Giovanni Dosi and Marco Grazzi
May 2006
This paper is part of the Laboratory of Economics and Management (LEM) working paper series. The cornerstone of the my thesis, that proved the Joint Operating Committee is the key organizational construct of the energy industry, used Professor Giovanni Dosi’s critical work “Sources, Procedures and Microeconomic Effects of Innovation” September 1988.
Professor Dosi is recognized as one, if not the premier, authority on innovation and his work is thorough and precise. Although he may be hard to read, that is a trait that is shared with most authors of great papers. So let’s dive in;
Dosi starts off by stating some assumptions that form the basis of his analysis. The most pertinent assumptions provide some insight to the current situation we are in.
Second, the higher the price for fossil fuels, the better it is in the long run for the world economy as for humankind in general. P.2
and
Third, even sky-rocketing prices of fossil fuels alone might not be enough to endogenously induce a sustainable pattern of consumption. P. 2
The long-term patterns of energy consumption and their sustainability.
This section sets out the problem that concerns me the most.
Inanimate sources of work exceeded animal work in the U.S. for the first time in 1870. p. 3
Not since 1870 has the physical labor of man been the primary driver of economic growth. In the last 138 years we have become so dependent on energy, and its associated efficiency, that there is difficulty understanding how the basic globalized economy would continue to function without energy. For example you have the opportunity to do a days work with a 200 horsepower forklift. If that 200 horsepower forklift suddenly is unusable due to fuel shortages, the alternative is to house, feed and incur the associated costs of 300 men. Without energy we would be reduced to the productivity that was attained in 1870.
Freeman and collaborators at the Science Policy Research Unit at Sussex – argued that growth could continue, provided that the two following conditions were to be met: (a) a combination of institutional changes that led to different paths of world development (with more emphasis on sustainability) and (b) a re-orientation of world R&D so that environmental objectives could be given higher priority (see Freeman [1992]). P. 4
We live in difficult times with problems that have many challenges. As difficult as it is to accept the two conditions that Dosi has listed above, I am unable to argue that there are alternatives. Dosi et al however notes the following optimistic point;
In fact, in our view the Club of Rome warnings massively underestimated the powers of technological progress with respect to the access to / exploitation of natural resources. P. 4
I have written before about the ability of the oil and gas industry to surprise on the upside with their performance. Oil and gas exists in the minds of oil and gas people. And I believe that given the right set of circumstances producers will surprise on the upside once again. However, I think that the structured hierarchy is the impediment to the global economy realizing the potential of these oil and gas people. Using the hierarchy is difficult to achieve “more,” and I just don't see how they can do it. It is applying last centuries thinking to this century’s problems.
The view that greater economic activity inevitably hurts the environment is based on static assumptions about technology, tastes and environment investment (IBRD [1992], p. 38). P. 6
This point is clearly evident in most people’s lives. If we were to continue on with the engine types that were built in the 1960’s and 1970’s we probably would have perished by now. But we didn’t and that fact is evidence of Dosi’s point here that the technology that is available today can solve many of these problems. As one can tell, I happen to think the current Information Technologies have only begun to provide for the world in this sense. And based on what Dosi says we’re in luck…
First, one tends to observe positive income elasticities for environmental quality; second, structural change in production and consumption toward “good” environmental friendly directions tend to be associated with higher per capita income; third, information on environmental consequences of economic activities increases with income levels. pp. 6 – 7
Does this assert that the U.S. and China will create less waste from more resources as their economies expand? I think it does and that seems to be consistent with Dosi’s thinking. I think the U.S. uses a lot of energy, but is the most efficient user of energy on the basis of GNP per unit of energy. Review of graph 8 and 5 are provided after Dosi’s point.
The bottom line is that technical progress – possibly together with structural change – has barely succeeded in stabilizing and even marginally decreasing energy consumption per capita, in high income countries: see figure 8 and 5 for the U.S. evidence. However demography heavily plays against any stabilization, let alone reduction of total energy consumption and of emissions in the environment. p. 11
Some – including the so-called IPAT model (standing for “Impact Population Affluence per capita Technology: cf. Ehrlich and Holdren [1971]) and other (see Shi [2003], Cole and Neumayer [2004], Dietz and Rosa [1997]) – do indeed account explicitly for demographics effects. The estimates – it turns out – yield elasticites which are in the neighborhood of one. Hence, other things being equal, even neglecting the effects on both energy consumption and emissions of growing per capita incomes, one should expect at least their doubling over the next three decades as a sheer effect of population growth. p. 12
Point well taken, the damage is cumulative.
What can technical progress do? And where does it come from?
If we turn now to document the progress of the North American automobile, which is the one area that can achieve benefits. We see the 10 mpg 1960's pony car replaced by its high teens mpg current version. We have reduced the amount of pollution produced in a substantial way. Yet, as I understand it the automobile still only uses 20% of its energy consumed on forward motion. Most is lost through heat. If we were to capture
60% of the energy that we used we could conceptually reduce our consumption by two thirds and reduce our environmental impact. It is obvious the 20% figure is substantially more then the vehicles of the 1960's. I believe this is the most promising area of where we can achieve the benefits we desire. Maybe the innovation will come as a refinery discovery, or simple retro-fit of some device in each vehicle, or maybe I am out to lunch here. Something needs to be done. And I would expect half of the energy savings to come from consumers and one half from producers.
