Extrapolating Technological Progress

The standard neoclassical growth model assumes growth in equilibrium, driven by an external force called 'technological progress' or total factor productivity (TFP). Goods and services are abstractions. Demand for energy (exergy) or other resources is a consequence, not a cause of economic growth. Silly as it sounds when stated explicitly, resources in such models are treated as if they were created by some combination of capital and labor. This is why growth, in this idealized model, does not depend in any way on the rate or quantity of consumption of natural resources, as such.

In contrast to the neoclassical model, the real economic system depends very much on material and energy (exergy) inputs, as well as on labor and capital. The real economic system can be viewed as a complex process that converts raw materials (and energy) into useful materials and final services. Evidently, materials and energy do play a central role in this alternative model of economic growth. The first stage is to convert raw materials into finished materials and raw fuels into finished fuels and electricity. These can be aggregated into a single category, namely 'useful work'. Later stages convert useful work into products and services. Over the past two centuries, as we saw in Chapters 6 and 7, successive improvements in the efficiency of these various exergy-to-work conversion stages have apparently accounted for most of the economic growth our Western civilization has enjoyed.

As we have noted earlier, the economic growth engine is a kind of positive feedback system. Demand growth for any product or service, and hence for raw materials and energy services, is stimulated by declining prices. Lower prices enable present consumers to buy more, and marginal consumers to enter the market. Higher prices have the opposite effect: they induce consumers to buy less or seek cheaper alternatives. Increased demand induces suppliers to add new capacity (such as new factories), which also tends to result in greater economies of scale, and savings from 'learning by doing', thus enabling further decreases in prices. Production experience also cuts costs by stimulating technological improvements in the production process itself. Finally, firms may invest in R&D to cut manufacturing costs or to increase product quality, which also helps sales. Evidently the system feeds on itself, which is why the 'engine' of growth can be described as a positive feedback cycle.

The feedback began operating in the 18th century when coal began replacing charcoal for a number of industrial applications, canals carried the coal and other goods, and steam engines began substituting for horses or watermills to operate machinery (Singer et al. 1958). One of the first significant applications of steam engines was to pump water out of coal mines, replacing horses. Coal-fired Newcomen 'atmospheric' engines, even very crude ones, could do this more cheaply than horses on a treadmill. The steam engines could use the coal from the mine to make steam, whereas the hardworking horses, unable to graze, had to be fed oats. The result of using coal to drive the pumps at the mine was cheaper coal. Coal (and later, coke) then began to replace charcoal in iron-smelting and brought about the widespread availability of cast iron, then wrought iron and finally steel (Landes 1969).

This is not the place to trace the operation of the feedback cycle in greater detail through the last two centuries. But throughout the 19th century, and the 20th, the basic mechanism has been the same: lower costs, lower prices, increased demand, increased investment, increased supply and, again, lower costs. Machines helped cut the costs of raw materials, especially fuels, which induced growth in demand for raw materials and energy, and induced continued substitution of fossil fuels for human (and animal) labor, and so on. This was - and still is - the basic recipe for economic growth (Ayres 2005). It has also been called the 'rebound effect' in another context (for example, Saunders 1992).

The technological efficiency of converting raw materials (and fuels) into useful work and power also increased enormously during the past two centuries, but the rate of increase has slowed down significantly since the 1960s. Unfortunately, the commonly cited 'renewable' alternatives to existing fossil fuel-burning steam electric power plants, notably wind power, biomass and photo-voltaics (PV) are not yet price-competitive with centralized electric-generating facilities. Moreover, costs are unlikely to fall rapidly unless there is a rapid increase in demand for such renewables, triggering dramatic economies of scale in manufacturing. Such an increase in demand can only be driven by subsidies to producers (as in Europe) or by regulation of some sort (such as the CAFÉ standards in the US). At the moment, subsidies are out of political favor in the US, and demand is not increasing fast enough to have a significant impact on costs.

As we have pointed out at some length, the costs of power and heat to users depends upon the thermodynamic efficiency with which primary fuels are 'converted' and delivered. The thermodynamic efficiency with which electric power is generated, on average, increased nearly ten-fold from 3 percent in 1900 to 30 percent in 1960, but it has remained almost constant at 33 percent since 1970 (Ayres et al. 2005). The reason for this slowdown is partly technical. A more efficient (up to 60 percent) technology does exist, notably the so-called 'combined cycle', consisting of a gas turbine whose hot exhaust drives a steam turbine. But this technology is only applicable where natural gas is plentifully available at low cost. Combined cycle with coal gasification is a future possibility but it is not yet enough of an improvement over existing older plants to justify their replacement.

Similarly, the efficiency of internal combustion (gasoline and diesel) engines increased by several times in the earlier period, but hardly at all since the 1960s, especially since refiners were forced to eliminate tetraethyl lead and auto manufacturers cut compression ratios to accommodate lower octane fuels. In automotive applications, the average efficiency of gasoline engine-powered vehicles, in typical stop-start applications, is not much over 12 percent, on average (American Physical Society et al. 1975; Ayres et al. 2003). The thermodynamic efficiency with which low temperature heat is produced (mostly by oil or gas-fired heaters) and used to heat air or water to comfortable temperatures in houses or office buildings is very low, in the range of 4 to 6 percent (ibid.).

Currently electric-power generation is much the most efficient of these three forms of useful work, so future increases are likely to be slow and expensive in coming. On the other hand, the least efficient form of 'work' is low temperature heat, such as space heat or hot water. But these forms of work are unlikely to get much cheaper in the near future, if only because raw forms of energy inputs, such as petroleum and gas, are unlikely to get much cheaper, and may well rise significantly in price when the present supply glut disappears. In the case of low temperature heating, the most promising source of improvement is more and better insulation and better windows (double or triple glazing). Mobile power systems and electric-generating systems have not improved significantly since the 1960s, and although efficiency gains are possible, they will require significantly higher capital investment. As regards mobile power, much better fuel economy is possible, especially with turbo-diesel direct injection, and later with electric-hybrid propulsion units.5

However, there is one other interesting possibility that has not yet been exploited to a significant extent in the US (unlike some other countries). This possibility, known as decentralized combined heat and power (DCHP), is to utilize the waste heat from a large number of small, decentralized electric power-generating units in factories and commercial buildings, thus reducing the need for fuel for space heating or water heating at the same time (Casten and Downes 2004; Casten and Ayres 2007; Ayres et al. 2007). This approach could simultaneously reduce overall fuel combustion and the accompanying unwanted emissions into the atmosphere.

The only technology that is still getting cheaper rapidly - thus driving economic growth in some sectors - is information and communications (ICT). But, while information processing is getting cheaper fast, information products are not (yet) capable of replacing, or significantly improving, the efficiency of older long-established materials-intensive technologies, notably agriculture, transportation and housing. Science fiction writers, notably William Gibson, have imagined a virtual world in which people live in tiny cubicles and work and travel mostly in a non-physical 'cyberspace'. Until that day comes, if ever it does, ICT will continue to have a marginal role.

Our point is that except for 'energy recycling' - or decentralized combined heat and power (DCHP) - there are no technologies on the immediate horizon that promise to cut the costs of electric power or mechanical power significantly below current levels. This means that, unless ways can be found to sharply increase the use of decentralized CHP, industrial society effectively faces an end to the positive feedback 'engine of growth' that has operated for two centuries. It remains to be seen whether the growth torch (as it were) can be passed to decentralized combined heat and power - or 'energy recycling' as it has been called - soon enough to keep the growth engine ticking over.

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