Friday, August 22, 2008

Fungible Energy

In a Comment to our Accretion of Power Topic, Howard wrote, in part:
In the long run, however, natural resources are what give power to a society, and modern societies are not isolated like primitive tribes. Consequently, economic power, defined as fungible resources, is necessary to support modern military power. [Emphasis added]

"Fungible" means "interchangeable" meaning the consumer or user cannot tell the difference between the product from source A or source B. While looking it up I came upon the above Dilbert cartoon that states:

Oil is a fungible commodity, the capitalist system virtually guarantees that you'll end up buying the lowest cost oil from sources unknown to you. [Emphasis added]

True, but does that negate Dilbert's desire to buy a fuel efficient car or the newly-forming national consensus that we need more domestic sources of oil and other energy? I think not.

Energy conservation, if it is done in a rational way, should save us money in the long run, regardless of what other nations may do. Since oil (and by extension any other form of energy that is interchangeable with oil) is fungible, any bit we save will reduce worldwide demand and therefore, eventually, reduce prices or at least reduce the rate of increase that would have occured absent the conservation.

Similarly, any decision to permit new drilling or wind farms or nuclear power plants or biodiesel and so on, will eventually increase supply and therefore reduce prices or at least reduce the rate of increase that would have occured absent the increased supplies.

The argument that newly-permitted drilling (or wind or nuclear, ...) will not "add a drop of oil for ten years" is, IMHO, a phony one. It is like telling a high school graduate not to go to college because it will take ten years to recover the lost income during the four to eight years he or she will not be in the workforce. You have to look at the long-term payoffs!

Also, since part of the price of oil is based on future expectations, the change in public attitudes about tradeoffs between the environment and energy has already reversed some of the rapid rise in energy prices worldwide.

Of course our energy conservation and expansion of supplies must be done in a reasonable and responsible way.

When we purchased our Prius we knew we were facing short-term increased costs and were "betting" on the long-term payback. The Prius costs a few thousand bucks more than a comparable non-hybrid and we were told we'd have to spend $4000 bucks to replace the batteries in four years. We originally figured it would not pay back our investment for five or six years. Well, with the more than doubling of gas prices over the four years we've owned it, and the new estimate that we'll only have to spend about $2000 to replace the batteries and they will last six years or more, it has already paid off!

Smart energy conservation could pay off much sooner than we think if energy prices continue to rise worldwide. Now that China and India and Russia and other countries have adopted something like capitalism, their productivity and standard of living have shot up and are expected to continue to rise to the level of western democracies. That means, despite energy conservation and development of new supplies, energy demand and therefore energy costs will continue to go up.

As I wrote in my Global Warming Topic, the increased use of energy worldwide will mean more release of previously sequestered carbon (gas, oil, coal) into the atmosphere. While I am not an alarmist who thinks all global warming is caused by humans and the "tipping point" is ten- or twenty-years away, I do accept that humans are responsible for a significant fraction of global warming and we should curb the release of sequestered carbon into the atmosphere to the extent possible without ruining the worldwide economy.

Politicians and "do-gooders" can trumpet conservation until they are "blue in the face" but most consumers and industries will do little until it hits them in the pocketbook.

I have long supported a punitive carbon tax. I believe, within ten years, most governments will screw up the courage to impose a substantial carbon tax despite its unpopularity with voters. Government regulation and imposed mileage standards and subsidies for alternative energy are counterproductive and simply enrich the well-connected and bloat government. Just raise the costs of excessive carbon and allow market forces to do the rest!

Ira Glickstein


Howard Pattee said...


You are clearly a free-market conservative, but the fact is that it is not a free market. The government is involved in both regulating and subsidizing almost all big industries.

To be specific, the government gives tax breaks and subsidies of many billions of dollars to oil companies even though in 2007 these companies made over 140 billion in profits. The democrats want to shift some of these subsidies to renewable energy sources.

I can find arguments that there must be some optimum level of distribution and amount of government subsidies to get us off oil dependence faster and more efficiently than a free market.

But first, what is your view of this?


Ira Glickstein said...

Howard wrote "...the fact is that it is not a free market. The government is involved in both regulating and subsidizing almost all big industries."

You are absolutely correct - AND IT IS WRONG!

I strongly opposed President Ford's loan guarantee to Chrysler. At the time, the average manufacturing wage was about $7 an hour and Chrysler was paying double that amount. It was unjust to let small struggling companies go under while a big corporation that paid its management and workers and shareholders excessive amounts was saved. Alhough Lee Iacocca says Chrysler paid back every penny of the loan, I think, in the long run, the USA would have been better off had Chrysler been split up, the profitable parts being absorbed by other companies and the bad parts going under.