Can technological advances reduce energy use and emissions in such a way to compensate the effect of both per capita income growth and demographics? p. 12
Dosi is not as optimistic as I.
We have already seen that energy-saving changes in production techniques appeared to have significantly contributed to the fall of energy intensity of GDP – at least at relatively high levels of development. Could the rate of technological progress be
increased to the extent of providing a full compensation for growth and demography? The answer we suggest is largely negative. p. 13
Still under the “inducement” rubric, public regulations have turned out to be a rather effective means of influencing the patterns of energy use and of emissions. In a curious paradox in the literature and in a good deal of policy debate one has both underestimated the environmental impact of the negative externalities stemming from production and locomotion and correspondingly overestimated the cost of regulation. p. 14
I would not recommend any changes to regulations. Although they are believed here to be more effective, I think the market will find its way through use of the market prices. Dosi lives in Italy where regulation may be more effective, by his estimation, and more acceptable. Here in gas guzzling North America we consider regulation is a bad word.
There is a general lesson here: imported price shocks might exert an important influence on the energy intensity of particular energy sources but dramatic changes in their use can only be made possible by the emergence and diffusion of new technological paradigms: in the case of electricity generation these are plausibly nuclear power and, eventually, photovoltaic and nuclear fusion; and, in the domain of locomotion, hydrogen-based means of transportation. p. 14
The higher energy prices are sending information to producers and consumers that invoke billions of decisions each day. This is the most effective way to deal with the energy concerns. Recall that without energy we are reduced to a lifestyle consistent with the year 1870. Price shocks have only begun in this process.
Indeed, technological advancement has reduced, for a given level of consumption of energy, the need for manufactured capital. Nevertheless, this trend has been counterbalanced by a corresponding trend in mechanization, which has substituted capital to work of manpower or animals. p. 15
Some Policy Suggestion by way of a Conclusion
The following policy suggestions I think stand on their own. Much of this thinking is new, to me at least, and should garner your serious consideration.
What is certain in our view is that the cumulative effect of such big and small evolutionary changes will not take care of itself as the most optimistic proponents of “Environmental Kuznets Curve” appear to suggest. Most likely an explosive demography let running until a new “steady state” forecasted somewhere between 12 and 20 billion inhabitants would be sufficient to lead beyond a disaster threshold which in fact some analysts believe that we have already passed (cf. Ehrlich and Ehrlich [1990]). pp. 15 – 16
Hence, sustainability is looming not for reasons of scarcity as it was claimed three decades ago but in a sense for lack of scarcity – at least with respect to energy availability and consumption. p. 16
As Nelson and Winter [1982] put it:
“The processes of change are continually tossing up new “externalities” (remember double clicking any word on this website will provide the answers.com entry for that word) that must be dealt with in some manner or other. In a regime in which technical advance is occurring and organizational structure is evolving in response to changing patterns of demand and supply, new non-market interactions that are not contained adequately by prevailing laws and policies are almost certain to appear, and old ones may disappear. Long-lasting chemical insecticides were not a problem eighty years ago. Horse manure polluted the cities buy automotive emissions did not. The canonical “externalities” problem of evolutionary theory is the generation by new technologies of benefits and costs that old institutional structure ignore.” (Nelson and Winter {[1982, p.368.) p.16
Second one should consider high prices of fossil fuels as a blessing rather than a curse. Of course there is, associated with it, a serious distributive problem which is not possible to discuss here. However, one should worry even more if some fossil fuels – as especially the most polluting one, coal – remains relatively cheap. p. 16
Third, it is unfair and unpractical to demand that emerging economies pay the full cost of “greener” patterns of production: only a mix of (i) mechanisms of preferential treatment of “greener” commodities and (ii) international transfer of less polluting technologies is likely to lower the peaks of whatever EKCs, if they exist at all. p. 16
Fourth, we have mentioned above that massive reductions in the levels of net emissions – to repeat, as such a necessary condition for long-term environmental sustainability – are likely to come only with the development of new technological paradigms. p. 17
On the grounds of what we know now the photovoltaic appear to be the most promising one, with, maybe, fusion, in a future further away. The emergence of new paradigms, however, generally demands major advances in basic and applied research sponsored to a good extent by public agencies. Massive “mission-oriented” projects in this area by the ensemble of developed countries are an urgent must. p. 17 Finally, possibly the most difficult issue: introduce measure aimed at the fast stabilization of population level well before the “natural asymptotic levels” from current forecasts. p. 17
The alternative is probably the “evolution towards collapse” brilliantly described by Diamond [2005] in several occurrences of “suicidal civilization” form the past. p. 17
Technorati Tags: People's, Dosi, LEM, Environment, Energy,
