Almost all modern economic theories were developed within the last 100 years. Recent human history has also been characterized by an abundance of energy supply allowing industrialization and rapid growth. In fact, the discovery of the famed Spindletop oil field was in early 1901. Unfortunately, this abundance of energy during most of the 20th century meant that early economists took energy for granted when they were developing their models of economies and markets—the same models we use today. These economists failed to recognize that nearly all economic growth and innovation is a direct result of increasing use of energy.
This is causation, not correlation, I promise!
Image from Energy and the Wealth of Nations
The same applies here - this close of a relationship is not an accident.
Image from Energy and the Wealth of Nations
Many (or most) people fail to make the connection between their daily lives and dependence on oil, but even actions like heating a shower or flushing a toilet use energy, which today typically stems from coal, oil, or natural gas.
The lack of consideration for energy is critical failing of the economic discipline, as models have struggled to explain economic issues largely due to their exclusion of the major underlying market-mover, energy. In fact, for many models that were coming up with inaccurate results, when energy was factored in they suddenly became accurate. Today we are in the era called “peak oil”, meaning that in the future our oil reserves and production will continue to decline and rise in cost. In all likelihood, we will come up with a different source of energy before we run out of oil, as the cost will necessitate this, but our economy is likely to suffer without abundant energy supply with which to expand. Given our economic models were formed during a time with abundant oil, how are they expected to apply during the inevitable economic contraction when our oil supply begins decreasing?
Image from Energy and the Wealth of Nations
For this reason, and more to come below, we need a separation of the field of economics into several distinct categories. The bickering among economists on different viewpoints (behavioral versus classical versus neo-classical, for example) only serves as detrimental to the subject, and it has often been argued that economics needs more of a basis as a “hard science”. (further reading: Economics, the Hardest of the Soft Sciences) Thus, I present a proposal for the creation of three distinct economic disciplines:
1) Natural Economics: A synthesis of engineering and economics that accounts for environmental and energy supply factors as they relate to the economy. This discipline is the most important of all to develop, as we face a future with uncertain environment and energy prospects. To fail to neglect the planet we live on and basis for our success as a civilization in our future projections would be dangerous and devastating.
2) Choice Economics: A discipline concerned with shaping human decision-making and rationality. As I have expressed before, the most valuable aspect of economics (in my opinion) is its use in developing a framework around any problem or belief with which to evaluate it. Little inter-disciplinary contention exists around the basic concepts of trade-offs and incentives, and though behavioral economics can be controversial it has important psychological roots. Synthesizing actual proof of human behavior (psychology) with methods for shaping and evaluating such (economics) into choice economics will be very useful for the majority of people who fail to grasp dry economic concepts like monetary supply. Emphasizing this aspect of the discipline will make economics more accessible to regular people and perhaps even increase the amount interested in other economic areas. Ideally, this would be the version of economics taught in schools—it is very easy to understand and highly applicable to life.
3) Market Economics: This discipline will be comprised of mainly what you think of when you think “economics”—money supply, interest rates, Federal Reserve policy, etc. Despite the ubiquity of this type of economics, the field remains hotly contentious and often inaccurate. Economists bickering and being wrong about major events only serves to cast a negative light on the entire discipline, so the financial and market economists need to be classified as separate from those attempting to work with tangible issues (as above). It is also highly likely that if/when bad economic times hit again and economists can’t explain it, the discipline will grow out of favor and/or be forced to change or evolve. Thus, it will be most helpful to all if a preemptive separation occurs that can allow certain aspects of the subject to survive untarnished while others are forced to change or are relegated as arcane economic theory.
Without the separation of economics, or at the very least, the incorporation of natural sciences into economic models, the entire discipline stands to lose credibility in the post-peak oil era.
“[Economic anthropologist] Polanyi provided what he termed a substantive definition of economics:
”The substantive meaning of economics derives from man’s dependence for his living upon nature and his fellows. It refers to the interchange with his natural and social environment, insofar as this results in supplying him with the means of material want satisfaction. “
In other words, the substantive definition of economics is how humans transform nature to meet their needs.”
Polanyi's definition of economics makes a great deal of sense, and the actuality of the discipline should reflect that - a subject not grounded in reality is not worth much at all.
Perhaps the influence of engineering in economics can help us come up with a new method of life support for the global economy. It isn't guaranteed to do so, but we owe it to both subjects and the future residents of this planet to try.
Perhaps the influence of engineering in economics can help us come up with a new method of life support.
Money represents a social agreement, which has implications for how we value wealthy people. Bitcoin replaces the need for this social agreement with technology, and in doing so challenges the values we ascribe to wealth.