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Energy and the Wealth of Nations

June 5, 2012

by Richard Vodra, JD, CFP

When our society relies on an understanding of economics that did not predict, prevent, or mitigate the current economic crisis, and that, more importantly, does not effectively address climate change or resource depletion, it is time for a new and different approach to understanding the economy.  That premise is the foundation of Energy and the Wealth of Nations, an important book by ecologist Charles Hall and economist Kent Klitgaard, who together are pioneering the new discipline of biophysical economics.

Two major themes interweave through this book.  One is about the nature of the economy; the other, about the nature of economics (by which I mean contemporary, academic economic thought).

Hall and Klitgaard’s work has important implications for financial planners, but first let’s look at their view of the historical role of energy in civilization and why they contend that contemporary economics lacks the tools to enable policy makers to make optimal decisions.

A history of energy

The book is based on the premise that the capture of excess energy supports all the functions of life.  Every plant or animal must not only get energy from food, sunlight, or other sources, but must ingest more energy than the energy it expends to obtain its sustenance – this excess enables an organism to move about, reproduce and raise its young, and do whatever else is on its agenda.  Social animals, like humans, can share energy within their tribe, pack, or hive. 

Human civilization began when agriculture led to enough excess storable food (derived from solar energy, via plant life) to support non-producing groups of priests, soldiers, royalty, artists and others.  Technology gradually allowed the capture of wind and water power (other forms of solar energy) for trading, simple manufacture and other purposes.  The economy was based on the capture and transformation of energy and other resources for the benefit of people, and when those resources were used up (as with deforestation or overfishing), disappeared (as with chronic drought, or loss of territory), or employed more effectively by others (as by an invading nation), civilizations declined or disappeared.  Human interaction with the “real world” was the ultimate determinant of economic activity.  We lived in a close balance – economic growth averaged less than 0.1% per year for the two thousand years before 1700. 

Something remarkable happened late in the 18th century – people discovered how to obtain and use vast new forms of stored solar energy, such that they were no longer dependent on the energy received in a single season or a few years.  Those new energy sources – fossil fuels – came from vast new supplies of concentrated and portable energy – first coal, then oil, then natural gas.  The challenge was on, both to find and extract more of these energy stores and to find new ways to use them.  Coal led to vast quantities of iron and steel, which allowed for trains, faster and bigger ships, factories, taller buildings, and more.  Oil became the main fuel for gasoline, diesel, and jet engines, allowing for cars, trucks, ships, and planes.  Natural gas not only led to better forms of heat, but also to artificial fertilizer.