Friday, February 4, 2011

Long Term Trends in Economic Output

Last night I was tired after work and took myself out to dinner with a copy of Samuelson's economics textbook (I have the 18th edition with coauthor Nordhaus).  I've been meaning to read this for a while (because Krugman was strongly recommending it) and finally got the chance to read the first few chapters.

I don't have it in front of me to give verbatim quotes, but I was intrigued to discover that Samuelson and Nordhaus appear to believe that the main differences between pre-industrial economies and industrial economies were institutional improvements: medieval craft guilds that had prevented technological innovation were done away with, and people discovered the principle of division of labor, which improved productivity.

To me, this is nuts.  The core difference between the pre-industrial era and the industrial era is the development of the steam engine, which allowed the economy to run at much higher EROEI, generating much larger surpluses, which in turn enabled all manner of other developments because most of the population could be freed up from directly working the land.  The first commercially successful engine (Newcomen) was in 1712 which was mainly a water pump in mines.  The Watt engine (which first made it possible to apply steam power in factories) came along in the mid 1700s, and Trevithick's engine - the first efficient enough for practical transport applications - was introduced in 1800.

I note that the Romans  understood the principle of specialization and division of labor.  For example, in his book The Decline of Rome, Bryan Perkins traces how pottery was made in large workshops by specialized artisans and exported all over the empire.  What the Romans didn't have was viable steam engines.

Then look at the figure above, which shows Brad Delong's numbers for GDP/capita over time.  I have selected the period from -1000 on, and used a linear scale, rather than a log scale as Delong did, which in my view suppresses the most important point about this data.  Note how the ups and downs of empires and dark ages before 1800 are barely visible, compared to what happened once you could power vehicles with fossil fuels.

It's also striking how from the outset the book sets up a division into the major factors of production: "Labor", "Land", and "Capital".  Then they explain hastily that these days, the "Land" factor is taken to include energy, minerals, etc.  Energy is a form of Land!

Economics is a very useful discipline and has developed many invaluable insights, but it has a blind spot a mile wide when it comes to energy.


Mike Aucott said...

Amen. It's amazing how blind traditional economics is to the importance of fossil fuel energy. This flaw, and the associated recent failure of virtually all economists to predict the severe recession, help make the case that economics isn't yet a science.

Stuart Staniford said...

Mike: I believe it's impossible in principle for economics as a discipline to predict recessions in advance, so we can't fairly hold them to that standard.

Brett said...

Good job on pointing out that the Romans more or less had early factories. I think it helps to debunk the myth that the Roman Empire was technologically and economically stagnant.

The real key with steam power was the development of pistons and other such parts, made possible with the development of good machine tools. Before that, steam power was too difficult and inefficient to harness.

Fixed Carbon said...

Stuart: I had the intensely interesting experience of watching a debate among Brad DeLong, Tyler Cowan, and Greg Clark about Clark's book, "A Farewell to Alms." I had just read Clark's book and was puzzled by the virtual absence of mention in the book of the role of fossil fuels in the Industrial Revolution, especially in light of the pretty large role assigned to fossil fuels by Pomeranz in "The Great Divergence." Naive biologist, moi, had his question chosen ("Why no treatment of fossil fuels in 'A Farewell to Alms'?"). Clark dismissed the question as if it were beneath his dignity, "Fossil fuels played no role in the Industrial Revolution."

Unknown said...

The link between energy and industrial growth is already dealt with, the big milestone is the Ayres-Warr model, which demonstrates the inadequacy of Solow and the contribution of exergy (net "work") to industrial growth is about 90%.

It took me a while to understand why it had been ignored but first it was developed by German physicists (not economists) in the 70s and economists even today are poorly tooled to embedd in their hard science since there is rarely suitable conditions to confront theories to facts. Back then it was all Club of Rome (even if strictly speaking exergy thinkers are an independent branch although with similar findings) and as it is Nordhaus was the main opponent to the "limits to growth".

The irony in this story is that the main finding of Solow back in '56 was that most industrial growth could not be explained by just adding work and capital inputs and therefore the famous "residual" had to be something else which everybody believed to be "technology". Nordaus did use that argument against the "environmentalists" and since he along with Samuelson he is mainstream this fundamental debate in macroeconomics has just not happened. So key protagonists like Krugman and Stiglitz are basically lacking the one piece of t intellectual toolkit that would justify spending big: an oil supplies plan B.

