Charles Hall
Energy Theory of Value
The laws of thermodynamics were formalized by physicists in the middle of the 19th century. Since then the principles derived from these laws have been used by many analysts in the social, biological, and physical sciences. Classical and neoclassical theories recognize the importance of fuel and other natural resources as necessary factors of production but believe(d) that these factors are not important enough to warrant the incorporation of the laws of energy and matter into economic theory. Two notable exceptions in the economics profession are Nicholas Georgescu-Roegen and Herman Daly who both describe the lack of a biophysical foundation as a major deficiency of conventional economic theory. But in general, the people who give energy a major role in economic systems are outsiders, such as biologists, physicists, sociologists, and engineers.
As succinctly expressed by Frederick Soddy:
If we have available energy, we may maintain life and produce every material requisite necessary. That is why the flow of energy should be the primary concern of economics.
The intent of Soddy and other analysts with a biophysical perspective of economics has been to synthesize a new paradigm, making the supply and quality of fuel and other natural resources the focus of analysis. Two ecologists, Howard T. Odum and Robert Costanza, have been in the forefront of those attempting to forge an alternative economic paradigm based on an energy theory of value. These ecologists and others are currently attempting to fashion these ideas into a complete paradigm for explaining economic systems. In this section we describe the attempts at such a synthesis.
Value
As set forth by Odum and Costanza, an energy theory of value assumes that individual and societal tastes, preferences, and economic decisions are influenced and often directed by environmental factors like natural resource quality and availability, and in particular free energy. In this line of reasoning energy is the organizing principle from which all values—economic, social, and political—ultimately are derived. Odum states that the formation of human tastes and preferences, a process explicitly beyond the realm of neoclassical economics and insignificant to the classical economist's view of class struggle, are critical to a thorough understanding of economics.
Odum's energy theory of value draws on Alfred Lotka's hypothesis that natural selection is driven by differential rates and efficiencies of energy use relative to competitors. Odum proposed that moral, ethical, and all psychological phenomena are derived from incorporating surviving patterns as ultimate values, simply because patterns selected against eventually disappear. Because of the importance of free energy he proposed that changes in the rate or efficiency of energy use lay at the heart of many human behaviors. According to Odum's hypothesis, changes in energy availability and the rate and efficiency of energy transformations are the principal mechanism in natural and cultural selection and economic development.
According to Odum, the maximum power principle is the criterion by which systems, whether they are ecological or economic, select behavior patterns. Surviving patterns are those that enable an organism, culture, or any unit of a system to transform energy from its environment into useful power at a rate and efficiency that enables an organism to compete successfully with those around it. The maximum power principal is based on the observation that for most energy conversions the efficiency of the conversion decreases as the rate of energy conversion increases. At very slow rates energy is used very efficiently, but because of this slow rate, not much power is generated. Furthermore, at low rates of use much of the energy resource remains available for potential competitors. At very rapid rates of use energy is used relatively inefficiently, and the power generated is small because not much of the energy consumed is converted to useful power. Thus at some intermediate rate there is a trade-off between effficiency and speed that maximizes power. Odum hypothesized that maximum power is the optimum that all living systems strive for.
Robert Costanza extended Odum's original analysis and offered empirical evidence that supports one necessary condition for an energy theory of value: the relative prices of goods can be explained by their relative embodied energy cost. Costanza hypothesized that solar energy is the only net input into the biosphere; therefore a perfectly functioning market would, through a complex evolutionary selection process, arrive at prices that were proportional to their embodied energy content. In support of this hypothesis Costanza showed that the fossil fuel energy embodied in goods and services is closely correlated with market-determined dollar values when the analysis is aufficiently comprehensive.
According to Odum, systems that maximize power outcompete those that do not. As W. Fred Cottrell proposed, some cultures switched from one energy source to another because such a substitution offers the potential to generate a greater amount of useful economic and social power. Thus some energy analysts hypothesize that economic systems (through the actions of their individual members) attempt to maximize power just as neoclassical economists hypothesize that individuals attempt to maximize utility and just as classical economists hypothesize that economic classes struggle for a larger share of surplus value.
