Something like a potential to exploit

My editorial

I have become quite accidental in my blogging. I mean, I do not have more accidents than I used to, I am just less regular in posting new content. This is academic life: giving lectures, it just drains you out of energy. Not only do you have to talk to people who mostly assume that what you tell them is utterly useless, but also you had to talk meaningfully so as to prove them wrong. On the top of that, I am writing that book, and it additionally taxes my poor brain. Still, I can see a light at the end of the tunnel, and this is not a train coming from the opposite sense. It is probably nothing mystical, as well. When I was a kid (shortly after the invention of the wheel, before the fall of the Warsaw Pact), there was a literary form called ‘novel in short episodes’. People wrote novels, but the socialist economy was constantly short of paper, and short of trust as for its proper use. Expecting to get printed in hard cover could be more hazardous an expectation than alien contact. What was getting printed were newspapers and magazines, as the government needed some vehicle for its propaganda. The caveat in the scheme was that most people didn’t want to pay for being served propaganda. We were astonishingly pragmatic in this respect, as I think of it now. The way to make people buy newspapers was to put inside something more than propaganda. Here, the printless writers, and the contentless newspapers could meet and shake their hands. Novels were being published in short episodes, carefully inserted at the last page of the newspapers, so as the interested reader has the temptation to browse through the account of Herculean efforts, on the part of the government, to build a better world, whilst fighting against the devils from the West.

As for me, I am running that blog at https://discoversocialsciences.com and it is now becoming endangered species in the absence of new, meaningful content being posted regularly. I mean, when you don’t breed, you become endangered species. On the other hand, I have that book in process, which might very well become the next bestseller, but it as well might not. Thus, I shake by blog hand with my book hand, and I decided to post on my blog, the content of the book, as it is being written. Every update will be, from now for the next five weeks or so, an account of my wrestling with my inner writer. I have one tiny little problem to solve, though. Over the last months, I used to blog in English and in French, kind of alternately. Now, I am writing my book in English, and the current account of my writing is, logically, in the beautiful language of Shakespeare and Boris Johnson. I haven’t figured out yet how the hell am I going to insert French in the process. Oh, well, I will make it up as I will be going. The show must go on, anyway.

And so I start.

(Provisional) Introduction (to my book)

This book is the account of the author’s research concerning technological change, especially in the context of observable shift towards renewable energies. This is an account of puzzlement, as well. As I developed my research on innovation, I remember being intrigued by the discrepancy between the reality of technological change at the firm and business level, on the one hand, and the dominant discourse about innovation at the macroeconomic level. The latter keeps measuring something called ‘technological progress’, with coefficients taken from the Cobb – Douglas production function, whose creators, Prof Charles W. Cobb and Prof Paul H. Douglas, in their common work from 1928[1], very strongly emphasized that their model is not really made for measuring changes over time. The so defined technological progress, measured with Total Factor Productivity, has not happened at the global scale since the 1970ies. In the same time, technological change and innovation keep happening. The human civilisation has reached a stage, when virtually any new business needs to be innovative in order to be interesting for investors. Is it really a change? Haven’t we, humans, been always like that, inventive, curious and bold in exploring new paths? The answer is ambiguous. Yes, we are and have been an inventive species. Still, for centuries, innovation has been happening at the fringe of society and then used to take over the whole society. This pattern of innovation is to find in business practices not so long ago, by the end of the 17th century. Since then, innovation, as a pattern of doing business, has progressively passed from the fringe to the centre stage of socio-economic change. Over the last 300 years or so, as a civilisation, we have passed, and keep passing, from being innovative occasionally to being essentially innovators. The question is: what happened in us?

