Economy

Growing Productivity in an Energy-Poor Economy

By Ryan McGreal
Published June 11, 2010

Until now, the formula for productivity gains - that is, an increase in production for a given investment - has been (e + t) / l, where e = energy inputs, t = technique, and l = labour costs.

Based on this formula, there are three ways to raise productivity: increase e, innovate with t, and reduce l (often merely by moving production to places with lower wages).

This was possible as long as the supply of cheap, abundant energy continued to grow - either to increase e or to pay for relocating l. Once our energy supply slides into decline, however, this formula will come under increasing pressure.

There are limits to how much we can improve productivity by changing technique without increasing energy use. When we actually have to reduce our overall energy use steadily, the pressure to innovate techniques will reach a crisis even as our capacity to innovate is constrained by our falling energy inputs.

The fact is that most of our efforts at innovation up to this point have been about finding ways to raise productivity by increasing energy flow.

In the future, we're going to have to start learning how to increase the productivity of human-powered work, a long-neglected innovation path.

Ryan McGreal, the editor of Raise the Hammer, lives in Hamilton with his family and works as a programmer, writer and consultant. Ryan volunteers with Hamilton Light Rail, a citizen group dedicated to bringing light rail transit to Hamilton. Ryan writes a city affairs column in Hamilton Magazine, and several of his articles have been published in the Hamilton Spectator. He also maintains a personal website and has been known to post passing thoughts on Twitter @RyanMcGreal. Recently, he took the plunge and finally joined Facebook.

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By zippo (registered) | Posted June 13, 2010 at 10:19:50

"In the future, we're going to have to start learning how to increase the productivity of human-powered work, a long-neglected innovation path."

Lets consider "the numbers" on that...

The most effective way we know to capture human muscle power is by riding a bicycle. A trained endurance cyclist (national competition level, but not "rare" elite athlete) can produce a sustained (8 hour) power output on a bike of about 150 watts, or to put it another way 6.6 hours of pedaling to produce one kilowatt hour (KWh) of energy. Maybe we can use this as benchmark of what might be possible on a large scale?

At the soon to be minimum wage in Ontario of $10 per hour that human produced KWh would cost $66. At more affordable "slave wage" rates, (unskilled industrial wage in China or India) of about $0.12 per hour it would cost about $0.79

To produce a KWh of electrical energy by burning coal costs, at the present time about $0.04

What I take from this is that even at slave wage rates substitution of human power is unlikely until forced by fossil fuel scarcity. Given that the supply-price relationship for fossil fuels is highly inflexible in the short to medium term price signals will not be sent in sufficient time to allow this substitution to be gradual. I.E. it will be in the form of a "crash" rather than a "transition".

It seems to me that for the foreseeable (decades...a century) future "productivity" as defined in your equation will be decreasing, not increasing, due to the overwhelming influence of the energy component of the equation.

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By A Smith (anonymous) | Posted June 13, 2010 at 18:04:16

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By A Smith (anonymous) | Posted June 13, 2010 at 22:40:14

Ryan, productivity is the amount of wealth produced per hour worked. In 1965, there were 25 students per teacher in the U.S.. By 2002 there were only 16 students per teacher...

http://nces.ed.gov/programs/youthindicators/Indicators.asp?PubPageNumber=11

In 1965, it took $3.5k (2001-02 dollars) to teach a student for a year. In 2002, this cost had increased to $9k (2001-02 dollars), a 157% increase. In that same period, new cars cost only 41% more (24k vs 17k)...

http://blogs.marketwatch.com/cody/2010/03/24/cars-pcs-and-transistors-how-to-trade-off-a-repetive-history-of-industry-cycles/

Inflation adjusted home prices were almost flat from 1965 to 2000, prior to the government's decision to buy up bad loans (Fannie and Freddie) as a political calculation. Computer prices fall with time, as do electronics. Real wheat prices have also stayed flat since 1970, even though the world's population continues to increase.

According to the BLS, $100 in 1965 would buy $692 today...

http://www.bls.gov/data/inflation_calculator.htm

... Yet prices at department stores (durable goods) have only increased 72.6% nominally. That means that real prices have decreased by a factor of 4. U.S. apparel prices have increased 159% nominally since 1965, this works out to a real price decrease of 2.67x. Even food and beverage prices have been less than the overall rate of inflation, increasing nominally by a factor of 6.3 since 1967.

Why can't public education keep a lid on their costs? Why can't teachers increase the number of students they teach, rather than having to to make classes smaller. Why are taxpayer funded teachers unable to do what the private sector does, which is to produce more per hour worked?

Is it because they have a monopoly on funding and our protected from competition because parents can't take their share of education funding and choose a private provider? Without competition and the ability to earn profits, why should teachers strive to be more productive like other business providers? In the strange world of government, being productive means putting yourself out of a job.

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By Ryan (registered) - website | Posted June 14, 2010 at 08:36:50

Zippo, it's not a matter of using human power to generate electricity to do the same things we currently do with powered machines in the same ways. As you correctly note, there's no comparison in the relative cost of power.

But take the bicycle example you raised. As Ted Michell calculated a few years ago, the bicycle gets 595 km/l equivalent in fuel economy. If an appreciable fraction of commuters switched from driving (fuel powered machines) to cycling (human powered machines), our per capita energy consumption would fall significantly.

Bicycles are an example of human-powered productivity innovation not because they compare favourably with automobiles, which are constrained by having to carry around their own mass, but because they compare favourably with walking.

