A New Economy Based on Energy Efficiency

Warren James Gilchrist PhD

January 2017

Introduction

Adam Smith described the dynamics of a system which ideally encompassed all of human activity and its interactions.  He delineated a somewhat mechanistic system, wherein money flowed according to principles which were inherent and mandatory and governed by the “invisible hand” of informed choice.  The extent of that “informed” choice has been questioned, given the wild surges in many directions that have been taken since in the economies of the world.

Smith also wrote of other influences which would temper the apparent inexorable flow of capital.  Where the supporters of economics as a determining force would justify it overriding the basic needs of whole populations, based on Smith’s seminal work, “The Wealth of Nations”, they ignore his often expressed priority that the aim of national activity is the welfare of people.  This, therefore, is one stave of an ideal.  The other is something that Smith did not foresee.

Since Smith’s time, the world has advanced from the Industrial Revolution to a postindustrial phase in which a different focus is appropriate, that of survival and advancement of the species of humanity and of the world in a manner that preserves as much as is possible the resources which supports the diversity of life.  One result of a continuous increase in production is depredation of the natural stock of resources, especially in conjunction with increasing population.  A steady state of economy would seem to be the way to avoid the most deleterious effects.

The basis of industry and domestic wellbeing then and now is a reliable supply of energy.  The greatest concern in this era is the maintenance of an energy supply which does not threaten the environment on which humanity and the biosphere depends.  All other components of the economy are dependent on this factor.  It therefore should assume the major part in any reassessment of how the world needs to work into the future.

This is a work in progress.  The text has to be expanded and I have yet to think through some of the implications and the likely objections to something which stands on its head the tenets of an accepted economic regime which has been unquestionably imposed, often brutally.

Part I

  1. The imperatives of the postindustrial era.

For centuries, vested interests have dictated that there must be profit and interest to enable them to extract rents from the economy (being the remainder of the society).  Three areas requiring urgent change result from the effects of the previous concentration on constant economic growth and from the perceived necessity for society to be polarised into buyers and accumulators, leading to extremes of wealth:

(1.)  The neoliberal domination and distortion of most of the economies of the world, leading to the requirement for an economic system to replace it and others which have failed (mercantilism due to its total lack of efficiency, communism due to lack of an absolute scale of value, Keynesianism due to inability to compensate for imbalances in the economy, capitalism due to its inability to ensure equable distribution at even a basic level)

(2.)  Money and its problems of inflation and subsequent collapse, the profit motive and the need for a currency based on energy efficiency (of which attempts to apply a carbon price or tax is a subset), made more urgent by the belated response to the climatic effects of the proliferation of heat retaining substances, mainly carbon dioxide, in the atmosphere

(3.)  The need to replace the constant of economic growth with a static system which supplies the needs of populations and accords with the physical limitations of the global environment.

2.  Replacing the existing demand based economic system:

(1)  The creation of energy units to replace currency

(2)  The assignment of value through calculation of energy usage or energy input during manufacture

(3)  The elimination of the market as a determinant of value, using  the more absolute methodology of energy efficiency, expressed as the number of energy units implicit in a product

(4)  The issue of units to all persons who are registered as inhabitants of a country as a basic income, based on the potential of the individual to consume, in terms of those same units.

3.  Ideological objections anticipated:

(1)  Destroying the stability of the world order (the real motivation for such an attack would be the threat to vested interests, motivated as usual by those without means and capital to seeing their interests reflected in maintenance of the system of answerability of the dispossessed to the arrogators of their production)

Answer:  This system would tend towards greater contentment of the greatest number, not only those who profit from the work of those without vested interest.

(2)  Destroying the relationship of production to value (motivated by those seeking to maximise profits, in other words, rent-seekers)

Answer:  The need to always increase prices to cover increasing costs would be obviated by the elimination of the cycle of profit, interest and subsequent wage rises which have been reflected in price rises.

(3)  Destroying incentive to produce (the main objection to communistic systems)

Answer:  Managers would be remunerated up to an amount equal to the total of the wages and salaries of base level staff under their supervision ( of course, their interest would be in employing the maximum number of persons which the company could maintain, and so be it), workers have the incentive to earn more than their basic issue of units and others are free to pursue their aims in innovation or arts.

4.  The calibration of energy efficiency amongst

(1) competing engines (man, horse, buffalo, steam engine, electric motor, liquid fueled motor, gas fueled motor, etc) would be rated by energy output as at present;

(2) competing electrical sources (solid fuel based, hydroelectric, solar-voltaic, wind turbine, solar storage, geothermal, tidal, nuclear, etc) would be rated by energy output as at present

(3) competing materials would be rated by their energy components of manufacture, transport and extraction.

5.  The system in operation.

The basic level of energy in production is joules per second (Watts).  Therefore, any process can be evaluated in terms of the energy used. This translates to the value as a cost in terms of energy.  The ultimate price equals the cost.  Each step in a sequence of processes adds to the value, as does the energy used in transport and other costs of production and distribution such as wages and salaries.  In addition to this, the environmental burden of a product such as coal, calculated as the energy required to reduce to its elements the amount of carbon dioxide potentially produced, is added to its cost.