In the author’s opinion, what happened is first and most of all, an unprecedented demographic growth. According to the best historical knowledge we have, right now we are more humans on this planet than we have ever been. More people being around in an otherwise constant space means, inevitably, more human interaction per unit of time and space, and more interaction means faster a learning. This is what technological change and innovation seem to be, in the first place: learning. This is learning by experimentation, where each distinct technology is a distinct experiment. What are we experimenting with? First of all, we keep experimenting with the absorption and transformation of energy. As a species, we are champions of acquiring energy from our environment and transforming it. Secondly, we are experimenting with monetary systems. In the 12th and 13th century, we harnessed the power of wind and water, and, as if by accident, the first documented use of bills of exchange dates back precisely to this period. When Europe started being really serious about the use of steam power, and about the extraction of coal, standardized monetary systems, based on serially issued bank notes, made their appearance during the late 18th century. At the end of the 19th century, as natural oil and gas entered the scene, their ascent closely coincided with final developments in the establishment of corporate structures in business. Once again, as if by accident, said developments consisted very largely in standardizing the financial instruments serving to trade shares in the equity of industrial companies. Presently, as we face the growth of electronics, the first technology ever to grow in complexity at an exponential pace, we can observe both an unprecedented supply of official currencies money – the velocity of money in the global economy has descended to V < 1 and it becomes problematic to call it a velocity – and nothing less than an explosion of virtual currencies, based on the Blockchain technology. Interestingly, each of those historical moments marked by the emergence of both new technologies, and new financial patterns, was associated with new political structures as well. The constitutional state that we know seems to have grown by big leaps, which, in turn, took place at the same historical moments: 12th – 13th century, 18th century, 19th century, and right now, as we are facing something that looks like a shifting paradigm of public governance.

Thus, historically, it is possible to associate these four streams of phenomena: demographic growth, deep technological changes as regards the absorption and use of energy, new patterns of using financial markets, and new types of political structures. Against this background of long duration, the latest developments are quite interesting, too. In 2007 – 2008, the market of renewable energies displayed – and this seems to be a historical precedent since 1992 – a rate of growth superior to that observable in the final consumption of energy as a whole. Something changed, which triggered much faster a quantitative change in the exploitation of renewables. Exactly the same moment, during the years 2007 – 2008, a few other phenomena coincided with this sudden surge in renewable energies. The supply of money in the global economy exceeded the global gross output, for the first time in recorded statistics. Apparently, for the first time in history, one average monetary unit, in the global economy, finances less than one unit of gross output per year. On the side of demography, the years 2007 – 2008 marked a historical threshold in urbanisation: the urban population on our planet exceeded, for the first time, 50% of the total human headcount. At the same moment, the average food deficit, i.e. the average deficit of kilocalories per day per capita, in our civilisation, started to fall sharply below the long-maintained threshold of 131 kcal, and presently we are at a historical minimum of 88,4 kcal. Those years 2007 – 2008, besides being the moment when the global financial crisis erupted, marked a significant turn in many aspects of our collective, global life.

Thus, there is the secular perspective of change, and the recent breakthrough. As a scientist, I mostly ask two questions, namely ‘how?’ and ‘what happens next?’. I am trying to predict future developments, which is the ultimate purpose of any theory. In order to form a reliable prediction, I do my best to understand the mechanics of the predicted change.

Chapter I (or wherever it lands in the final manuscript) The first puzzlement: energy and population

The first scientific puzzlement addressed in this book refers to the most recent research by the author. The research in question was oriented on explaining the role of renewable energies in the sustenance of our civilisation, and it was very much inspired by a piece of information the author had read in Fernand Braudel’s masterpiece ‘Civilisation and Capitalism’ (Braudel 1981[2]). According to historical accounts, based on the official documents of the Habsburg Empire, in the author’s home region, Lesser Poland, known as Austrian Galicia under the Habsburg rule, at the end of the eighteenth century, there was one water mill, on average, per 382 people. The author’s home town, Krakow, Poland, sustains a population of 800 000, which would correspond to 2094 water mills. Said watermills are significant by their absence. Since I had learnt about this little fact, reading Fernard Braudel’s monumental work in summer 2015, I have gradually become quasi-obsessed with the ‘what if?’ question: what if today we had those 2094 water mills in my home city? What would our life look like? How different would it be from the world we are actually living? This gentle obsession crystallized into a general theoretical question: can renewable energies sustain the present human population? This generality found a spur in the reading of statistics pertaining to renewable energies. In 2007 – 2008, the rate of growth in the market of renewable energies changed, and became higher than the rate of growth in the overall, final consumption of energy. This change in trends is observable on the grounds of data published by the World Bank, regarding the consumption of energy per capita (https://data.worldbank.org/indicator/EG.USE.PCAP.KG.OE ), and the share of renewable energies in that overall consumption (https://data.worldbank.org/indicator/EG.FEC.RNEW.ZS ). This change of slope was something of a historical precedent since 1990. In 2007 – 2008, something important happened, and still, to the author’s knowledge, there is no research explaining what that something could possibly have been. Some kind of threshold has been overcome in the absorption of technologies connected to renewable energies.