In general, tax breaks and subsidies are counter-productive. They should be ended rather than shifted to other purposes. Government largess always goes to the politically well-connected, and always for reasons that sound good for the country. Unfortunately, politicians don't have the courage to do unpopular things.

As Joel pointed out in his Corny Schemes Topic, subsidies for corn-based ethanol have caused famine in some less-developed countries and may not pay off for us. Anyone know how to spell "unintended consequences"?*

I think biofuels, including ethanol, will eventually help, along with new drilling and nuclear and wind and so on. An advantage of biofuels is that they do not liberate sequestered carbon but only recycle the carbon already in the atmosphere. I hope corn-ethanol is just our initial foray into biofuels and that, once the bio-processing and distribution infrastructure is in place, we use it to process more energy efficient switchgrass and biowaste from farms, industries, and households into fuel.

Given a punitive tax on sequestered carbon (gas, oil, coal), biofuels and nuclear and wind and so on would have an economic advantage because they would not be subject to that tax. Unlike a direct subsidy to ethanol, or to oil companies to encourage drilling, a carbon tax would be easy for the government to administer and would, in effect, allow the true engineering and economic tradeoffs to push us to the best set of alternative energy resources and usage, including conservation.

Ira Glickstein

*I spell it "well-intentioned government interference with market forces".

Howard Pattee said...

I accept (up to a point) two basic arguments against government trying to influence the free market by tax policy, subsidies, and regulations. They both go back to von Mises and Friedrich A. Hayek (the Austrian School of Economics)

The first is the “slippery slope” argument, almost the same as Cornford’s “Principle of the Dangerous Precedent.” This argument was often used by Hayek:

“It is an illusion when the more conservative interventionists believe that they will be able to confine these government controls to the particular kinds of which they approve. In a democratic society, at any rate, once the principle is admitted that the government undertakes responsibility for the status and position of particular groups, it is inevitable that this control will be extended to satisfy the aspirations and prejudices of the great masses.”

For the full quote and a discussion by Gary North “The Snare of Government Subsidies” visit the von Mises Institute.

The second argument, also favored by Hayek, is that the market is too complex to be predictably controlled. This is consistent with the “unintended consequences” or “good intentions gone bad” argument.

I accept this principle of minimum government, but only pragmatically, that is when it works. However, I disagree with conservatives who treat it as ideology, that is, as an inflexible dogma even when it doesn’t work. I have lived through two cases where it didn’t work and where government controls saved us from disaster.

During the Great Depression of the 1930s, Roosevelt effectively took over the government and reformed the entire economy and banking system. Conservative hated FDR at the time, and some still enjoy cursing him. But most republicans now accept FDR’s Federal Deposit Insurance Corporation (FDIC), Securities and Exchange Commission (SEC), and Social Security. Many other programs have disappeared and some, like the Tennessee Valley Authority (TVA) should have disappeared.

Another case is WWII when the government regulated almost everything including our personal freedom, i.e., the draft. We could not have won the war without this total government control. After the war most of the controls ended but government support of education did not (e.g., the GI Bill). And today our predominance in science is largely the result of government subsidies in the form of grants.

Ira Glickstein said...

I think you (Howard) have come quite far in the right direction and I appreciate your honesty and insights.

I am more of a Milton Friedman Free to Chose kind of guy than a Mises/Hayek type, but they all make more sense to me than the alternatives (e.g., Galbraith). I did read “The Snare of Government Subsidies” that you linked to and generally agreed. Thanks for the link.

You wrote: "I accept this principle of minimum government, but only pragmatically, that is when it works."

You give examples of when government intervention was necessary, namely the Great Depression and WWII. I agree! In both cases, minimum government would not have worked. (Some have argued it was WWII that really ended the Great Depression more so than the Roosevelt era social programs. And, WWII eventually ended, not so the social programs that have created a welfare culture full of waste and corruption.)

You also mention the GI Bill that sent veterans to college and government subsidies and grants that have helped fuel US predominance in technology and science, and Social Security. Here too, I agree.

However, I wonder if this is a case of selfish-interest. As you know, I now earn money teaching an online graduate system engineering course for the U Maryland that caters to students who are in the military with government-funded tuition. I also benefitted from government-funded Independent Reasearch and development projects I led while working in the high-tech part of the military-industrial complex. Like you, I collect Social Security.

Are we influenced by “The Snare of Government Subsidies”?

Ira Glickstein

Howard Pattee said...