(1)  Exchange: GNP is the sum of the value of all production and activity in an economy.  Theoretically, in a condition of scarcity, a quantity of money limited to the value of the total production of the relevant society will regulate supply within that economy.  Variations of money supply from this standard are expected to lead to inflation of its value in a competitive atmosphere by causing a bidding upward of prices by those holding the most capital or accumulated funds.  Two developments would tend to obviate the necessity to allow for this behaviour:                                                                                                                            (a) Universal scarcity does not exist as it did when the original concepts were promulgated.  The supply of necessities is no longer inadequate throughout the world.  Only the distribution of goods is.                                                                                                             (b) If the competitive aspect were removed by fixing the value through the use of a universal constant, stability should be enhanced.  Shortages may be handled by practical means, given the current level of technology and the ability to trade.

(2)  Basic income equaling value in energy units of the necessary purchases of a single person plus half that amount for each dependent. The existence of such minors or incapacitated persons and their welfare would be provable by mandatory enrolment in education (in the case of home schooling by examination and inspection by the educational authority), mandatory regular physical and psychological health checks.  The basic income would replace all pensions and welfare payments.

(3)  Implications for international trade

(a)  An equivalence would need to be established between energy units and a currency which would be used in international exchange.

(b)

Part II – The Conversion of the Bases of Conventional Economics.

1.  Land

(1)  Land value would be assigned as the level of efficiency in producing (a) vegetation, (b) animals (not necessarily agricultural commodities), given the climate and the nature of the ground.  This would not change unless improvements enabled greater production and/or efficiency.  Domestic land would be valued as the total of the basic income payment to the theoretical limited number of occupants in any dwelling able to established on it plus the potential value of vegetable produce that could be grown on the remainder of the land.

2.  Labour

The value of labour would be assessed as the amount of work that an average person could perform on a continuous basis over a week of five eight-hour days, expressed as an hourly amount.

3.  Capital

The concept of capital, being the accumulated discretionary component of production, would still be the savings of the person and partners available for promotion of a project.

Part III – Ownership

Persons may own property to the extent that their accumulated savings allows

Part IV   Banking

A central bank would conduct all functions of banking.  Where private and corporate banks existed, they would be agents of the central bank and concerned with the detailed interactions with individual and corporate accounts.  Banks, as such, produce nothing and some aspects of current banking practices, such as the trade in derivatives, would not occur.  The central bank would control all fiscal activities and fund national development.

Part V –  Credit and Interest

The central bank would issue currency to the value of GDP each year; and to the value of the total basic income payment; and to the value of wages and salaries of government employees and the costs of services provided by government, including the health system; and to the value of loans advanced for worthy purposes.

The central bank would hold accounts for all persons and business entities for the purpose of (a) holding their savings upon which interest would not be paid (inflation not being an issue), (b) making the payments noted above and (c) advancing loans free of interest upon request and certification.

Part VI – Profit

Any system which is expected to provide the context for economic functioning in the future must incentivise improvement in technology while discouraging wasteful production such as that based on planned obsolescence.  Individual rewards calculated as the sum of expected contribution of an innovation to social wellbeing should ensure the former.  The elimination of the need for profitability as such and a return based on only the energy content of production would give certainty to necessary manufacturers.

PartVII  Royalties

Royalties for the use of patented innovation would be payable as now.

Part VIII  Funding of Government

The central bank would pay the costs of government and its employees.  Taxation would not occur as the spending of the government employees and those receiving the basic income (everyone) would enable consumption of the products of manufacture.  The loans component, where it is greater than the accumulated savings held, would be as investment in the future as value would be created by its use.  Under Modern Monetary Theory, a sovereign state can issue currency for any reason because it is underwritten by the entire economic potential of the nation.  It is also an investment in the prosperity created by the economic activity additional circulation creates.

Part IX  Large Business

The incentive to produce would be upon the individuals at all levels, given the systems of remuneration described above.  The output of the enterprise need cover only the costs of production, wages and salaries and repayment of loans.  Productivity would be enhanced by the interests of all parties.

Part X  Small Business

Under this system, input prices to business are static, obviating the necessity to increase prices to succeed.  The entrepreneurs can personally fall back on to the basic income. The finance is interest free, leaving their prosperity to be based on increasing numbers of small sales.

Part XI  Housing

The value of housing would be solely the sum of the energy component of the materials used in building, of the other inputs used and of the cost of labour in the construction.  The value would not appreciate.  If allowed to deteriorate, the value would be that of the salvable value of the materials.

Part XII  Proofs and a Model

Assume, for the purposes of this illustration, an employable population of 1,500,000 persons, a conglomeration of manufacturing ventures (M) which employ 750,000 persons (the economy consists of the sum of all microeconomic events), a government (G) which employs 100,000 persons, a plot of productive land (A, representative of all agriculture) which employs 100,000 persons (50,000 persons are unemployed or not able to work and 500,000 persons are retired).  The employers remunerate their employees under the scheme described earlier, excepting the agricultural sector which has only one level of management  The central bank pays 1,000,000 persons the basic income and all the costs of government.

