Efficiency, conservation, and the inescapable Jevons Paradox

Michael Giberson

Given the preponderance of government energy policies aimed at promoting technical efficiency, a careful consideration of the Jevons Paradox is in order. I’ve spent some time this summer reading about William Stanley Jevons, one of the three 19th-century economists co-credited with sparking the marginal revolution, and especially Jevon’s book The Coal Question. Most recently I’ve been reading the recently published The Myth of Resource Efficiency: The Jevons Paradox (2009).

Joseph Tainter’s foreword to The Myth of Resource Efficiency provides a clear statement of the importance of The Coal Question:

In his 1865 work The Coal Question, William Stanley Jevons (1835-1882) expressed the concern that Britain would lose its economic dynamism and preeminence in the world due to an inevitable depletion of its reserves of easily mined coal. Of course he did not foresee the dominance of petroleum, even denying its likelihood, and so the central worry of the book turned out to be misplaced. But The Coal Question contains a gem that enshrines the book as among the most significant works of resource economics. That gem is know today as the Jevons Paradox. It cannot be expressed better than in Jevons’s own Victorian prose:

It is wholly a confusion of ideas to suppose that the economical use of fuel is equivalent to a diminished consumption. The very contrary is the truth. (Jevons, 1866, p. 123)

As a rule, new modes of economy will lead to an increase of consumption… (Jevons, 1866, p. 123)

Now, if the quantity of coal used in a blast-furnace, for instance, be diminished in comparison with the yield, the profits of the trade will increase, new capital will be attracted, the price of pig-iron will fall, but the demand for it increase, and eventually the greater number of furnaces will more than make up for the diminished consumption of each. (Jevons, 1866, p. 124-125).

In short, as technological improvements increase the efficiency with which a resource is used, total consumption of that resource may increase rather than decrease. This paradox has implications of the highest importance for the energy future of industrialized nations. It suggests that efficiency, conservation and technological improvement, the very things urged by those concerned for future energy supplies, may actually worsen our energy prospects.

The Myth of Resource Efficiency, written by John M. Polimeni, Kozo Mayumi, Mario Giampietro, and Blake Alcott, examines the Jevons Paradox from several angles – everything from history of economic thought, to the methodological issues raised by measuring values over time, to application of complex adaptive systems thinking, to efforts to test empirically for efficiency-driven rebound and backfire effects.

One of the points the authors make quite clearly is that there is more to the Jevons Paradox than the direct effect of more-efficient resource use on demand for that resource, there is an indirect effect as well. Tainter in his foreword illustrates the idea clearly in reference to a poll conducted in Sweden concerning the environmental effects of meat consumption. When asked, “If you were to eat less meat in your daily diet, what would you do with the money this saves?” the surveyed Swedes indicated that they would travel more. Tainter pointed out that travel comes with environmental costs, just as eating meat does.

The energy efficiency policy implications are clear. Improvements in automobile fuel efficiency, for instance, reduce the cost of travel and would tend to lead to at least some additional travel and attendant fuel consumption. That additional travel will eat into some (or all, or more than all in extreme cases) of the conservation gains that might have been expected of the efficiency improvement. Yet beyond the direct rebound of improved fuel efficiency on fuel consumption, any consumer savings on fuel expense may also be spent other energy-resource-using activities. From the broad view of conservation policy, all such rebounds are relevant.

It is not exactly an optimistic book, as the Vaclav Smil blurb on the back indicates, “it may leave an unsuspecting reader rather depressed.” Smil follows the remark with a “[but] it leaves all of us better prepared to face the reality.” The macro-scale empirical work reported in the book say “energy-efficient technological improvements will not work. Rather, energy-efficiency technology improvements are counter-productive, promoting energy consumption. Yet energy efficiency improvements continue to be promoted as a panacea.”

But I’d say the depressing effects of the book mostly apply within a depletionist wordview. If you are worried that the world is on a downward Malthusian slide, then efficiency policy is a bright light guiding you through the tunnel. According to the book, the bright light is the headlight of an oncoming train: efficiency policy promotes faster depletion.

For us cheery resource optimists, however, the book remains valuable. Resource optimists like to use rebound effects to beat up on energy efficiency policy proposals. This book illustrates both how powerful this tool is that Jevons has given us and how subtle and complicated it can be to apply the tool well.