As the author connected those two dots – the historical facts and the recent ones – the theoretical coin started dropping. If we want to understand the importance of renewable energies in our civilisation, we need to understand how renewable energies can sustain local populations. That general intuition connected with the theoretical contribution of the so-called ‘new economic geography’. In 1998, Paul Krugman referred to models, which allow construing spatial structures of the economy as general equilibriums (Krugman 1998[3]). Earlier work by Paul Krugman, dating from 1991 (Krugman 1991[4]) supplied a first, coherent, theoretical vehicle for the author’s own investigation. The role of renewable energies in any local, human community is possible to express as aggregate utility derived from said energies. Further reflexion led to a simple observation: the most fundamental utility we derive from any form of energy is the simple fact of us being here around. The aggregate amount of utility that renewable energies can possibly create is the sustenance of a given headcount in population. In this reasoning, a subtle tension appeared, namely between ‘any form of energy’ and ‘renewable energies’. An equation started to form in the author’s mind. On the left side, the size of the population, thus the most fundamental, aggregate utility that any resource can provide. On the right side, the general construct to follow was that suggested by Paul Krugman, which deserves some explanation at this point. We divide the whole plethora of human activity, as well as that of available resources into two factors: the principal, differentiating one, and the secondary, which is being differentiated across space. When we have a human population differentiated into countries, the differentiating factor is the political structure of a country, and the differentiated one is all the rest of human activity. When we walk along a busy commercial street, the factor that creates observable differentiation in space is the institutional separation between distinct businesses, whilst labour, capital, and the available urban space are the differentiated ones. In the original model by Paul Krugman, the final demand for manufactured goods – or rather the spatial pattern of said demand – is the differentiating factor, which sets the geographical frame for the development of agriculture. The fundamental mathematical construct to support this reasoning is as in equation (1):

  • (1)         U = A*F1µ*F21-µ        µ < 1

…where ‘U’ stands for the aggregate utility derived from whatever pair of factors F1 and F2 we choose, whilst ‘A’ is the scale factor, or the proportion between aggregate utility, on the one hand, and the product of input factors, on the other hand. This mathematical structure rests on foundations laid 63 years earlier, by the seminal work by Prof Charles W. Cobb and Prof Paul H. Douglas (Cobb, Douglas 1928[5]), which generations of economists have learnt as the Cobb-Douglas production function, and which sheds some foundational light on the author’s own intellectual path in this book. When Charles Cobb and Paul Douglas presented their model, the current economic discourse turned very much around the distinction between nominal economic change and the real one. The beginning of the 20th century, besides being the theatre of World War I, was also the period of truly booming industrial markets, accompanied by significant changes in prices. The market value of any given aggregate of economic goods could swing really wildly, whilst its real value, in terms of utility, remained fairly constant. The intuition behind the research by Charles Cobb and Paul Douglas was precisely to find a way of deriving some kind of equilibrium product, at the macroeconomic scale, out of the observable changes in industrial investment, and in the labour market. This general intuition leads to find such a balance in this type of equation, which yields a scale factor slightly above 1. In other words, the product of the input factors, proportioned in the recipe with the help of logarithms construed as, respectively, µ < 1, and 1-µ, should yield an aggregate utility slightly higher than the actual one, something like a potential to exploit. In the original function presented by Cobb and Douglas, the scale factor A was equal to 1,01.

Investigating the role of renewable energies in the sustenance of human populations led the author to experiment with various input variables on the right side of the equation, so as to have the consumption of renewable energies as input no. 1, something else (we are coming to it) as input no.2. The exploratory challenge was, firstly, to find the right variables, and then the right logarithms to raise them to, in order to obtain a scale factor A slightly above one. The basic path of thinking was that we absorb energy from environment in two essential forms: food, and everything else, which, whilst non-edible, remains useful. Thus, it has been assumed that any human community derives an aggregate utility, in the form of its own headcount, to be subsequently represented as ‘N’, out of the use ‘E’ of non-edible energies (e.g. fuel burnt in vehicles or electricity used in house appliances), and out of the absorption as food, further symbolized as ‘F’.

