Joel Mokyr on growth, stagnation, and technological progress

My friend and colleague Joel Mokyr talked recently with Russ Roberts in an EconTalk podcast that I cannot recommend highly enough (and the links on the show notes are great too). The general topic is this back-and-forth that’s been going on over the past year involving Joel, Bob Gordon, Tyler Cowen, and Erik Brynjolfsson, among others, regarding diminishing returns to technological change and whether we’ve reached “the end of innovation”. Joel summarizes his argument in this Vox EU essay.

Joel is an optimist, and does not believe that technological dynamism is running out of steam (to make a 19th-century joke …). He argues that technological change and its ensuing economic growth are punctuated, and one reason for that is that conceptual breakthroughs are essential but unforeseeable. Economic growth also occurs because of the perpetual nature of innovation — the fact that others are innovating (here he uses county-level examples) means that everyone has to innovate as a form of running to stand still. I agree, and I think as long as the human mind, human creativity, and human striving to achieve and accomplish exist, there will be technological dynamism. A separate question is whether the institutional framework in which we interact in society is conducive to technological dynamism and to channeling our creativity and striving into such constructive application.

The peanut butter Pop-Tart is not an innovation

Today’s Wall Street Journal has an article about the use, overuse, and misuse of the word “innovation” in modern business, particularly with respect to consumer products. The number of instances of S&P 500 CEOs using the word in their earnings calls has doubled since 2007. Sadly, this misuse and overuse threatens to remove all meaning from the word. Witness the example offered in the article’s title: Kellogg’s new peanut butter Pop-Tart, which Kellogg executives tout as one of the most important innovations of 2013. Peanut butter filling instead of cherry or strawberry or chocolate, an innovation? Really?

Next time your boss starts droning on about innovation, it might be helpful to stop and analyze: Is she talking about building the next iPod or the next Pop-Tart? Does “innovate” mean just “stay competitive”? And if so, where is the innovation in that? …

In this context, to innovate can often mean falling short of the word’s Latin roots (of “new creation”). It’s more modest: simply keeping pace with rivals.

They used to call it competitiveness—a word fraught with the implication that others might win. Now it has been elevated to innovation, a more regal way to describe what business has always done: Adapt.

That’s a great point, and it’s a point that Schumpeter and Austrian economists have made for over a century — there are many different ways that firms adapt to the effects of rivalry in markets, and one of them is innovation. But, you might reply, Schumpeter emphasized the role of product differentiation in lessening the effects of rivalry, by making your new product less substitutable for the existing competitor products, and isn’t a peanut butter Pop-Tart an example of product differentiation? (Technically speaking, my answer to that question is no, but that may be me being pedantic, which is what I do …)

That’s where an old post from Roger Pielke Jr. is helpful:

In recent comments I was asked about what I mean when I use the term “innovation.”  I use the term as Peter Drucker did:

Innovation is change that creates a new dimension of performance.

Roger tweeted the link to that old post in response to the WSJ peanut butter Pop-Tart article today. Does Drucker’s definition help; is it “operationalizable”? Only if you define “sell more peanut butter Pop-Tarts” as the new dimension of performance!

“That—that—is what we are for: voluntary associations, in all their richness and bewildering complexity”

The above is a quote from Duke political economist (and friend of KP) Mike Munger, who also blogs at Kids Prefer Cheese and Euvoluntary Exchange, and is a frequent guest on EconTalk. Mike’s written a thoughtful and interesting reflection in the Freeman on what libertarians stand for. In many ways it’s a riff on Toqueville and his analysis of American society, which remains fresh and relevant today in Mike’s view (and mine). While it’s eminently quotable, please do read the whole thing, especially if you don’t identify as a libertarian. Mike’s insights might change your thinking about what libertarians do stand for.

Why is he bothering to reflect on what libertarians stand for?

The government is not providing the basic services that our more idealistic fellow citizens expect, and they want to know why. The things they think they wan [sic]—healthcare, pensions, schools, the war on terrorism, and the war on drugs—are a litany of failures. We don’t need to pile on and say we’re against those things. We need to offer an alternative.

In other words: What positive, optimistic alternative vision of society (yes, of society, the social thing, where you actually talk to other people and work together) can we offer? Unless we can answer that, the next question will be, “Why don’t Libertarians care about real people?”