Cycling is one area of human-powered productivity that has continued to realize increases over the past century, since it's a significant niche for sports (and is widely used as a form of transportation in some parts of the world). Many other areas of human-powered productivity have stagnated - and I'm interested in investigating what missing opportunities for gains are waiting for us if we pick up those dropped threads.

Comment edited by administrator Ryan on 2010-06-14 07:41:09

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By zippo (registered) | Posted June 14, 2010 at 09:02:58

A Smith: It may well be that the "government effect" is responsible for some of the relative increase in the cost of primary education, but I think there are other factors to consider that you do not mention.

Consider the trend in the cost of post secondary eduction, where colleges and universities are free to compete with each other and set their own tuition rates. I don't have numbers available, but I'd be surprised if the costs for this eduction had not risen just about as much as those of the primary schools.

Comparing agriculture and manufacture with education is somewhat problematic I think. Many of the techniques which have allowed increased productivity in these sectors are not directly applicable to eduction i.e. industrial robotics and other forms of automated assembly and fabrication, "Green revolution" technologies in agriculture, the off-shoring of much production to slave wage countries, and significant increases in government subsidies to the agricultural and energy sectors.

It may well be that you could educate your child less expensively if you shipped them off to a boarding school in India for 10 years, but I don't see much of a demand for that sort of solution.

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By A Smith (anonymous) | Posted June 14, 2010 at 20:40:40

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By jasonaallen (registered) - website | Posted June 15, 2010 at 10:05:08

Ryan - this is all interesting to note in the context of the report out today that Canada's productivity is #17 among OECD nations, and is essentially at the same level it was at in the early 70's. Some commentator on the ceeb this a.m. said that this was because Canada is reluctant to invest in new machinery and processes, and I couldn't help but think - what if powering those machines was prohibitively expensive?

Makes your initial question all that much more relevant.

A good example was to be found walking by one of the gardens that Russ Ohrt farms - someone had a very strange looking device that looked like a 2x4 frame with spikes on the bottom. One of Russ' helpers was using it like a giant lever to break up the soil. Something that could have been done much more easily by a rototiller, except that Russ' ongoing commitment is to people powered agriculture.

There are lots of ways that people have been leveraging simple, pepole-powered technology over the centuries, but it still begs your original questions - has there been any real advances in that productivity in the last 100 years. To which the answer is probably a resounding - No. As economists like to say "People follow the incentive." And the incentive since the last 1800s has been to build more and more intricate machines to take away our need to labour at all. To me, bread machines are the most glaring example of this phenomenon.

It will be interesting to see how society reacts to the shift backwards.

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By Undustrial (registered) - website | Posted June 15, 2010 at 17:54:14

The real question is why has productivity gone up so heavily in past decades while average real wages for most Canadians have stagnated since at least the early 1970s?

A Smith is right - we're not giving incentives to the people who create value. He is, however, wrong, about who that is. Owners and investors don't create value, they facilitate creation of value by workers. A factory, a bunch of ore, and a billion dollars of investment are absolutely worthless without somebody to work them into useful goods. If workers can double the amount of work they do and not see any real gains in pay, why should they?

And as for technology - yes, it can increase efficiency, but if the technology costs more than it provides in efficiency, then it won't. Over the long run it's hard to draw anything other than a direct connection between technology and MORE work, not less. Hunter-gatherers worked the least (2-4 hours per week), medieval peasants often had a holiday/festival every other day, and now after a century of unbelievable gains in productivity we're starting to see our workweek creep up again (thank you Mike Harris). It's pretty common knowledge amongst anthropologists that "labour-saving technologies" simply don't (ya just spend more time at work to pay for them). Jevons' paradox applies to people too.

"Labour was the first price, the original purchase - money that was paid for all things. It was not by gold or by silver, but by labour, that all wealth of the world was originally purchased." Adam Smith

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By A Smith (anonymous) | Posted June 16, 2010 at 17:48:50

Undustrial, government can't give anything to people that haven't first taken from someone else, they have no money of their own. That being the case, the best way to promote innovation and productivity is to allow people to earn and spend the money that they have legally earned. Prior to WWI, Canada didn't even have an income tax, yet Hamilton's economy was a magnet for capital and workers right across the continent.

Today, Hamilton relies on government funded industries, social services, health care and education. These sectors of the economy all lack competition from the private sector and all of them are backed from failure by the power of the taxman. In other words, Hamilton's economy has become weak, coddled and uncompetitive. There is simply no need to become productive, so we don't.

If Hamilton would foster competition, by cutting taxes, reducing it's reliance on subsidies, we would begin to build leading companies. It is a choice, either embrace competition and get stronger or embrace safety and stay reliant on handouts.

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By A Smith (anonymous) | Posted June 16, 2010 at 19:16:15

According to indexmundi, Switzerland's GDP (PPP) per capita increased by 38.21% from 2000-09. In contrast, Canada's was only 32.1%. Switzerland's top income tax rate is 41.5%, Ontario's is 46.41%. Switzerland taxes consumption at 7.6%, Ontario at 13%. Median corporate tax rates in Switzerland 21.3%, in Ontario they are 32%.

On the spending side, Switzerland's government's only spend 32.1% of GDP. In Canada, it is closer to 39%.

In 20010, Switzerland's unemployment rate was 3.7%, Canada's 8.5%.

Does anyone want to make the argument that lower taxed, smaller government, resource poor Switzerland is running their economy worse than we are?

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