Energy equivalents being not available for this summary, the tracking of absolute amounts through the economy will suffice for a broad overview.  Quantities are for illustration only and are not intended to bear any relation to a true situation.

Assume that the basic income (B) is 100 units which is totally spent on living and that the wage of lower level employees is 200 units in addition to the basic income.  Assume also that the enterprises are fluid and that manufacturing has three levels of management above the basic workers while agriculture has only one level of management and is paid ten times the amount of the basic level employee.  The government has three levels of management.

The value of production (P) is equal to the total cost of employment plus other costs in the manufacturing and agricultural  enterprises.  Employed persons spend 200 units on living and other purchases, leaving 100 units as savings.

See the Appendix for the calculation of the quantities below:

Btot = 1,500,000 x 100 = 150,000,000 units

Gtot = 79,200,000 units*

Mtot = 666,000,000 units

Atot = 20,180,000 units

Total labour cost (Ltot) = Gtot + Mtot + Atot = 766,380,000 units

Necessary production (Ntot) = Btot + Gtot/2 + Mtot/2 + Atot/2 = 150,000,000 + 40,000,000 + 333,000,000 + 10,000,000 = 533,000,000 units

Ptot = Mtot + Atot = 666,000,000 + 20,180,000 = 686,180,000 units + other costs (to be obtained).

Savings available for loans and development, (Stot) = Ltot – Ntot = 766,380,000 – 533,000,000 = 233,380,000 units

The work value of production in the economy therefore underwrites (quantified as Utot) the payments to other sectors (Gtot) and those retired or not working (Rtot).

Utot = (Gtot + Rtot) = 79,200,000 + 550,000 x 100 = 629,200,000 cf. Ptot = 686,180,000

This is exclusive of any surplus of production which is exported and the necessity to import goods which are not locally produced.  Trade is a separate subject which will be considered in a later part.

Part XI  Increasing Mechanisation of Industry

The model can be further described for the situation of robotic workers replacing human workers.

If robotic workers were to displace half the working population, and the investment that mechanisation is taken as a sunk cost, Mtot would be 333,000,000 units and Atot would be 10,000,000 units.  If Ptot is taken to be always the total of labour and other costs, then it would be reduced also.  Local consumption (Ntot) would be less due to reduced buying power and Stot would therefore be reduced:

Ptot = 333,000,000 + 10,000,000 = 343,000,000 units (it would actually be more than half of the previous levels as inputs would not be expected to vary appreciably and the energy costs of the machinery would be additional)

Ltot = 79,200,000 + 333,000,000 + 10,000,000 = 422,200,000 units

Ntot = 150,000,000 + 40,000,000 + 166,500,000 + 5,000,000 = 361,500,000 units

Stot = Ltot – Ntot = 422,200,000 – 351,500,000 = 70,700,000 units

The prosperity of an economy is based on the purchasing power of its members at the basic level.  Unrestrained substitution of employment would threaten this provision. Even with the price reductions concommitant on the lower cost structure, local purchasing power would be reduced as the large number of displaced workers experienced a lessening of earnings of two-thirds.  Under the usual prescription for setting the basic income, it would be reduced along with the reduced prices of its basket of goods.  The surplus of production which would result from this situation and from the increased productive capacity would need to be traded overseas, leaving the proceeds in the hands of the producers.  This would enable them to be more self funded for future expansion.  The net effect would be maldistribution of income such as is occurring under the present system unless the governing authority were to increase rather than decrease the basic income.  This would require an adjustment of the formula  for setting it which allowed for the increased productivity.

Appendix  Calculations

  1. Government employment

1st level:  10 CEOs (supervising 100 level2 managers and 9,900 basic workers each) = 9,900 x 200 x 10 = 19,800,000 units (1,980,000 units each)

2nd level:  100 managers (supervising  10 level 4 managers and 990 basic workers each) = 990 x 200 x 100 = 19,800,000 units (19,800 units each)

3rd level:  1000 managers (supervising ~99 basic workers each) = 99 x 200 x 1000 = 19,800,000 (1,980 units each)

Basic level:  100,000 – 1110 managers = 98,890 x 200 = 19,778,000 units

Total Government employment cost = 79,200,000 units

2.  Manufacturing employment

Similarly, manufacturing, which employs 750,000 persons, has 1110 managers in three levels, also has a total employment cost of four times the total cost of basic personnel, which is (750,000 – 1110) x 200 x 4 = 666,000,000 units.

3.  Agricultural employment

Agriculture employs 100,000 persons, 100 of whom are managers earning ten times the amount of the basic level employee.  The total cost of agricultural employment is (100,000 – 100) x 200 + 100 x 10 x 200 = 20,180,000 units.

 

Warren James Gilchrist PhD

January 2017