Dollar Profits in Energy Terms
The nature and origin of economic profits can be explained with the theoretical construct of an energy theory of value. An energy theory of value suggests that profit in human economic systems is the unpaid work of nature measured in dollar terms. Profit accrues to those who control the products derived from the flow of energy. Such a view is analogous to Marx's theory of surplus value where profits were equated with the unpaid services of labor.
Natural resources are highly-ordered, thermodynamically improbable arrangements of matter. Biogeochemical cycles, which are driven by solar energy and energy derived from radioactive decay in the Earth's interior, occasionally have organized the various elements into concentrations far greater than would be found in a system at maximum entropy. Had this work not been done by nature, or had it been done to a lesser degree, humans would have to invest far more of their economic energy simply to upgrade natural resources to a state where they could be used as a factor of production. Humans reap the benefits of nature's work but do not pay nature a dollar amount for its services rendered. According to an energy theory of value, the uncompensated effort of nature is what makes profit possible in human economic systems.
The work done by nature in creating and upgrading fuel deposits is especially important. Surplus energy available from fuel is measured by its energy return on investment (EROI) and represents the energy available to produce nonenergy goods and services. As the energy surplus grows, it is possible to increase the per capita material standard of living. The distribution of the products of surplus energy depends on individual levels of productivity and the relative bargaining position of economic classes. It is not possible to predict the distribution of the products of surplus energy or to judge whether a given distribution of surplus energy is just or not. An energy perspective can, however, identify the source of societal surpluses and how changes in the natural resource base affect this surplus.
Unit of Analysis
Inherent in an energy theory of value is the principle that a society, or individual, maintains its existence by securing energy and natural resources from its environment for the purpose of producing those goods and services that facilitate survival. Individuals choose items freely in the market, but they may be penalized for choices that may jeopardize their survival or the survival of their culture in the long run. Because of this ongoing selection process, whole cultures may institutionalize choices that have contributed greatly to their survival, in a manner analogous to natural selection in biotic systems.
Survival of a system requires the survival of its support system (e.g., a human economy and its environment). Each unit of a system must contribute certain amounts and qualities of work to its support system, or else that unit will drain resources away from the system causing that unit and the entire system to be selected against. The requirement for survival of any part within the system therefore is some type of service fed back to some other unit of the system. Since low-entropy energy is the primary requisite for the survival of any living system, the useful work contributed by an individual unit is a measure of its value to the system as a whole.
The objective of energy analysts is to understand how energy availability and use influence the rate and direction of economic and cultural development. The interactions between components of economic systems also interest energy analysts because it is important to understand how the actions taken by one part of the system affect the functioning of the other parts and how this interaction affects the type and amount of economic work done. For example, extracting fuels from the environment may disrupt other natural energy flows which the economy also depends on. Thus the net amount of useful power generated by extracting fuel from the environment depends in part on the amount of fuel extracted relative to the magnitude of the natural energies lost due to the extraction process. Because such impacts of fuel use occur during the production process, energy analysts tend to focus on production just like classical economists.
An energy theory of value emphasizes basic physical laws rather than the psychical attitude of humans to explain economic phenomena. Energy, however, is not a necessary and aufficient cause of economic value because many economic decisions are not influenced by energy quality and availability. Criteria other than biophysical laws also must be considered when developing models to explain and predict human economic behavior. Federick Soddy observed:
. . . the interest of the average man will be and must continue to be in a just appreciation of the relations of several worlds, the spiritual and the mechanical, to his own life . . . they do not meet in common ground in him. His is the unfortunate body from which, during life, neither the aspiring soul can altogether soar, nor the wheels of scientific materialism can be unmeshed. He has to make his peace with both, as he is the sufferer if his soul gets caught in the gear.
Like Soddy we emphasize the physical aspect of life at the expense of the humanistic aspect but not because we deny or belittle the existence of the latter, rather because the former has been greatly ignored in the history of economics. Although a biophysical perspective is very different from either one of the two economic paradigms that hold political power in different nations, we feel that it is indispensable to solving many economic problems faced by all societies.
