State of Innovation

Patents and Innovation Economics

Toward a Hard Science Approach to Economics – 2

As I began to explore this idea that entropy was a key concept in understanding economics and putting it on the path of a true science, I investigated whether other people had made this connection.  I found that Edwin Schrödinger, Nobel Prize winner in physics, wrote the book, What is Life.[1] He pointed out that life was a struggle against entropy.  There is also a field of study called thermoeconomics or biophysical economics, which focuses on the role of entropy in economics.  An article in Scientific American featured the ideas of thermoeconomics.  According to the article:

Central to their argument is an understanding that the survival of all living creatures is limited by the concept of energy return on investment (EROI): that any living thing or living societies can survive only so long as they are capable of getting more net energy from any activity than they expend during the performance of that activity.[2]

This appears to be completely consistent with my thesis.  From this hypothesis thermoeconomists draw the conclusion that peak oil is real because it takes more and more energy to extract oil.  They even acknowledge that technology could allow for greater efficiencies.

“It isn’t that there’s no technology,” Hall said. “The question is, technology is in a race with depletion, and that’s a whole different concept. And we think that we can show empirically that depletion is winning, because the energy return on investment keeps dropping for gas and oil.”

The article argues that it use to take 1 barrel of oil to extract 100 barrels of oil in the 1930’s and in 2006 in the U.S. it now takes 1 barrel of oil to extract 19 barrels of oil.  Their prediction is that at 1 to 3 ratio the system fails.  Neoclassical economics look at the inflation adjusted price of oil and argue that there is no evidence of diminishing returns for oil.  The thermoeconomists’ response is that prices are a poor way of measuring diminishing returns for energy.[3] If the price of oil has not increased appreciably and the cost of extraction has increased, then some other factor must have decreased.  For instance, the cost of transporting oil may have gone down.  The neoclassical economic approach to this question seems to take into account all the factors that define the energy return on investment.  The value of oil is not just in the extraction, but in the transportation and refining of the oil.  If the cost (energy) to extract oil goes up, but the cost (energy) of refining oil goes down an equal amount, the energy return on investment remains the same.

This debate about peak oil is an example of a bigger debate in economics that I believe is the cornerstone of many of the arguments in economics.  The bigger debate is whether it is possible to escape the Malthusian Trap.  Is the present situation where humans have escaped this fate temporary?  The two camps are pessimists who believe that it is impossible for humans to escape the Malthusian Trap permanently versus the optimists who believe we can permanently escaped the Malthusian Trap.  Pessimists always point to the diminish supply or return associated with various natural resources.  The pessimists have about 489,800 years of human history on their side.  They also point to projections based on science that various natural resources will run out.

The optimists point to the repeated scare stories of natural resources or more commonly food running out that did not come true.  For instance, ever since oil was found people have been projecting the end of oil.  The pessimists have data showing trends based on scientific evidence that the present course is unsustainable.  The optimists have evidence that during the last 200 years the pessimists’ scenarios have been wrong time and time again.  Optimists point out that the pessimists ignore that people invent substitutes and therefore the doomsday scenarios, no matter how logical, do not occur – at least not during the last 200 years.

This point about substitutes was studied by Howard Barnett and Chandler Morse in their paper Scarcity and Growth where they concluded that resource scarcity did not threaten economic growth.[4] In an updated version of their paper they state:

The efficiency with which raw resources are converted into what physicists call “useful work” has improved markedly over the past few centuries. This finding is entirely consistent with the results derived by Barnett and Morse and later optimistic authors. If, however, progress is tied to the consumption of particular resources rather than being “disembodied,” the scarcity of such resources would constrain growth.[5]

Using this thought process we should rephrase the question of peak oil as will we hit peak energy.  The question of peak energy is not a question of a lack of natural resources but lack of inventions.  Berkeley astronomer Don Goldsmith reminds us that the earth receives about one billionth of the suns energy, and that humans utilize about one millionth of that. So we consume about one million billionth of the suns total energy.[6] Civilizations can be characterized as Type 1, 2, and 3 on the Kardashev scale.  A type I  civilization is able to harness all of the power available on a single planet.  A type II civilization is able to harness all of the power available from a single star.  A type III civilization is able to harness all of the power available from a single galaxy.[7] Physicist Freeman Dyson of the Institute for Advanced Study estimates that, within 200 years or so, we should attain Type I status. In fact, growing at a modest rate of 1% per year, Kardashev estimated that it would take only 3,200 years to reach Type II status, and 5,800 years to reach Type III status. Living in a Type I,II, or III civilization.[8] Based on this modest growth rate of 1% in energy use, it seems entirely possible for technology to keep up or exceed this growth rate.