Skwire at Cato Unbound: “Bonfire of the Clichés”

Michael Giberson

We ought not let Sarah Skwire’s second hit-and-run posting here at Knowledge Problem slip by without mentioning that she is also lead-off essayist in the current month’s Cato Unbound. The teaser from Cato:

Literary scholar Sarah Skwire asks us to revisit the western canon’s portrayal of business and commerce. Mainstream scholars and libertarians both seem to agree that these works portray business in a negative light, but Skwire finds the evidence for this contention to be thin. She proposes a much more nuanced view, in which critiques of the market stand side by side with favorable depictions and even sound, encouraging advice for would-be businessmen. It’s time to get beyond the clichés about literature and commerce.

Skwire begins her essay, “There is a problem with the relationship between literature and business. But it’s not the one you think.” Go read the rest of it. All good, but for the instruction to read more (and more broadly, and more deeply); I already want to read more than I have time for, so now the trade-offs will only become tougher!

As is the Cato Unbound practice, several invited responses to the lead essay will be posted in the next few days, Skwire will respond, further interaction, etc. Enjoy.

We Miss Manners

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Sarah Skwire

So Matt Zwolinski and I had a fun moment last week when we more or less simultaneously published on more or less the same topic. This either means that Matt and I need to get out more, or it means that we’re on to something. I’m going for the latter explanation. And all available evidence suggests that Matt will agree with me.

And even if he doesn’t agree with me, I know he’ll be polite about it. Matt and I both have civility on our minds.

In the current issue of The Freeman, in a piece called Reading Each Other I argue that the humanities are a useful educational tool for practicing the skill of sympathy that is a vital underpinning for the civil society. “When we’re practiced in sympathy, it is easier for us to notice “what is not seen.” When we have tried, over and over again, to put ourselves into others’ places and to see the world from where they are standing, we’re better people, living in a more civil world. …Because our children have read, and have had read to them, stories that help them think about the perils of greed, or the importance of kindness, or the dangers of drinking from bottles marked “Drink me”  they will grow up to be more considerate and more careful of themselves and others.

And over at BHL, Matt has a post called “Libertarianism and Good Manners” that argues that, “It is a mistake, first of all, to think about rules regarding the location of forks as paradigmatic of manners and etiquette. It is a mistake, too, to suppose that there is no important distinction to be made between the rules of etiquette and the principles of manners. And it is a mistake for libertarians, especially, to disdain all this business as the stuff of authoritarian busy-bodies.” Matt also, intriguingly, suggests thinking of manners as a kind of spontaneous order–an approach I like a great deal.

Why the confluence of topics? Well, there are a lot of reasons to be irritated right now. It’s hot. There’s a drought. The power is out all over the place. The government has gone and done something stupid again. It’s only July 2nd, and people are already setting off fireworks late at night and waking the kids up. That means it’s a good time to think about civility and manners. It’s a good time to take a deep breath and remind ourselves to ask “What would Miss Manners do?”

Price gouging in literature: Little House on the Prairie’s “The Long Winter”

Michael Giberson

Jeremy’s Blog at LDSLiberty.org comments on a price gouging episode in The Long Winter, the sixth book in the Little House on the Prairie series by Laura Ingalls Wilder.

Due to a long winter of snow and storms, the people in the town of De Smet are at the point of starving.  Suddenly the shop owner in town has a large supply of wheat at his disposal and rather than selling it for the normal mark-up amount above costs, he decides to sell each bushel for over two times what he paid.

After Loftus, the store owner, states “That wheat’s mine and I’ve got a right to charge any prices I want to for it.”  Pa Ingalls responds:

“That’s so, Loftus, you have,”…”This is a free country and every man’s got a right to do as he pleases with his own property.”  He said to the crowd, “You know that’s a fact, boys”.

… However, Pa decided to use persuasion to get the store owner to lower the price.  In addition to petitioning the humanitarian side of the business owner, Pa also goes on to state:

Don’t forget every one of us is free and independent, Loftus.  This winter won’t last forever and maybe you want us to go on doing business after it’s over…  You’ve got us down now.  That’s your business, as you say.  But your business depends on our good will.  You maybe don’t notice that now, but along next summer you’ll likely notice it.

Loftus decided to sell the wheat at cost, due to persuasion and not force.

I haven’t read the Little House on the Prairie books myself, so I can’t authoritatively comment on what market alternatives the people of De Smet may have the next summer. But the small group scenario posed in the story may reasonably support different conclusions about the prudence of price increases under difficult market conditions than might be reached when considering more anonymous consumer-retailer interactions under typical conditions today.