The laws of thermodynamics were formalized by physicists in the middle of the 19th century. Since then the principles derived from these laws have been used by many analysts in the social, biological, and physical sciences. Classical and neoclassical theories recognize the importance of fuel and other natural resources as necessary factors of production but believe(d) that these factors are not important enough to warrant the incorporation of the laws of energy and matter into economic theory. Two notable exceptions in the economics profession are Nicholas Georgescu-Roegen and Herman Daly who both describe the lack of a biophysical foundation as a major deficiency of conventional economic theory. But in general, the people who give energy a major role in economic systems are outsiders, such as biologists, physicists, sociologists, and engineers.
As succinctly expressed by Frederick Soddy:
If we have available energy, we may maintain life and produce every material requisite necessary. That is why the flow of energy should be the primary concern of economics.
The intent of Soddy and other analysts with a biophysical perspective of economics has been to synthesize a new paradigm, making the supply and quality of fuel and other natural resources the focus of analysis. Two ecologists, Howard T. Odum and Robert Costanza, have been in the forefront of those attempting to forge an alternative economic paradigm based on an energy theory of value. These ecologists and others are currently attempting to fashion these ideas into a complete paradigm for explaining economic systems. In this section we describe the attempts at such a synthesis.
Value
As set forth by Odum and Costanza, an energy theory of value assumes that individual and societal tastes, preferences, and economic decisions are influenced and often directed by environmental factors like natural resource quality and availability, and in particular free energy. In this line of reasoning energy is the organizing principle from which all values—economic, social, and political—ultimately are derived. Odum states that the formation of human tastes and preferences, a process explicitly beyond the realm of neoclassical economics and insignificant to the classical economist's view of class struggle, are critical to a thorough understanding of economics.
Odum's energy theory of value draws on Alfred Lotka's hypothesis that natural selection is driven by differential rates and efficiencies of energy use relative to competitors. Odum proposed that moral, ethical, and all psychological phenomena are derived from incorporating surviving patterns as ultimate values, simply because patterns selected against eventually disappear. Because of the importance of free energy he proposed that changes in the rate or efficiency of energy use lay at the heart of many human behaviors. According to Odum's hypothesis, changes in energy availability and the rate and efficiency of energy transformations are the principal mechanism in natural and cultural selection and economic development.
According to Odum, the maximum power principle is the criterion by which systems, whether they are ecological or economic, select behavior patterns. Surviving patterns are those that enable an organism, culture, or any unit of a system to transform energy from its environment into useful power at a rate and efficiency that enables an organism to compete successfully with those around it. The maximum power principal is based on the observation that for most energy conversions the efficiency of the conversion decreases as the rate of energy conversion increases. At very slow rates energy is used very efficiently, but because of this slow rate, not much power is generated. Furthermore, at low rates of use much of the energy resource remains available for potential competitors. At very rapid rates of use energy is used relatively inefficiently, and the power generated is small because not much of the energy consumed is converted to useful power. Thus at some intermediate rate there is a trade-off between effficiency and speed that maximizes power. Odum hypothesized that maximum power is the optimum that all living systems strive for.
Robert Costanza extended Odum's original analysis and offered empirical evidence that supports one necessary condition for an energy theory of value: the relative prices of goods can be explained by their relative embodied energy cost. Costanza hypothesized that solar energy is the only net input into the biosphere; therefore a perfectly functioning market would, through a complex evolutionary selection process, arrive at prices that were proportional to their embodied energy content. In support of this hypothesis Costanza showed that the fossil fuel energy embodied in goods and services is closely correlated with market-determined dollar values when the analysis is aufficiently comprehensive.
According to Odum, systems that maximize power outcompete those that do not. As W. Fred Cottrell proposed, some cultures switched from one energy source to another because such a substitution offers the potential to generate a greater amount of useful economic and social power. Thus some energy analysts hypothesize that economic systems (through the actions of their individual members) attempt to maximize power just as neoclassical economists hypothesize that individuals attempt to maximize utility and just as classical economists hypothesize that economic classes struggle for a larger share of surplus value.