I believe this debate between the optimists and the pessimists about natural resources and technology is about what I call the instability postulate.


Instability Postulate:  Present technology cannot support present population income levels.


I cannot prove this, so it is labeled a postulate.  If we were still in the Malthusian Trap, the postulate would have just stated that present technology cannot support present population levels.  Since we have escaped (presently) the Malthusian Trap I have to state that we cannot support the present population at its present life style (income) levels.  This may be a restatement of the idea of diminishing returns.  However, I believe that even if we could increase our technology at exactly the same rate as the projected diminishing returns of present resources this state is not stable.  Various random perturbations in the environment make this perfect balance impossible.  For instance, variations in the amount of rain or output from the Sun will upset this instability.  The huge meteor that wiped out the dinosaurs is an example of such an instability.

If we accept the pessimist point of view on this argument we are condemning billions of people to death and the survivors to a subsistence life on the edge of starvation.  Even if we fail, morally we have to side with the optimists.  From a logical point of view, inventions are not subject to diminishing returns.  Every invention is a combination of known elements – you cannot create something from nothing.  This follows from the conservation of matter and energy.  As a result, every invention opens up the possibility of more inventions.  Creating these inventions takes real energy, but the number of potential inventions we can conceive increases with every invention we create.  As a result, the number of potential inventions grows factorially.  Thus, it appears entirely impossible to grow our technology faster than the limitations of diminishing returns and the instability postulate.  Modest gains of 1% per year in energy will result in humans advance fairly quickly to a type I civilization, which are energy usage rates that seem unthinkable today.  Invention is the key to escaping the Malthusian Trap and growing real per capita income.


Fundamental Observation of Economics (restatement): Inventing is the only way humans can increase real per capita income.

[2] Does Economics Violate the Laws of Physics?, Scientific American, October 23, 2009,, 10/9/10.

[3] Does Economics Violate the Laws of Physics?, Scientific American, October 23, 2009,, 10/9/10.


[4] R. David Simpson, Michael A. Toman, and Robert U. Ayres, Scarcity and Growth in the New Millennium: Summary, Resources for the Future, 2004,,  10/10/10.

[5] R. David Simpson, Michael A. Toman, and Robert U. Ayres, Scarcity and Growth in the New Millennium: Summary, Resources for the Future, 2004,, p. 8, 10/10/10.

[6] Kaku, Michio, The Physics of Extraterrestrial Civilizations,, 10/11/10.

[7] Kardashev scale, Wikipedia,, 10/11/10.

[8] Kaku, Michio, The Physics of Extraterrestrial Civilizations,, 10/11/10.



October 10, 2010 - Posted by dbhalling | -Economics, -History, Innovation


  1. The “debate” on Peak Oil is over.
    We are there.

    The real problem is not Malthusian Trap but rather Evolution-driven population explosion.

    If you invent a device (**) that will globally curb the sex drive and reduce population world-wide, you will have saved humanity from itself.

    **note: Just don’t make it too perfect.

    Comment by step back | October 15, 2010 | Reply

  2. Stepback,

    The question is not whether “Peak Oil” is correct, the question is whether we have hit “Peak Energy.” We have not even begun to tap the energy available to us. We only tap one millionth the power of the sun. Nuclear energy has the potential to provide us with enough energy that is essentially unlimited, even with population growth and energy usage growth. We do not have an energy problem, but we may have an invention problem.

    Comment by dbhalling | October 15, 2010 | Reply

  3. Sweet thoughts DB

    But how are those going to get your SUV and you out of a snow bank on cold dark winter’s day while out in a rural area and after your liquid fuel has run out? :-)

    We do not have an invention problem, we have a we can’t keep our musical instrument zippered in its containment sack problem

    Comment by step back | October 15, 2010 | Reply

  4. Stepback,

    Its called invention.

    You can find numerous examples of “Peak Oil”, historically. For instance, the fertilizer crises of the 19th century. In 1830 is was discovered that guano was an excellent fertilizer. As the guano was used in Europe, the human population exploded because of the additional food that was produced and because of mechanization. The best sources of guano began to run out fairly quickly. People predicted the equivalent of “Peak Guano.” The question was not whether we would have “Peak Guano,” but Peak fertilizer. The Haber-Bosch process was invented in 1909 which allowed fixing nitrogen in air and solved the “Peak Guano” problem.

    Mark Ridley had numerous “Peak Oil” examples in his book The Rational Optimist: How Prosperity Evolves, Harper Collins, 2010, New York, pp 121 -156.

    Comment by dbhalling | October 16, 2010 | Reply

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