I have been making this argument to my colleagues with respect to energy and environment policy for some time. I team-teach a sustainability course with a geologist and a philospher, both of whom are politically Progressive and have typically advocated large-scale top-down regulation and government control to address global warming. As they have seen the reality of using political institutions to make collective decisions, they have expressed frustration; as they have heard my lectures on public choice and political economy and read some of the political economy literature on environmental regulation, they have expressed some ideas similar to what Mike said above.

So I’ve been focusing on alternatives — liberty allows for experimentation and for individuals to make choices that express their environmental values. The more of those experimentation and expression processes we foster, the more likely we are to devise lower-carbon ways to achieve what we want to achieve. That’s one application of the vision that Mike describes.

But a lot of people don’t think about the connection from liberty to experimentation to thriving, and default to expecting “the government” to solve collective problems. In general, people pay too much attention to politics:

If citizens ignored politics, things wouldn’t be so bad. But we are worried that our excessive focus on politics will cause us to ignore society and each other. If we fail to connect as social beings in complex reciprocal exchange relations, modern “democratic” life becomes anomic and mean, just as Tocqueville foresaw.

That—that—is what we are for: voluntary associations, in all their richness and bewildering complexity.

If you want to go out and persuade some people to work with you, and all voluntarily work for the benefit of each, then that is libertarian social change. If someone wants to opt out and form a different association, they are free to do so. And that’s a good thing because you get diverse experimentation in problem solving.

And I really like his conclusion, which makes me feel happy, large, empowered, and connected (four feelings I never experience in political collective action):

Libertarians are for voluntary action, always. It is because we are for society—a vibrant, active society—that we resist the expansion of state power.

It is because we are for giving people a chance to reach their full potential that we doubt the motives and effectiveness of government. Political coercion corrupts the human spirit; political leaders tell us they take our wealth for our own good, and political processes straitjacket independent thought—the essence of liberty.

We are for individuals, working together in complex, interconnected organizations they have designed in their efforts to solve problems.

We are for liberty, for celebrating the infinite and infinitely varied capacities of the human mind. Libertarians are for a limitless sense of the possible, for the idea that for a society of truly free and responsible citizens, nothing is impossible.

Alexis Madrigal: Why are gasoline prices falling?

Freshly returned from a few months spent with his new baby (congratulations!), Alexis Madrigal at the Atlantic wonders why gas prices are falling in the US. He notes that the national average is the lowest it’s been in almost three years.

He identifies a few factors that influence gas prices, most notably world oil prices. These prices have fallen, due both to demand and supply factors, and most importantly how higher gas prices induced consumers to change their behavior:

But they [gas prices post-Arab spring] couldn’t go too high because, at least here in the U.S., demand has softened. Americans are buying (slightly) more fuel-efficient cars, on average. And younger people are driving less.

Which is all a pretty rational response to the big run up in gas prices during the mid-2000s.

He then points out (courtesy of Brad Plumer) something that shows just how complex the dynamics are in gasoline markets — gasoline and diesel are joint products, so to produce more diesel you get more gasoline. Diesel is in high demand in Europe, thanks in part to the economical and energy-efficient, yet also sassy and full of fun, TDI diesel engines from Volkswagen and Audi (and it’s an interesting question to ask why US regulations still provide such barriers to TDI diesel, but I’ll leave that as an exercise for the reader ;-0 ). If you are refining diesel in the US to export to Europe, you will increase the supply of domestic gasoline, shifting the supply curve out. In the face of that softened demand, that’s going to mean lower prices.

A couple of neat points, but this post is mostly an excuse for me to say how glad I am that Alexis is back from paternity leave! I missed his writing.

Economist debate on solar power

The Economist often runs debates on their website, and their current one will be of interest to the KP community: Can solar energy save the world?

The debate is structured in a traditional manner, with a moderator and a proposer and a responder. Guest posts accompany the debate, and readers are invited to comment on each stage of the debate. The two debaters are Richard Swanson, founder of SunPower, and Benny Peiser of the Global Warming Policy Foundation. Geoff Carr, the Economist’s science editor, is moderating the debate.

One common theme among the debaters, the moderator, and the commenters is the distortions introduced due to decades of energy being politicized, which means (among other things) that the complicated web of subsidies across all fuel sources is hard to disentangle. Given the thorough and valuable discussion that Mike’s provided of his recent analysis of wind power cost estimates, this solar debate is a good complement to that discussion.

