Thursday, March 11, 2010

Why 'saving' energy raises the demand for more energy

Gerard Jackson, Brookesnews' economics editor, raises an interesting point in Why 'saving' energy raises the demand for more energy. Jackson points out:

For years greens have been wailing that the public is wasting energy and by doing so endangering the planet and squandering resources. Their solution, as always, consists of governments, meaning ignorant politicians, mandating so-called conservation measures. This view overlooks two basic facts. First it ignores the little detail that energy can be neither created nor destroyed. All that we can do is convert energy from one form into another that will do useful work for us, whether it be running a factory or keeping us cool in summer.

We can therefore have all the energy we need at any time for as long as we want so long as we have sufficient means to turn it into useful work*. Those means are called capital goods and it is capital and not energy that is scarce and needs to be maintained. It follows that it is the availability of capital that puts a fundamental limit on energy consumption

The second fact is that economic efficiency means getting more for less. In other words, reducing the unit costs of production. One does not need to be a trained economist to see that any improvements that greatly reduced the use of a vital input are reducing the cost of that input per unit of output. This is the equivalent of reducing its price. As we all know, reducing the price of a good raises the demand for its services.

Let us assume, for example, that it requires x dollars of energy to produce one unit of P. Someone now develops a new technique that reduces energy costs to one-third of x then this will raise the demand for P which in turn will raise the demand for more energy. (The market does indeed work in mysterious ways its wonder to perform.)

The steam engine is an excellent example of this process. Before Watt's innovations the steam engine was horrendously wasteful. The introduction of his separate condenser reduced coal consumption per unit of output by about 66 per cent. This not only increased the demand for coal but also for more steam engines which in turn led to more innovations which in turn.... This very early example of 'energy conservation' was brought about by market forces, not meddling politicians or ignorant 'journalists', and its reverberations were quickly felt throughout the British economy — and beyond — by stimulating economic growth and raising the demand for labour.

Jackson concludes with:

We have seemingly reached the absurd situation that someone who has spent four years at university studying economics can leave with a first class honours without having acquired the ability to apply sound economic reasoning when called for, despite having learnt a whole array of fancy statistical techniques. Making it worse are a bunch of politicians, activists and so-called journalists who in turn cannot tell the difference between a hot cross bun and set of supply and demand curves. No wonder the public is becoming increasingly suspicious of economics.

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