficient work in the future. Efficiency here may be interpreted as units of work accomplished per unit of time and per unit of effort expended by the worker. At any given technology level applied to the work process, there will be some upper range of efficiencies which will allow the individual to minimize his/her time and effort while producing a sufficient number of units of product or service. What we mean by sufficient, of course, is that the work product or service will obtain an income adequate to the individual's needs in life.

What is important here is to recognize the crucial role energy flow plays in the acquisition of knowledge with regard to the successful accomplishment of work for income purposes. This presupposes that the 'customers' for this work are willing to trade goods, services, or money to meet the income needs of the laborer for the volume and quality of product or service put out. The individual is assumed to decide to learn the kind of knowledge needed to do this sort of work because he or she perceived the desires of others for this work were such that a fair trade of labor for income would obtain.

Take this one step further. Suppose the individual in question learns additional skills in supervising others who have learned how to do the same work. This learning also has an energy investment cost on top of learning the knowledge needed for the direct work. Moreover, knowledge of accounting will be required for the individual to become a supervisor or owner of a business in which he or she hires workers (who have also invested in learning their trade) to perform the operational work. The owner of the business expends extra energy learning to be a supervisor/coordinator of the work and must also expend real time energy doing the work of a supervisor. Again the investment in learning is predicated on achieving some level of efficiency in managing multiple workers, sales and purchases, and payroll. Many such owners learn these skills on-the-job, but that doesn't mean they haven't expended energy investing in learning. One of the reasons the 'boss' makes a larger salary is the tacit recognition (by society) that people who achieve the capacity for effective supervision add more value to the entire work process and have, themselves, expended more energy getting to the point of being skilled in supervision. Unfortunately, in the modern world, it isn't always clear that the boss has in fact achieved a higher level of skill and earned their higher wages. Indeed, as recent events have made clear, people have long ago learned how to game the system and appear, at least for a while, to have the knowledge and skills needed to guide the success of enterprises. Right Jeff Skilling? Right Rick Wagoner? Along with the scam of qualifications these faux coordinators/strategists have helped themselves to hefty rewards in anything but a free market of talent.

Finally, consider the energy expended in the education enterprise that is needed to make the knowledge acquisition process (by the future workers) as efficient as possible. A whole institutional framework is constructed in order to educate as many minds as possible in the shortest amount of time as possible for the least expenditure of energy as possible. The school system is the result. Teachers must efficiently guide students to learn what they need to know and since this is an energy investment scheme — no thought to humanization as also contributing to future value — only what they need to know. Schools are a tool. It is unfortunate that the mass perception of education is strictly oriented toward the tool value of schools and humans. Only a very few thinkers and educators have realized that there is a distinction to be made between short-run energy efficiency and long-term energy savings. The former is what maximizes profit. The later puts emphasis on our humanity. A more broadly and deeply educated individual ends up better understanding the need to save and relax, to be content with necessities and eschew luxuries. But, oh well, you can't have everything.

Energy Theory

So at last we come to an energy theory of value. In a sense, by pointing out the deficits or problems in the standard economics theories I have already pointed to the energy theory. Put simply it says that a good or service is valuable to the extent that it brings real comfort to a human being and his or her family. The key is in the phrase 'real comfort'. I am more comfortable sleeping on a mattress, in a bed, in a house that keeps me warm in winter and protects me from the glaring sun in summer, than I would be sleeping on a pile of grass in a cave. But the former took considerably more energy to produce than the latter. On the other hand, would I be any more comfortable sleeping on a gigantic mattress on a gigantic bed in a gigantic house that took orders of magnitude more energy to produce? Some people would believe that they would be happier. But no one can claim they would be more comfortable.

All of our tools, which includes everything in our energy cocoon are there to increase the comfort in our lives by reducing the amount of manual/physical labor that we need to do to achieve safety and community. They provide convenience and allow us to do many things more rapidly. It is this trade-off between our personal energy and time and the use of external energy flows that constitutes the basis of value. As biological beings with psychological needs (c.f. Maslow's Hierarchy of Needs) we are compelled to find external sources of energy and use our intelligence to construct tools to achieve these ends. Some of our needs are oriented toward achieving mental health in a complex social context. We need music. We need art. We need to both sense these things and produce them to one degree or another ourselves. The less time we spend making a living, the more time we have available to devote effort to having our higher psychological needs met.

But two conditions have thrown a monkey wrench (a tool) into the social fabric (another, biological, tool). The first is that somewhere along the line we started confusing tool value (needs) with pleasure value (hedonic value). Comfort is pleasurable, but hedonism goes beyond mere comfort to assert that pleasure is the end pursuit in its own right. Modern neuropsychology is bearing out the notion that humans can become fixated on pleasure value and seek those things that provide that even when it goes way beyond providing comfort. The standard explanation is that we evolved in a time of scarcity, in which we needed to seek, for example, fatty, sweet, and salty foods just for survival. Sex is certainly a good example of this pleasure as a marker for comfort and survival. But in modern times, when we are no longer confronted (at least in the developed world) with scarcities of these kinds, we have no way to turn off the drive to seek pleasure. We've even managed to transfer some of our pleasure from the original form, say sex, for a substitute, say a big fancy car or designer clothes. We are no longer motivated just by needs, but by manufactured wants that masquerade as needs. As a result we are willing to attach more value to frivolous energy expenditures than is warranted by the facts.

The other major condition that has created a real problem for us is that the pleasure-based drive behind sex has paid off in spades. We reproduce prodigiously. Moreover, because we have cleverly found ways to meet our basic needs, especially safety, we are no longer subject to ordinary ecological controls on our numbers and have thus managed to overshoot the natural carrying capacity of our planet for our species. We did this by expanding our external energy flows by many orders of magnitude with fossil fuels, thereby creating tools that protect us and help each individual live longer lives.

The problems that are becoming apparent, based on these two conditions, come down to too many people expending too much external energy (from a carbon-based fuel that is depleting rapidly) for too many things that are really about pleasure more so than comfort. And that has led us to what is in reality a negative value being treated as a positive one. We are literally paying for things that make us feel good but that are, collectively and over not too long a time span, going to kill us.

We need to reestablish the biophysical basis of value. We need to comprehend the limits of comfort we can reasonably expect, especially since our energy flows are about to decline at ever increasing rates. We need to parse the value of goods and services into real energy costs (emergy), tool value (how much energy saved, but really saved, and reasonable profit (income energy to the purveyor) in establishing prices. Pure market mechanisms do not provide adequate information on these value elements, so have become very poor ways to establish prices. The solution that has been offered is to establish an energy standard for money. By doing this we can establish a cost accounting system that will provide the basic cost accumulations in producing products and services. Buyers will need to grasp the significant difference between tool value and psychological desires and be able to assess the premium they might be willing to pay for that energy advantage. My guess is that once all of the energy costs, including externalities, are included in the cost basis of price, there will be very little room to pay a price for an object or service that includes a fair profit for the seller, such that most buyers will think many times about purchasing things that fulfill wants primarily.

Therein lies the problem. Humans have already demonstrated a lack of judgment when it comes to deciding on purchases. They are not the rational beings most economists had assumed. Even with more actual or real cost information and given a basic understanding of the role energy plays in production and distribution, they are not likely to, on average, make sound decisions in terms of willingness to pay for things that do not substantially contribute to their comfort (except in the hedonic sense). Could a better education turn this around? And, if it could, could we reorient the educational institutions to provide it in time to matter? Always more questions." (