Wind energy’s price suppression effects (Debating wind power cost estimates – 6)

[Series header: On the Morning of October 15 the Institute for Energy Research in Washington DC released a report I’d written about the federal government's wind power cost estimates. (Links available here.) Later that day Michael Goggin of the American Wind Energy Association, the lobbying organization in Washington DC that represents the wind energy industry, posted a response on the AWEA website: “Fact check: Fossil-funded think tank strikes out on cost of wind.” I’m considering points made by the AWEA response in a series of posts.]

Goggin objects to my report’s emphasis on the high cost of wind energy. He said, “The reality is that wind energy is driving electricity prices down, thanks to large recent reductions in its cost.” I agree with Goggin, as I said earlier in this series of replies, at least on price suppression: “Wind power is responsible from bringing down average prices in regional power markets, a consequence of subsidizing entry of generation with high capital costs but low marginal operating costs.”

But the effect of wind energy on prices is only obviously negative in the short run. Longer term the cost of energy could rise. More importantly, the price suppression effect is only tangentially related to the overall benefits and costs of wind power policy and so of only modest policy relevance.

The basic short-run “price suppression” effect is explained various places–here is a bit from a short report produced by the staff of the Public Utilities Commission of Ohio, “Renewable resources and wholesale price suppression” (August 2013):

Price suppression is a widely recognized phenomenon by which renewable resources produce lower wholesale market clearing prices. The economic theory that drives price suppression is actually quite simple. Renewable resources such as solar and wind are essentially zero marginal cost generators, as their “fuel” costs (sunlight and wind) are free. As such, they will always be dispatched first by the grid operator, thereby displacing units with higher operating costs. This results in lower wholesale market clearing prices than would have been experienced in the absence of the renewable resources.

A simple graphical representation appears below. The new renewable resources (depicted by the red line) are added to the dispatch stack, shifting the supply curve out and to the right. This results in a lower cost unit setting the market clearing price, shifting the equilibrium price down from Po to P1.

PUCO, Renewable Resources and Wholesale Price Suppression,” August 2013.

The above analysis, so far as it goes, adequately shows the simple short-run impact of adding low marginal cost resources to a supply curve. The marginal cost of producing wind energy isn’t zero–wind turbines experience wear from operation and non-zero maintenance costs. But the marginal costs are low relative to most other power plants and the short-run impact on spot prices is to push prices down. In the simulations for Ohio analyzed by the PUCO staff, the effect is a price suppression of between $0.05 and $0.20 per MWh (or, to put it in residential consumer terms, a reduction in energy cost of 0.02 cents per kwh).

But, as the staff of the Public Utilities Commission explain in their report, observing a tiny tiny price suppression effect doesn’t indicate anything about overall costs and benefits or about least-cost capacity expansion. The above analysis is a short-run assessment that ignores longer term effects on investments and retirement of assets. A more complete assessment, they said, would need “to consider additional variables such as capital and capacity costs, renewable energy credit (REC) prices, and transmission upgrade expenses.”

And that is among the problems with Goggin’s simple-minded trumpeting of a price suppression effect as some sort of renewable energy triumph: it ignores the future consequences of the policy. Other things being equal, as intermittent low-marginal-cost resources are added to a power system, less-flexible medium-low marginal cost baseload power plants tend to be most disadvantaged and most likely to be retired. At the same time, the resulting increased need for flexible, dispatchable resources will tend to support investment in responsive natural gas generators that have lower capital costs but medium to high marginal costs.

These changes to the generation portfolio in a market will also shift the shape of the supply curve. It is an empirical question, or will be in five or ten years when energy markets have finished adjusting to the 2018-2013 wind energy construction boom in the United States and data is available, whether the overall effect has been to reduce or increase average prices to consumers.

But there is at least on more point: public policy analysis ought to involve a careful counting of projected benefits and costs. It is hardly surprising that subsidizing entry of production capacity would tend to drive down market prices in the short run, but that says nothing about either the short-run or long-run overall benefits and costs of the subsidy policy. The high capital costs of wind energy are one big signal that the steel, concrete, rare earth magnets, other component parts and manufacturing expertise that are drawn into wind energy production all have valuable potential other uses in the economy. We forgo these other potential contributions when policy steers these resource into electric power generation.