Thus, we have two consumables – energy and food – and one of the theoretical choices to make is to assign them logarithms: µ < 1, and 1-µ. According to the fundamental intuitions of Paul Krugman’s model from 1991, there are two paths to follow in order to find the dominant factor in the equation, i.e. the differentiating one, endowed with the logarithm µ <  1. The first path is the actual, observable change. Paul Krugman suggested that the factor, whose amount of input changes faster than the other one, is the differentiator, whilst the one displaying slower a pace of change is being differentiated. The second path pertains to the internal substitution between various goods (sub-inputs) inside each of the two big input factors. The new economic geography suggests that the capacity of industrial facilities to shape the spatial structure of human settlements comes, to a great extent, from the fact that manufactured goods have, between them, much neater a set of uses and mutual substitution rates than agricultural goods. Both of these road signs pointed at the use of non-edible energies as the main, differentiating factor. Non-edible energies are used through technologies, and these have clearly cut frontiers between them. A gasoline-based combustion engine is something different from a diesel, which, in turn, is fundamentally different from a power plant. The output of one technology can be substituted, to some extent, to the output of another technology, with relatively predictable a rate of substitution. In comparison, foodstuffs have much foggier borderlines between them. Rice is rice, and is part of risotto, as well as of rice cakes, rice pasta etc., and, in the same time, you can feed your chicken with rice, and thus turn the alimentary value of rice into the alimentary value of meat. This intricate scheme of foods combining with each other is made even more complicated due to idiosyncratic culinary cultures. One pound of herring trades against one pound of pork meat differently in Alaska and in Lebanon. As for the rate of change, technologies of producing food seem changing at slower a pace than technologies connected to the generation of electricity, or those embodied in combustion engines.

Thus, both paths suggested in the geographic model by Paul Krugman pointed at non-edible energies as the factor to be endowed with the dominant logarithm µ < 1, leaving the intake of food with the residual logarithm ‘1 – µ’. Hence, the next step of research consisted in testing empirically the equation (2):

  • (2)         N = A*Eµ*F1-µ        µ < 1; A > 1

At this point, the theoretical model had to detach itself slightly from its Cobb-Douglas-Krugman roots. People cluster around abundance and avoid scarcity. These, in turn, can be understood in two different ways: as the absolute amount of something, like lots of food, or as the amount of something per person. That distinction is particularly important as we consider established human settlements with lots of history in their belt. Whilst early colons in a virgin territory can be attracted by the perceived, absolute amount of available resources, their distant ancestors will care much more about the availability of those resources to particular members of the established community, thus about the amount of resources per inhabitant. This principle pertains to food as well as to non-edible energies. In their early days of exploration, entrepreneurs in the oil & gas industry went wherever they could find oil and gas. As the industry matured, the daily yield from a given exploitation, measured in barrels of oil, or cubic meters of gas, became more important. This reasoning leads to assuming that quantities of input on the right side in equation (2) are actually intensities per capita in, respectively, energy use and absorption of food, rather than their absolute volumes. Thus, a mutation of equation (2) is being posited, as equation (3), where:

(3)                        N =A*[(E/N)µ]*[(F/N)1-µ]          µ < 1; A > 1

[1] Charles W. Cobb, Paul H. Douglas, 1928, A Theory of Production, The American Economic Review, Volume 18, Issue 1, Supplement, Papers and Proceedings of the Fortieth Annual Meeting of the American Economic Association (March 1928), pp. 139 – 165

[2] Braudel, F., 1981, Civilization and Capitalism, Vol. I: The Structures of Everyday Life, rev.ed., English Translation, William Collins Sons & Co London and Harper & Row New York, ISBN 00216303 9, pp. 341 – 358

[3] Krugman, P., 1998, What’s New About The New Economic Geography?, Oxford Review of Economic Policy, vol. 14, no. 2, pp. 7 – 17

[4] Krugman, P., 1991, Increasing Returns and Economic Geography, The Journal of Political Economy, Volume 99, Issue 3 (Jun. 1991), pp. 483 – 499

[5] Charles W. Cobb, Paul H. Douglas, 1928, A Theory of Production, The American Economic Review, Volume 18, Issue 1, Supplement, Papers and Proceedings of the Fortieth Annual Meeting of the American Economic Association (March 1928), pp. 139 – 165

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s