QUIRKY NOTE: Laura Ingalls Wilder’s daughter Rose, who was born in De Smet in 1886, became a prominent and noted early libertarian.  (Consider this story of a state trooper appearing at Rose Wilder Lane’s door in response to a postcard objecting to Social Security. Not the most significant event, but clearly she was a lively character.)

(HT to my brother Todd for mentioning the price gouging post.)

Nutrition experience, research, and orthodoxy, with some economics parallels

Lynne Kiesling

Last week was our spring break, and I finally took some time to read Gary Taubes’ 2008 book Good Calories, Bad Calories. Taubes is an investigative science journalist who has been writing for years about the science of nutrition and epidemiology, and the book focuses on a long, careful, detailed narrative about how such science has evolved since the mid-19th century. One of the themes that emerges is that some of the most prominent researchers, particularly those advancing the dual hypotheses that fat causes heart disease/overeating causes obesity, did not test their hypotheses for falsification using controlled trials in designing their research, and are also personally invested in doing research that “proves them right”. Thus, Taubes argues, an orthodoxy has formed around these hypotheses when he finds the scientific support for them lacking, and similarly finds support for an alternate hypothesis — refined carbohydrates cause heart disease and obesity. But the orthodoxy resists testing that alternate hypothesis.

I have personal interest in this topic based on my own experience. As a high metabolism athlete for all of my life, I grew up being able to eat almost anything in unrestricted quantities. But when I got my first faculty job out of grad school (at WIlliam & Mary, yay!) in 1992, the combination of teaching and research duties with moving to a swampy climate against which my body rebelled meant a reduction in my activity, bloating because of the humidity, and weight gain. Without really thinking about it (because I hadn’t had to before), I reduced my meat consumption and substituted into (refined and unrefined) carbs. The next two years were right out of Taubes’ book — reduction in calories to manage weight while increasing exercise, but not having enough energy to actually make it meaningful, culminating in what is now known as metabolic syndrome complete with insulin resistance, hormone imbalance, and symptoms of polycystic ovarian syndrome. I then spent two years revamping my diet to reduce refined carbs, include more animal and vegetable protein at every meal, and monitor my hormone and energy levels, and succeeded in reversing all negative symptoms. I returned to the energy levels that have enabled me to do longer and longer distance cycling and triathlon endurance events and the demanding training for them. Even though I don’t eat low-fat, my triglycerides are so low that my doctor marvels at it. Taubes’ argument is consistent with my experience.

Economist Russ Roberts has been experimenting with his diet and exercise for the past six months, following broadly the same principles that I do (including the refined carbs on the weekend), and he reported in on Friday: 20 pounds lost, more energy, feeling of satiation, low triglycerides. Again, consistent with my experience.

You may know Russ for his outstanding EconTalk podcast series, and in November 2011 he interviewed Gary Taubes. The conversation was interesting and informative, and the podcast page lists lots of resources for further reading. One theme that Russ developed in the discussion was that in both nutrition research and economics research, the issues come up of orthodoxy and structuring research questions in ways that generate falsifiable hypotheses when you are studying such a complex, dynamic system as either the human diet/cardio/endocrine system or the human economy. The human traits that incline us toward orthodoxy, whether it’s wanting to prove ourselves right or appeal to authority or some other trait, have led to models and hypotheses that are not supportable or not even meaningfully testable/falsifiable. So for me reading Taubes’ book was a good cautionary tale of the value of humility beyond the analysis of low-carb/low-fat nutrition.

Another insight that comes up in the book that I would add to Russ’ comparison with macroeconomics is heterogeneity. Taubes is careful to point out that individuals have different metabolic experiences and achieve homeostasis with different combinations of fat, carbs, etc., so while low-carb nutrition may allow some people to strike a healthy heart and weight balance, others may be able to eat more carbs and do the same. Heterogeneity means that there’s no one-size-fits-all hypothesis … and as any Austrian macroeconomist will tell you, that’s the argument they put forth about macroeconomic models and aggregation. Heterogeneity in the capital structure in reality means that models abstracting from such heterogeneity are more likely to mislead.

