thinking: relating- celebrating :-)

With Christmas coming up time to hit the beach with a book (Southern hemisphere here).

We have been through a precarious business year where our faith in the vagaries of the “free market”  should have been very considerably challenged although I personally don’t see too many people taking real notes and they should be.

This is more witless economy than weightless since for all the technology – business growth is still inextricably linked to energy usage patterns and efficiencies.

It seems like the global financial systems are much more unstable than previously acknowledged.

When there is a market meltdown it makes sense to check out the models to see if we missed the equivalent of a fractal thunderstorm. Somewhere there must be an economist who has a much clearer view of the rolling trainwreck we have been witnessing.

Robert Ayres is one economist who might have some clues based on his previous work. I’d be keen to hear from anyone who has read and thought about “The Economic Growth Engine: How Energy and Work Drive Material Prosperity” which seems incredibly apposite to this time.

One of the best things about reading The Last Oil Shock was to get an overview of the work of Professor Robert Ayres on what is coming to be called industrial ecology.

Since 1956 the Solow Residual has been an albatross around the neck of economics because it made a mockery of the very arguments it was trying to support.

Ayres worked out the correlation between energy and economic growth is 14 times larger than that assumed by Solow. In doing so by implication the impacts of a new oil shock are much, much higher than any economists had assumed before then.

Economics has often been dismissed as a dismal science because of many of the classical economic theories have been less than convincing, putting it generously.  As Robert Frenay surmises in this piece when talking about the oil shocks of the 70’s.

“Mainstream economics not only didn’t foresee what happened in the seventies, it couldn’t explain it. To those focused on bioeconomics, the cause was less mysterious. The economic models that held the field then, and in modified form still do, were not connected to the real world.”

Now that is an understatement with far reaching implications.

“There is a potential for confusion here between technological progress and “progress” in the more general, even more undefined sense. Along with many others, I have long tended carelessly to equate economic growth with that kind of undefined progress. Though aware of the difference, I nevertheless assumed for convenience that the one is virtually a surrogate for the other. The time has come to try to sort out this confusion.

In a certain simplistic sense the difference between growth and progress is all too obvious: It is the difference between “more” and “better”. In challenging the growth paradigm itself I am not assuming that growth necessarily means “more” physical goods. Far from it, I insist that the true measure of economic output is not the quantity of goods produced, but the quality and value of final services provided to the consumer. What is most wrong about the “growth syndrome” is not its tendency to consume material resources (as Barry Commoner, for instance, assumed). What is wrong with it is that growth of the kind now occurring in the US and Europe is no longer making people happier or improving their real standard of living.

It is possible to have economic growth – in the sense of providing better and more valuable services to ultimate consumers – without necessarily consuming more physical resources. This follows from the fact that consumers are ultimately not interested in goods per se but in the services those goods can provide. The possibility of de-linking economic activity from energy and materials (“dematerialization”) has been one of the major themes of my professional career.”

Retrieved from “http://en.wikipedia.org/wiki/Robert_Ayres” from Turning Point: The End of the Growth Paradigm (London: Earthscan, 1998)

Idea that just as Sir Ken Robinson takes educators to task for an education framework built on a propping up an industralisation view of the work that no longer has much sway.

Abstract from ACCOUNTING FOR GROWTH: THE ROLE OF PHYSICAL WORK
Robert U Ayres & Benjamin Warr
Center for the Management of Environmental Resources
INSEAD
Fontainebleau, France – 2004
Email: robert.ayres@insead.edu

This paper tests several related hypothesis for explaining US economic growth since 1900. It begins from the belief that consumption of natural resources – especially energy (or, more precisely, exergy) — has been, and still is, an important factor of production and driver of economic growth.

However the major result of the paper is that it is not `raw’ energy (exergy) as an input, but exergy converted to useful (physical) work that – along with capital and (human) labor – really explains output and drives long-term economic growth. We develop a formal model (Resource-EXergy Service or REXS) based on these ideas.

Using this model we demonstrate first that, if raw energy inputs are included with capital and labor in a Cobb-Douglas or any other production function satisfying the Euler (constant returns) condition, the 100-year growth history of the US cannot be explained without introducing an exogenous `technical progress’ multiplier (the Solow residual) to explain most of the growth.

However, if we replace raw energy as an input by `useful work’ (the sum total of all types of physical work by animals, prime movers and heat transfer systems) as a factor of production, the historical growth path of the US is reproduced with high accuracy from 1900 until the mid 1970s, without any residual except during brief periods of economic dislocation, and with fairly high accuracy since then.

(There are indications that an additional factor, possibly information technology, needs to be taken into account as a fourth input factor since the 1970s.) Various hypotheses for explaining the latest period are discussed briefly, along with future implications.

Here is more detail on the latest book.

