Homo Economicus and Energy

The recent energy crisis in Europe illustrates very well the importance of energy in our economies. Many countries in Europe are experiencing energy shortages and high inflation propelled by sharp increases in energy prices, making it impossible to satisfy most basic needs like rent, food, and transportation. Germany’s inflation report for October 2022 shows a rise to 10.4%, a number not seen since the reunification. The main contributor to this inflation is a 43.9% energy price rise that is trickling down the goods supply chain, accelerating food prices to 20.3%.

The economic outlook for all of Europe, and especially a highly industrialized country like Germany, has recently worsened with the mysterious sabotages of the Nord Streams 1 and 2 that brought natural gas to Germany. These events prompted Germany’s new Chancellor, Olaf Scholz to say: “Nord Stream being damaged means no gas for us in foreseeable future”, while German Economy Minister Robert Habeck said: “An Energy Crisis in Germany threatens to grow, to spiral into a social and economic crisis”.

This sudden acknowledgment of the role of energy in a country’s economy goes against the tenets of traditional economic theory. In this theory, practiced by what has been called ‘homo economicus’, energy has no place at the table and economic downturns are usually explained using purely economic variables like inflation, interest rates, bad fiscal management, widespread high wages, currency manipulations, and excessive government spending.

A good example is US Federal Reserve chairman Jerome Powell, who recently attributed high inflation in the US to high wages, without taking into account the effects of incredible hikes in energy prices. President Biden’s former White House press secretary, Jens Psaki, joined the denial of energy’s importance in economics when she said in March 2022 that the upcoming inflation report would not include food and energy prices. Since then, there have been many inflation reports that have excluded these two commodities essential for determining true inflation.

Powell and Psaki are two exponents of Homo economicus, a person who believes that humans are completely rational entities who pursue economic goals based on self-interest that seeks to maximize profits and utility. This supposedly all rational human, makes decisions based on all available information, even if this information is restricted to purely economic concerns.

It is very strange that although energy is the main variable in everything that happens in the universe, homo economicus, the best exponent of rationality, has designed economic theories without taking it into account. It is as though human economic transactions happened in a special bubble outside the universe, in which the tiny planet called Earth resides. On this weird planet, economic theory is based on a dream world in which the supply of goods and services appears out of nowhere, without needing all the energy transformations required for the manufacturing, transportation, and use, inherent in every process. Further, the inhabitants also believe that they have all the information required to make decisions without taking it into account.

The physicist and economist Robert Ayres, a specialist in the role of thermodynamics in economics once said:

“The economic system is essentially a system for extracting, processing and transforming energy as resources into energy embodied in products and services.”

What is the supply and demand theory without understanding the importance of “extracting, processing, and transforming energy resources? Not much. Ayres’ theory explains why the world’s greatest economic growth coincides exactly with the discovery and use of the densest and most intense energy that the world had ever seen: fossil fuels. These fuels, processed during eons, managed to pack the greatest energy –an indispensable requirement for the growth of modern economies.

The happiest time for homo economicus was the fossil fuel and economic boom experienced in the Western world from the 1950s to the early 1970s. The oil abundance in the US, combined with the fossil fuel resources of the Middle East provided the fuel for a fantastic economic growth that lasted until 1973 when OPEC was created, and oil-producing countries were able to get a bit more control over their resources.

The oil abundance in the US was unfortunately used to power an economy of squandering that convinced Americans that oil was infinite and energy an unimportant variable. The power of American culture spread homo economicus’ enthusiasm for the American Dream -an ideal that promoted an extremely consumerist society. The big house and powerful car became a must for the perfect American family and the freeway became, not just the epitome of a successful modern city but also individual freedom. Advertisements and movies were populated with images of prosperous couples in convertibles enjoying the freedom of speed and fast air moving through the blond wife’s hair.

Homo economicus’ beliefs in rationality based on seeking profits at any cost took for granted the eternal availability of usable energy and the unimportance of the waste that these energy transformations inevitably produce. Homo economicus beliefs biased our cultural and economic views to care mostly about dollar amounts while ignoring sustainability.

If Homo economicus had been as rational as they claim to be, their priority would have been long-term sustainability, instead of short-term enrichment. This true rationality would not have measured a country’s success in terms of GDP but instead in an index that measured how wisely a country balanced their goods’ production and consumption, with their waste accumulation.

Another quote from Robert Ayres explains better the energy reality in the universe:

“The “first law of thermodynamics” implies that the notion of “consumption” as applied to products is misleading: material transformation processes unavoidably generate large quantities of material wastes or residuals. Some of those wastes are merely inconvenient but others are harmful or toxic. The second law says that energy becomes less useful by every action.”

Homo economicus’ ideas have become the foundation of the world’s dominant culture, characterized by a complete unawareness of the nature of energy. Physicists have understood for a long time the laws of thermodynamics that clearly explain how any activity we do, involves an energy transformation that includes a part that can do work (usable) and another unusable one (waste). Unfortunately, this knowledge never reached Homo economicus or the public at large. This generalized energy ignorance encouraged by Homo economicus caused huge economic and technological growth that piled up waste in the form of CO2 emissions, pollution, and the destruction of ecosystems.

Recently, the planet’s systems’ actions have started to gravely affect humanity’s quality of life, so even Homo economicus has awakened and partly acknowledged their part in the mess that their extreme use of the engines of their economies has produced. Homo economicus doesn’t like increased occurrences of hurricanes, floods, fires, and droughts to annoyingly destroy their million-dollar homes, cars, utility services, and food security, but he is still not sure about how to deal with the accumulated dangerous waste.

As expected, Homo economicus proposals for dealing with the problem continue giving priority to an infinite business-as-usual model even if they admit the urgent need for a few modifications. Rishi Sunak, the new prime minister of England is a perfect example of the Homo economicus who wants to appear as a champion of sustainability and climate awareness while showing incredible energy-reality ignorance. He recently dared to say that England was going to pursue ‘clean growth’!

Once we keep in mind Ayres’ ideas about the nature of energy, we can clearly see that there can never be clean growth, even if we label the energy transformations involved in growth, as ‘clean and renewable’. This thermodynamic problem is also present in all the proposed solutions for emissions reductions that include carbon capture facilities and a sharp increase in renewable energy. All of these involve energy transformations that will always lead to an increase in the accumulated waste that is already causing problems for our planet.

Homo economicus’ sustainability ideas dominate the airwaves so that most people accept these solutions as feasible. The few people who accept the reality of our energy and waste feast are soon demoted to the category of ‘doomers’. This has prevented any true accountability of Homo economicus’ eternal growth delusion which has led to the deep disturbance of the Earth’s systems, damaging the survival possibilities of Homo sapiens and many other species.

Most people don’t want to face this, because we still live in Homo economicus’ fairy-land world, in which energy- reality hasn’t sunk into the minds of most of the population. The truth is that there are no answers to the conundrum we are in. We feel happier believing in illusions that work only on paper when in reality there is not much to calculate. The question is simple, the more we do, the more energy we transform and the more waste we have. The universe’s workings are impervious to our labels, agreements, debates about critical temperatures, and deluded definitions of sustainability. This is no moral judgment - this is just how the world works!