Dollar Profits in Energy Terms
The nature and origin of economic profits can be explained with the theoretical construct of an energy theory of value. An energy theory of value suggests that profit in human economic systems is the unpaid work of nature measured in dollar terms. Profit accrues to those who control the products derived from the flow of energy. Such a view is analogous to Marx's theory of surplus value where profits were equated with the unpaid services of labor.
Natural resources are highly-ordered, thermodynamically improbable arrangements of matter. Biogeochemical cycles, which are driven by solar energy and energy derived from radioactive decay in the Earth's interior, occasionally have organized the various elements into concentrations far greater than would be found in a system at maximum entropy. Had this work not been done by nature, or had it been done to a lesser degree, humans would have to invest far more of their economic energy simply to upgrade natural resources to a state where they could be used as a factor of production. Humans reap the benefits of nature's work but do not pay nature a dollar amount for its services rendered. According to an energy theory of value, the uncompensated effort of nature is what makes profit possible in human economic systems.
The work done by nature in creating and upgrading fuel deposits is especially important. Surplus energy available from fuel is measured by its energy return on investment (EROI) and represents the energy available to produce nonenergy goods and services. As the energy surplus grows, it is possible to increase the per capita material standard of living. The distribution of the products of surplus energy depends on individual levels of productivity and the relative bargaining position of economic classes. It is not possible to predict the distribution of the products of surplus energy or to judge whether a given distribution of surplus energy is just or not. An energy perspective can, however, identify the source of societal surpluses and how changes in the natural resource base affect this surplus.
Unit of Analysis
Inherent in an energy theory of value is the principle that a society, or individual, maintains its existence by securing energy and natural resources from its environment for the purpose of producing those goods and services that facilitate survival. Individuals choose items freely in the market, but they may be penalized for choices that may jeopardize their survival or the survival of their culture in the long run. Because of this ongoing selection process, whole cultures may institutionalize choices that have contributed greatly to their survival, in a manner analogous to natural selection in biotic systems.
Survival of a system requires the survival of its support system (e.g., a human economy and its environment). Each unit of a system must contribute certain amounts and qualities of work to its support system, or else that unit will drain resources away from the system causing that unit and the entire system to be selected against. The requirement for survival of any part within the system therefore is some type of service fed back to some other unit of the system. Since low-entropy energy is the primary requisite for the survival of any living system, the useful work contributed by an individual unit is a measure of its value to the system as a whole.
The objective of energy analysts is to understand how energy availability and use influence the rate and direction of economic and cultural development. The interactions between components of economic systems also interest energy analysts because it is important to understand how the actions taken by one part of the system affect the functioning of the other parts and how this interaction affects the type and amount of economic work done. For example, extracting fuels from the environment may disrupt other natural energy flows which the economy also depends on. Thus the net amount of useful power generated by extracting fuel from the environment depends in part on the amount of fuel extracted relative to the magnitude of the natural energies lost due to the extraction process. Because such impacts of fuel use occur during the production process, energy analysts tend to focus on production just like classical economists.
An energy theory of value emphasizes basic physical laws rather than the psychical attitude of humans to explain economic phenomena. Energy, however, is not a necessary and aufficient cause of economic value because many economic decisions are not influenced by energy quality and availability. Criteria other than biophysical laws also must be considered when developing models to explain and predict human economic behavior. Federick Soddy observed:
. . . the interest of the average man will be and must continue to be in a just appreciation of the relations of several worlds, the spiritual and the mechanical, to his own life . . . they do not meet in common ground in him. His is the unfortunate body from which, during life, neither the aspiring soul can altogether soar, nor the wheels of scientific materialism can be unmeshed. He has to make his peace with both, as he is the sufferer if his soul gets caught in the gear.
Like Soddy we emphasize the physical aspect of life at the expense of the humanistic aspect but not because we deny or belittle the existence of the latter, rather because the former has been greatly ignored in the history of economics. Although a biophysical perspective is very different from either one of the two economic paradigms that hold political power in different nations, we feel that it is indispensable to solving many economic problems faced by all societies.
Anyone have an opinion or know more about this?
