June 08, 2013

Saturday Morning Essay: Mr. Krugman's Science Meets Liebig's Law of the Minimum

Brought to you by Peet's Costa Rica blend...

Mind you, the "Mr. Krugman's Science" series is so entitled only as a reference to a certain type of dry-lab economist, of which Paul Krugman of the New York Times, Princeton University and talk shows everywhere is a leading exemplar.  It's nothing personal.  It is true, however, that his columns and blogs are excruciatingly dull and repetitive, and have virtually no relevance to the real world.  That being the point of this post, sort of.

Mr. Krugman, along with Neo-Classical, Neoliberal, Keynesian economists everywhere, believes that the American economy is in the doldrums because the "inadequate demand" from the consuming populace results in an "underutilization" of our economic potential.  Thus, high unemployment, slow or no growth, and the need for what economists call "policy" measures, fiscal and monetary.  The first being federal budget deficits, the second Quantitative Easing.

I suspect Economists must be tempted on a regular basis to start swinging hammers forcefully against their own skulls.  Simply the act of saying or writing such words as "demand," "policy," "inflation expectations," and "economic potential" over and over again could understandably undermine one's will to live.

Anyway, the economic models of the Neoclassicals apparently explain what is going on in the industrialized countries of the West and in Japan to their satisfaction.  An inadequate "policy response" (wham!) leaves these economies in a perpetual state of stagnation, whereas borrowing lots of money and printing even more would revive these juggernauts to their former robust performance. Our problems are the result of self-inflicted wounds.

If, as to me, this sounds a little fishy to you, you might be tempted to look elsewhere for an explanation.  The first place I would look is the real world.  See, my a priori assumption about my fellow humans is that if these problems were as simple as declaring ourselves rich by printing lots of money and writing lots of IOU's against the future, that's the very first thing we would do. Let us not forget, as Craig Dilworth told us in Too Smart for Our Own Good, that Homo sapiens is a species that avoided farming for 30,000 years after it knew how, simply because it was way too much work compared to killing animals and plucking wild plants. Mr. Krugman's smug disdain for political and banking leaders everywhere, that they allow this "depression" to go on because they lack the will to print and borrow enough (and this is what Mr. Krugman is saying) is, to put it mildly, a little grandiose.  (However, Mr. Krugman, in reality, is simply using this as a marketing shtick, and we should not take it so seriously.  It is his carnival barker routine.)

Back to the real world, and Liebig's Law of the Minimum, to which many more-comprehensive thinkers have directed their attention.  Liebig's Law was developed in the context of agriculture, and essentially holds that if a plant needs certain essential nutrients for optimal growth, its growth rate will be limited by the scarcest resource among these essential elements.  The image of the short-staved barrel above is used to illustrate the principle: it doesn't matter how long the other staves are; the barrel will begin to overflow (and to hold no more water) when the level reaches the height of the shortest stave.

An increasing number of "ecological economists" such as Herman Daly of the University of Maryland have pointed out that the Limits to Growth foretold by the Club of Rome in 1972 are now being reached, more or less along the lines predicted.  The resource or "nutrient" of economic growth most often cited (but not the only one) is the relative scarcity of petroleum.  As the price has remained persistently high (graph below), the use of gasoline (graph above) in the United States (and elsewhere) has flatlined to levels not very different from usage of about 15 to 20 years ago (source: Energy Information Agency of the U.S. Department of Energy).  Only about 12% of this constraint is the result of fuel efficiency.  Thus, despite the large growth in U.S. population in the intervening years, gasoline usage is way, way down.  Or, as Mr. Krugman would have it, is "inadequately demanded."

Petroleum (and its proxy marker, gasoline) represents a good reference point for Liebig's Law.  As noted by Gail Tverberg, Dmitry Orlov, Richard Heinberg, and many others, petroleum is a "master resource."  To move things in the global economy, you need oil.  You need it to power ships, to fly planes, to fertilize soil (and run the machinery of agri-business), to get people to work and to retail outlets, to go on vacation, to do practically anything requiring energy, which is to say - everything. A modern Western economy runs on the stuff, and nowhere is this truer than in the United States.

Mr. Krugman is left with the quandary: why do petroleum prices remain high in the face of "inadequate demand?"  The answer is: relative scarcity, in terms of the tight fit between worldwide usage and available supply.  (About 88 million barrels per day, in both cases.)

It's difficult for me to see how printing money or borrowing money from each other would change this fundamental problem.  Oil prices are likely to fall over the coming months as usage continues to sag, but if the economies are temporarily "revived" by the availability of cheaper energy, usage will increase to the point that prices will again soar and the economies will again sag.

As I've said before, Mr. Krugman and his fellow Scientists do not like this way of looking at things because it makes all of their model-driven, dry-lab quackery manifestly irrelevant.  Nevertheless, we remain limited by the short stave in the economic barrel.

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