Are consumers better off when public policy pulls some of these resources from the manufacture of other goods and services and pushes these resources into electric energy supply? Maybe yes and maybe no, but the price suppression effect is mostly about the division of the spoils of wind power policy, and has little to do with the overall benefits and costs of the policy.

PJM region could handle substantially more renewable generation, study says

PJM Interconnection has been studying, with the help of GE Energy Consulting and other groups, the consequences of adding significantly more wind energy and solar energy to its transmission grid. The “headline result” of a preliminary report, presented to PJM stakeholders recently, is that the system could handle renewable power generation capacity at a 30 percent penetration rate in 2026.

Here is how EnergyWire summarized the preliminary results (may be gated):

The eastern Great Lakes and mid-Atlantic region could rely on wind and solar power for as much as 30 percent of their generation capacity without threatening electricity delivery with net benefits even after additional transmission lines and reserve resources are added, according to a preliminary study released by the PJM Interconnection, the region’s grid operator.

The study, by GE Energy Consulting, investigates several scenarios for additions of wind and solar generation to the PJM grid, which extends from New Jersey to northern Illinois. It calculates the amount of new transmission lines needed to deliver the renewable energy and the required backup generation to support the variable wind and solar power.

The main impacts it reports are lower emissions of pollutants and greenhouse gases; no power outages and minimal curtailment of renewable energy; lower systemwide energy production costs; and lower wholesale customer power costs with the additional wind and solar resources.

“Even at 30 percent penetration, results indicate that the PJM system can handle the additional renewable integration with sufficient reserves and transmission build out,” GE said.

GE Energy Consulting is one corporate unit in the General Electric family, other corporate units make and sell generation equipment including wind turbines, solar pv products, natural gas turbines, etc. We can probably assume that GE Energy Consulting had access to good information in preparing their analysis.

Scanning through the 149-slide presentation reveals a bit about what GE Energy Consulting understands concerning intermittent renewable generation. For example, slides 49-55 discussed the transmission additions needed under the various scenarios studied. Slide 15 summarized the added transmission costs, which ranged from $3.70 to $13.7 per MWh depending on scenario.

On the question of whether adding intermittent renewable generation increases reserves requirements, the report concludes at slide 67, “The study identified a need for an increase in the regulation requirement even in the lower wind penetration scenario (2% BAU), and the requirement would have noticeable increases for higher penetration levels.” Regulation, as the term is used in power systems, refers to a fast-responding reserves service that dispatchable generators can provide to the grid.

Power plant cycling costs are discussed at slides 78-93; the report indicates that adding renewable power results in more cycling operations for dispatchable power plants, higher cycling costs for dispatchable power plants, and less time spent operating in more efficient stable-output baseload conditions. Cost estimates for cycling range from $0 to as much as $21.90 per MWh of renewable output, depending on the scenario studied and the type of unit forced into additional cycling.

Power plant cycling emissions are discussed at slides 94-101; the report indicates that added cycling of fossil fuel plants does offset some of the emission reductions that might otherwise be expected from using wind energy or solar energy, but the effect is pretty small.

The report estimates the overall value of the renewable energy delivered to the system at about $50 per MWh.

The GE Energy Consulting analysis is interesting, in part, because of how their projections relate to my recently released report on wind energy cost estimates. I observed, among other things, that in addition to the costs of wind power capacity to  project developers, there were other costs to be considered when evaluating wind energy in a policy context. Among the factors noted: transmission additions, grid-integration costs (mostly added reserves), some partial offsetting of renewable’s emission benefits due to increased cycling of dispatchable power plants, and added cycling costs imposed on the owners of these dispatchable units.

Michael Goggin of the American Wind Energy Association attacked my report on Into the Wind, the trade association’s blog, for “rely[ing] on obsolete data” and “regurgitat[ing] anti-wind myths that have already been debunked.” (I’ve responded to Goggin in a series of posts.)

I am now looking forward to Goggin’s attack on GE Energy Consulting for perpetuating these anti-wind myths.

NOTE: Here is Goggin’s actual reaction to the GE report, where instead of accusing GE Energy Consulting of failing to understand how the power grid operates, he chooses to accentuate the positive: “Independent grid operator study confirms wind power’s economic, environmental value.” (I guess it would have been awkward to complain too much about the report since GE Energy is an AWEA member.)