Ira thinks I “. . . have come quite far in the right direction.” Actually, I don’t think Ira knows from where I’ve come, or from which direction, so I want to be clear that I don’t trust any economic model! Skepticism is the only right direction in economic theory. Economics is the last place you want extreme or inflexible beliefs.

That is why I’m not persuaded by Friedman’s position. After winning the Nobel Prize, Friedman became popular with conservatives because of A Monetary History of the United States (written with Anna Schwartz who never got fair credit for her scholarly contribution). In it he used statistics to blame FDR for the depression. There may or may not be some truth in this, but in any case, it thrilled the conservatives who hated FDR.

After his scholarly life, Friedman became more and more a “public intellectual’ if not a cult figure. He was deeply involved in controversial domestic and international politics. His popularity is largely the result of his extremism that is attractive to many black-or-white C-minds.

Extremism also makes for good press (See his PBS series Free to Choose) I call Friedman “extremist” because it’s hard to find cases in which Friedman acknowledged even the possibility that markets could go wrong, or that selective government intervention could serve a useful purpose.

Ira is more flexible, and is willing to accept government intervention; but he worries that it is only because of “selfish-interest.” Game theory and natural selection has taught us that the concept of “self-interest” is so ambiguous that it is useful only in the context of a well-defined model that gives the rules and goals of the game, that is, the selection process and the payoff or fitness function.

As a graduate student after WWII at Stanford, we were exposed to von Neumann and Morgenstern’s Theory of Games and Economic Behavior largely because of von Neumann’s fame and because he gave a lecture on it at a Physics seminar. The book became a great influence among economists because it formalized modeling of strategic decision-making under incomplete information. Wiki says eight game theorists have won Nobel Prizes in economics, and it is now a central part of evolution theory.

The Prisoner’s Dilemma is the paradigm model, and it is the iterated Prisoner’s Dilemma that is relevant for economics and evolution. All these models are still too simplistic. The upshot after a vast number of studies is that both evolution and economics are too complex to predict global behavior. However, some (microeconomic) systems over limited time scales are statistically predictable. It is like predicting the weather. If it looks stormy you take an umbrella. It might clear up, it might rain, or you might get struck by lightning.

Both economics and evolution are even more complex than weather because they are essentially competitive games. All games require rules, a goal, and strategies. In evolution the rules are natural laws that don’t change, and the goal is just to stay in the game. In economics the rules are cultural and governmental laws that change all the time, and because nobody agrees on what the goal ought to be there is no way to decide what the rules should be or what strategies to use!

The best strategy is to make local pragmatic decisions and change policies if they don't work. The worst strategy is to follow a grandiose economic theory that only polarizes endless unresolvable ideological arguments.

Ira Glickstein said...

There is nothing you (Howard) wrote in your most recent Comment that I disagree with!

Your Comment led me to read the Wikipedia entry on Milton Friedman and I was intrigued that he was an FDR New Deal Keynesian in the late 1930's and into the '40's. Unable to find academic employment in 1935 he went to Washington and benefitted from FDR's job creation programs. (Selfish interest perhaps? He realized the error of his ways only after he found steady academic employment!)

You call him an "extremist" due to his faith in free markets. I acknowledge that free markets can, and often do, go wrong. However, except in extreme cases (WWII and possibly the Great Depression) government intervention is almost always motivated by well-connected special interest groups, is initiated too late to do much good, and is therefore often in the wrong direction.

Don Gause, our colleague at Binghamton U, spoke of "enlightened self-interest" which differs from immediate selfish gratification in that it considers the long-term consequences.

David Wilson, our colleague at Binghamton U, made excellent use of game theory (based on the poorly-named "iterated prisoner's dilemma") to illustrate how "altruism" arises through his controversial theory of "group selection" (in contrast to Dawkins argument that all selection is at the gene level). I agree with Wilson that competitive selection takes place at multiple levels, including the group, but I argued that it is not "altruism" (in the strict sense of the word). IMHO it is all "kin selection" of those who share common genes and memes.

I agree with you that economics, like evolution, is so complex that accurate predictions are nearly impossible - even more so since there is no agreement on the rules or goals!

You end your excellent Comment with: "The best strategy is to make local pragmatic decisions and change policies if they don't work. The worst strategy is to follow a grandiose economic theory that only polarizes endless unresolvable ideological arguments."

That sounds like "muddle through" - making local pragmatic (market?) decisions and changing the rules (government policies) when they don't work (for whom?). I think that well describes US economic policy over our lifetimes and perhaps, as Churchill said of democracy "it is the worst system, except for all the others that have been tried."

Ira Glickstein