Note however that the science is still progressing underground with various concepts coming e.g. from biology, like homeostasis, or why your body never maximizes output but tries to find a "balance" and so on.

Stuart Staniford said...

Fixed Carbon: amazing. It's really the tell, right - he hasn't even thought about it enough to discuss the pros and cons of an argument.

If anyone ever wonders how I can be so arrogant as to question Nobel prize winning economists - this is the reason. As soon as I started to read about the subject five years ago, it was immediately obvious that they'd never worked out how they related to physics (in the way, that say, biologists or ecologists have - they know that energy flow through their systems is at the root of everything, and they've worked through the implications of that).

Stuart Staniford said...

Benoit - thanks for the link. I've read some of Ayre's papers, but hadn't seen the book.

Kenneth D. Worth said...

Stuart, re: getting rid of the log scales, I understand the reason, time at least is an absolute number and should appear on the graph as such, but suppose GDP per capita were to increase a few percent per year due to human innovation and cultural preservation, a better spear at first, domestication of animals, metallurgy, the steam engine, and then gradually on to supercomputing. It would certainly make the resulting graph very steep just by the nature of the exponential growth, leaving aside any input from fossil fuels. Could you perhaps present the graph with GDP in log scale and time as normal?

Stuart Staniford said...

Kenneth: you can see it with a log scale at Brad DeLong's site (where I sourced the numbers). said...

It's a real pleasure to see a beloved hunk of paper like Samuelson essentially falsified, in less than 500 words. But, I think you have done it. :-)


Greg said...

If I can go a bit Thomas Aquinas for a moment, fossil fuels were the proximate ... not cause, but reason why the IR did not peter out as previous periods of innovation did. But the Enlightenment, and the systems of government in northwestern Europe, particularly England and the Netherlands, and a few accidents of history (high wages, a boost to agricultural productivity causing 20% unemployment) and geography (an Empire) are the effective causes. The steam engine was (re)invented in France -- why didn't the IR take place there? Institutions.

The IR was about cloth, and only cloth -- by the time diversification happened in the 19th century, the socioeconomic change was really too old to be called a revolution any more. When it started, the bottleneck in cloth production was the spinning of thread. The spinning jenny allowed a person (using human power) to produce eight times as much as previously. It was replaced in short order by water powered spinning frames that quadrupled production again; water power was replaced with steam much later.

There's a lot that's controversial in Greg Clark's work, but this isn't.

All that said, Ayres and Warr, and the ecological economists have a better explanation for the continuation of economic growth from approximately 50 years into the IR up to the present day: the increase in useful mechanical work done by inanimate objects using non-living fuels (A & W); or increasing total energy flux (ecological). Mainstream economists argue that the system of institutions developed in the west (especially intellectual property protection) enable and provide incentives for whatever innovations we demand to keep growth going. This is unsatisfactory, as it cannot explain why we have the particular set of innovations we have, in fact, ended up with.

Fixed Carbon said...

Greg: Your "spinning jenny" comment is intriguing and gives insight about Clark's theme. Where can I read more about the notion that the IR is simply about the "spinning jenny." Niether Clark's nor Pomeranz's index includes the term or an entry for "loom." Both have lots of refs to "cotton." The cotton, of course, was produced by slaves in the US (Slavery was treated by both Clark and Pomeranz). I wonder, does the "spinning jenny" theme has a political side? Clark seems to me to be a fairly conservative sort of economist. DeLong introduced him at this confab to which I refer above as having written a paper as an undergrad with a title something like "how workers exploit their bosses." However, I'm not sure about how these economists can be classified by politics.

Stuart Staniford said...


I think I agree with you at least in broad strokes. The steam engine wasn't invented in a vacuum - the enlightment, the invention of the scientific method, the early stages of the industrial revolution - all these were necessary precursors.

But, I do not believe that growth would have taken off at anything like the same rate if society had not invented a high EROEI way to extract fossil fuels and use them in prime movers.

I mean - maybe western civilization would still have gotten to the same level by slowly refining watermills and windmills and solar enginers to the point were they have modern EROEIs. But I have to think it would have taken a couple of centuries longer.

ColdNorth said...

Intriguing post! The recent paper from James H. Brown and colleagues: Energetic Limits to Economic Growth compares per capita GDP and energy consumption for a variety of countries over the last ~25 years. By country there is a good log-log coorelation between wealth and energy consumption (per capita). As a gross generalization, the data also appears to show that we are generating more GDP per unit energy than 25 years ago.