The Economic Growth Engine: How Energy and Work Drive Material Prosperity
Edward Elgar, April 2009
Robert U. Ayres and Benjamin Warr

The authors of this unique book explore the fundamental relationship between thermodynamics (physical work) and economics.

They take a realistic approach to explaining the relationship between technological progress, thermodynamic efficiency and economic growth, the findings of which conclude with a fundamental explanation of endogenous growth that is both quantifiable and consistent with the laws of thermodynamics.

A major implication of this is that future economic growth is not guaranteed inasmuch as efficiency gains that have driven past growth may not continue in the future.

Ayres explains: “According to the standard theory, energy is an intermediate good that can be ‘produced’ by some combination of capital investment and labour (plus technology). This means that economic growth is essentially independent of energy use, which suggests – in turn – that growth can continue indefinitely at historical rates. And when people talk about recovery, implicitly that’s what they’re saying – that right now the world economy has a hiccup or is perhaps suffering from a case of the swine flu, and that we can expect to get back sooner or later to a trajectory of growth that’s based on the last 100 years.”

“But if we’re right – and I think there’s much more than a small chance that we are – you can’t make that assumption. It’s a very dangerous assumption and it’s leading to potentially very risky advice to political leaders. For example, we’re immediately faced with a possible inconsistency  between the idea of taxing energy use, or putting a cap on carbon emissions – either of which will raise the price – while, at the same time, hoping that growth will not be affected.”

If you’re new here, you may want to subscribe to my RSS feed. Thanks for visiting!

The search for a new business model or new version which makes more sense today is a recurring background story or theme in many business sectors.

A truly great business is one that re-invents itself and especially the business model like Shai Agassi is doing with the Electric car.

Local debate on whether or not paid content models can work has prompted some discussion but in my view we need to dig a bit deeper.

Media businesses who previously were gatekeepers of scarce information could ration out their product or service and earn a very good rate of return. For well over a decade now newspapers and all forms of media are at various levels waiting for a new business model to rescue them.

Classified advertising has left the building, ad blockers, ad blindness and general abundance of news sources means that readers follow the path of least resistance and that is away from mainstream formats.

“Vivian Mercier – famous for describing Waiting for Godot as a play which “has achieved a theoretical impossibility—a play in which nothing happens, that yet keeps audiences glued to their seats.

What’s more, since the second act is a subtly different reprise of the first, he has written a play in which nothing happens, twice.” from Wikipedia

I saw that play a very long time ago and while no- one can really agree on what is happening it seems to be universally relevant and pushes the right emotional and/or idea buttons in the audience who engage enough of the time to connect with themes and archetypes in the play.

At the risk of glossing over the play (go and see it some time) one of the key ideas I took from it was that we often think that if events / people arrived we would recognise them even though we have no real idea of exactly what or whom they might be or when.

It becomes a kind of “we’ll know it when we see it” continuing cycle of hopefulness and disappointment as different outcomes are explored.

This is pretty much the state of play in many publishing businesses now.

When your business model gets turned upside down and news is a commodity it becomes much harder to justify investment in resources to write, collect, edit and compile all of the content into some form of media offering – especially online.

Spinning in the Grave – The three biggest reasons music magazines are dying. By Jonah Weiner (hat tip to @mrinternet (Nigel Horrocks) for pointing this story out.)

“One of the most important historical functions of music magazines has been precisely to speak in a semisecret language that separates in-the-know us from square them.”

reason 3 – Music magazines were an early version of social networking. But now there’s this thing called “social networking” …

Jonah has enough of a story to keep our attention for a few minutes but Godot never turns up.

That is the writing does explore some of the reasons why music magazines in particular are dying but I’d rather read about where they are succeeding and I suspect I am not alone in that thought.

My belief is that successful future publishing business models will be more narrow-casting than broadcasting. They will offer huge depth of compelling content rather than trying to be all things to all people.

The music website that is closest to this model now is Rocks Back Pages which has something like 15,000 articles for a subscription fee. There is a whole lot more community that RBP could leverage off the content but its a steps closer to a viable model.

Last weeks post came out before the Media 7 version where Bernard Hickey and Barry Colman went into the studio with Russell Brown to talk through some of these ideas. (see clip below)

Another view on the NBR model is by Bill Bennett over here.

There will be more than one model that will work and the balance of workable formats will change.

Will we know when the right business model turns up?

Will we ever get to meet Godot?

Your comments / thoughts please.

Note: Now that I’ve finished this post I just found out that Alan Rooks wrote about the Paper Industry in 2003 and made some similar comparisons.

I’m just waiting for someone to describe Twitter as the “Godot Syndrome” which turns out to be an actual type of anxiety condition “repeatedly asking questions on a forthcoming event” just like what are you doing? seems to me.

Watching the tweet stream slip by in a tangle of half connections and random combinations at at once comforting and disconcerting – just like waiting for a new business model.