Bourgeois Virtues in Action

Sarah Skwire

The “most modern man” in Dickens, John Wemmick from Great Expectations, makes much of the importance of separating what Deirdre McCloskey calls the P-values of prudence from the S-values of sociability.  “The office is one thing, and private life is another. When I go into the office, I leave the Castle [his home] behind me, and when I come into the Castle, I leave the office behind me. If it’s not in any way disagreeable to you, you’ll oblige me by doing the same.” As McCloskey’s work suggests, such a division is not only disagreeable, it is deleterious. P values and S values must be mingled in order for our business lives and our social lives to function well.

A fine example of the good results that arise from this kind of mingling is offered in Charles Duhigg’s new book The Power of Habit. The most frequently excerpted chapter of the book seems to be the chapter on Pepsodent that explains how those sneaky advertisers manipulate us to make us think that we have a nasty film on our teeth that requires frequent brushing with Pepsodent to make us socially acceptable. The most McCloskeyan chapter, is the chapter about Alcoa.

Alcoa is an aluminum manufacturing company that has “manufactured everything from the foil that wraps Hershey’s Kisses and the metal in Coca-Cola cans, to the bolts that hold satellites together.” There’s a lot of molten metal involved in what they do, and a lot of heavy machinery, and for a long time, there was a lot of worker injury.

In 1987 Alcoa hired a new CEO named Paul O’Neill who set Alcoa a single goal–No worker injuries. Zero. None. According to Duhigg, everyone thought he was nuts. Alcoa was beleaguered by all kinds of problems with profits and processes, and O’Neill wanted them to ignore all that and focus on worker safety to the exclusion of all else? This was sacrificing all kind of apparent P value stuff on the altar of S values. It was madness. But O’Neill held firm.

Duhigg writes, “In 2010, 82% of Alcoa locations didn’t lose one employee day due to injury…On average, workers are more likely to get injured at a software company, animating cartoons for movie studios, or doing taxes as an accountant than handling molten aluminum at Alcoa.”

Heck, I got a wicked bad paper cut looking for the Dickens quote at the top of this post.

And a funny thing happened on the way to satisfying O’Neill’s S values. A lot of P values got satisfied as well. Aloca’s safety obsession required a way to share real time safety data between offices, so O’Neill had the offices linked up in a computer network. It seemed natural to employees to use that network to share other useful business information, so Alcoa was faster to respond to market demands and price information. Alcoa doubled their profit from aluminum siding because a worker suddenly felt important and “listened to” enough to make a suggestion about the way Alcoa set up the machines that painted the siding. Machines were redesigned to protect worker safety, and their new reliability meant more reliable aluminum and better products. Alcoa’s costs went down. Their stock price went up by 200%.

That’s what happens when you bring your virtues, or your S values, or your good home-training, or whatever you’d like to call it, to the market. That’s what happens when the market is free enough to respond to those virtues. Virtue is its own reward, but when you bring it into the market with you, everybody wins.

Book review: A Genius For Money

Lynne Kiesling

Today’s Wall Street Journal has a review, King of the Shopkeepers, of a new biography from Caroline Dakers. A Genius For Money tells of the rags-to-riches life of James Morrison, a Victorian innovator of retailing and banking in England. I can already tell that I am going to order the book as soon as I’m done writing this post:

Morrison was not an inventor-capitalist but a retailing genius, more Sam Walton than Steve Jobs. He catered to England’s growing consumer class by diversifying his wares and, in his ever-growing network of shops, introducing luxurious showrooms. He was a disciple of volume, seeking “high turnover, small profits, and quick returns.” He sent his traveling men not to find buyers, as was typical, but to find the best suppliers. Advantageously purchased in bulk, goods would sell themselves. Morrison’s buyers were specialists, anticipating the practices of later department stores. He kept his finger on the pulse of fashion and on “market making” events. Legendarily, he was never caught short of black crepe when a member of the royal family was ill. “The Duke of York has died most conveniently,” he once quipped while tallying profits.

Entrepreneurs like Morrison and Josiah Wedgwood transformed the everyday lives of so many people, and changed how we view work, consumption, and beauty. They also made markets work more efficiently, Morrison through banking and Wedgwood through infrastructure investment (he was a driving pioneer in the construction of canals in England). In that sense, innovators like Morrison and Wedgwood are equilibrating entrepreneurs in the way that Kirzner describes. The review of Dakers’ book also suggests that it raises themes that Deirdre McCloskey raises in The Bourgeois Virtues and Bourgeois Dignity, and that we have discussed here in the past.

I have not talked here much about Wedgwood, but I have had plans to for a long time, so this book may be the catalyst.