Greg said...

Fixed Carbon: I just googled around. I've had an interest in the sources of economic growth for a while. (I think it really started with the medieval invention of the profession of lawyer. That gave rise to universities, and ...)

Growth wasn't just about production, or at least, not directly. I recall Stuart saying he'd read part of Fernand Braudel's 3-part Civilization and Capitalism. Adam Smith's observation that "the division of labour [and therefore productivity] is limited by the extent of the market" was very acute; Braudel examines markets and trade in pre-industrial times (among other things). Worth the money, if you have some. Economic growth during the industrial revolution can be (mostly) explained as a result of driving down the cost of transport, and thus increasing the effective size of the market - bigger ocean-going ships and better navigation, and canals.

Anyway, google for Robert Allen at Nuffield College in Oxford - my comment was partly based on a paper of his that I'd read, along a couple of Greg Clark's papers and critiques thereof. That should give you an entry point into the literature - the part of it that's available on the net, at least.

Interestingly the guy who invented the spinning jenny didn't make a lot of money out of it. This is cited as one of the examples for the contention that intellectual property rights are over-hyped as a cause of growth.

Stuart - agreed; as I said at the start, fossil fuels are the reason why the industrial revolution didn't fade away after a few decades. The population never got a chance to catch up to the production ceiling. (This century, of course, the production ceiling might be lowering, like the pendulum in Edgar Allen Poe's story, The Pit And The Pendulum. I guess we'll find out whether the market can really conjure whatever innovations are demanded - or if there's a difference between "demand" and "need".)

Sam Penrose said...

Best concise statement of the challenge the energy-centric analysts make to center-left orthodoxy. Thanks very much. I'll link to this liberally.

kjmclark said...

Spinning wheels predated the spinning jenny by hundreds of years. The spinning jenny was an improvement, but the spinning wheel was an improvement on hand spinning. It's not like the idea of using more complicated machines to improve productivity appeared out of nowhere at the beginning of the industrial revolution.

And mechanization goes back to the Greeks. The Romans heavily used water power, including sophisticated water mills. (Search "barbegal".)

But the increase in the British use of coal, and just before that, the denuding of the Irish forests to fuel British iron smelting, was different. Take away the coal, and the industrial revolution would have proceeded at the same pace things had since the Norman conquest. Without the coal, the British iron industry would have died from lack of fuel. Without the iron, the industrial revolution would have had to stop with the machines they could make from wood.

See "The Unending Frontier" (2003) by John Richards of Duke, particularly chapter 6, "Landscape Change and Energy Transformation In The British Isles." Over the course of the 17th century, the British reduced Irish forests from about 12% of the land area to about 2%. They had also begun importing wood from Norway. Without their ample coal resources, their improvements would have stopped in their tracks.

Stephen B. said...

This has been an intriguing discussion, and, I have to admit, somewhat over my head.

Still, it recalls a line of thought I had once when I was younger and into reading about the development of our technologically advanced civilization along with considering whether there could be other advanced civilizations out there, the search for radio signals from said civilizations, and so on.

It occurred to me how lucky on this rocky planet we are to have evolved in an oxygen atmosphere, where we can burn things in a controlled way. With fire came the manipulation of materials, especially metals. With the manipulation of metals came the exploration and development of electrical and electronic technologies. Suppose another race out in the universe developed a high intelligence, but perhaps on a world completely covered with oceans (take your pick of water, methane, or whatever.) I realize I'm limiting the choices to what we know worked on earth, but just try developing advanced metallurgy in a deep water existence.

So much of what we have done as a technological race was done because we crawled out of the oceans and onto land in a moderated oxidizing atmosphere on a planet surface supplied with abundant embodied energy to tap into in the form of biomass and then fossil fuels.

As I say, it's quite an intellectual danger to limit our imaginations to what has evolved on just one planet (earth), but it's always been obvious to me, high technological development needed/needs an easy, energy source, heat source, material-modifying source, to work with.

The past few hundred years of fossil fuel powered existence may be more of an unprecedented occurrence than we might at first have thought, especially amongst economists.

Stuart Staniford said...


You might be interested to know that there is work by physicists showing that if some of the fundamental constants of nature were even slightly different, the universe would be very different and planets and life could not have formed. These are known as "anthropic coincidences". The book by Barrow and Tipler is a good study of this, but there's a little flavor at the Wiki page on the Anthropic Principle.