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Thursday, 15 March 2012

Caught in a Rat Trap: Jevons’ Paradox

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As natural sources of fuel deplete there is, not unnaturally, a concern to introduce more efficiency, to conserve our resources. The idea is that by producing more efficient cars, heating systems or whatever we’ll decrease fuel use and buy ourselves more time to do whatever it is we need to do: melt the polar icecaps, most likely.

Unfortunately, this is exactly wrong. If we make more efficient use of fuel we will use it faster and probably do more damage than if we stagger along in our current fashion. This is the Jevons’ paradox, a mode of market failure that should make grown environmentalists weep, if they weren’t too busy saving the few remaining penguins by smothering them in oil retardant chemicals.

Jevons v Midgley

This e-rag has previously been rather critical of Stanley William Jevons, largely on account of the fact he managed to originate two really stupid economic ideas. Of course, when it comes to really bad ideas in general he can’t lay a finger on Thomas Midgley, Jr. who was responsible for brain damaging millions of children by adding lead to petrol and then invented CFCs in order to destroy the world’s protective layer of ozone before managing to kill himself in bed with a labour saving invention that looked like it belonged in a shadier kind of bordello. They don’t make them like that anymore. For which we – and the penguins – are truly thankful.

In contrast, Jevons merely managed to model economics on thermodynamics, so inadvertently launching a thousand wasted careers, and suggest that business cycles were based on sunspot activity. Of course, it’s easy to sneer with hindsight, but despite being wrong Jevons was also a significant thinker about economic matters. And to redress the balance somewhat, on what we now know as the Jevons paradox, he was almost certainly correct.

The Coal Question

The paradox states that if we become more efficient at using a particular source of fuel we use more of it: which makes perfect sense, because if some fuel is cheaper and more efficient we’ll tend to prefer it. The net effect, all other things being equal, is that we use more energy than before and our net energy gains go up in a puff of smoke. Jevons pointed this out to the British government as long ago as 1865 – showing that improving the efficiency of coal powered steam engines would lead to more coal being used.

In fact it’s quite unlikely that any improvement in fuel efficiency will straightforwardly translate into sufficient cost savings to render it uneconomic through increased use. However, such moves will tend to boost economic activity, which increases confidence, which leads to a typical runaway effect across the whole economy – which, in turn, leads to the Jevons’ paradox.

Technically if the decrease in the price of a given resource means more of the resource is purchased than predicted, because people buy more of it because it's cheaper, then we have a rebound effect.  If more of the resource is purchased than before then we hit the Jevons paradox, a phenomena also known as ‘backfire’, and which is not to be confused with the behavioral backfire effect (see: Backfiring Investment Theories). These effects can be wildly counter-intuitive: when Midgley’s CFCs were phased out the immediate impact on global warming was to make it worse because the alternatives had unexpected side-effects.  It's the idea of unintended consequences writ large.

Oil Shock

Consider, for instance, the fuel price shock of the 1970’s which occurred when OPEC got its act together and forced up the price of oil. This led to a range of fuel economy and efficiency measures in the oil guzzling developed world. As an eventual result of these policies, designed to reduce fuel consumption, the top selling US vehicle in 2006 was nearly 4 mpg less efficient than the equivalent vehicle 40 years before: people were using more gas rather than less, despite it being more expensive. This is an economic puzzle – if it’s in our economic self-interest to reduce our gas guzzling you’d expect us to do so.

The solution lies in the net economic impact on fuel efficiency: as we were able to do more with less oil then economic growth surged, to the extent that increased gas prices had less of an affect on individual disposable incomes: so people used more fuel, rather than less. Recent research suggests that increasing fuel economy has less of a rebound effect than expected because people are richer – so they’re already wasting all the energy they possibly can, much of it expended by flying environmentalists around the world to attend conferences about how to save those damn penguins:
"The rebound effect is likely to diminish still further as rising incomes reduce the significance of fuel costs in decisions about travel, although this may be offset to some extent by increases in fuel prices."
Which is fine if incomes continue to rise, but if they don't, as has been the case during the recent recession in the developed world, the impact on energy resources is likely to be less benign.  Basically, if people have less money to spend then any improvements in fuel efficiency are more likely to trigger a rebound effect.

Government Intervention

To mitigate the rebound effect governments can intervene to artificially keep the price of the fuel source high by taxing it or introducing quotas, which does result in genuine environmental savings. Unfortunately this is anathema to most free-market inclined states because it depresses economic growth – and as most democratic governments require such growth to ensure re-election the last thing they’re likely to do is act to restrict it. In fact we’re seeing exactly such a backlash in the UK at rising energy prices intended to pay for renewables.

Unfortunately, if you believe that the world’s resources are really finite then a reduction in economic growth is an inevitable consequence – and the fact it won’t happen on our watch doesn’t make it any less palatable. The unwillingness to take pain now when we can push it into the future – so called hyperbolic discounting – is a standard finding of behavioral economics. Why should we pay for our consumption when we can get our grandchildren to do it for us?

Rats in a Capitalist Trap

So we’re caught in a trap. On one hand the only method available to the free market of conserving fuel resources is by increasing the efficiency of resource use, but this leads to the Jevons paradox, that more resource gets used. Government intervention is then required to ensure that efficiency leads to less fuel use, but this restricts economic growth; which is anathema to democratic governments whose future re-election depends on making people feel happy.

The only real solution to this is to address the underlying culture of consumption that’s linked to free market economics. The idea that freedom is all about the freedom to choose to consume whatever you want is a relatively recent invention, developed when producers realised that consumers already had all they actually needed: which is largely why the modern marketing industry developed, to get people to want to purchase things they don’t actually need:
"Freedom of choice came to be perceived as a freedom more significantly exercised in the marketplace than in the political arena.  The process gained momentum in the 1920s; it gained maturity during the 1950s as a sense of class differences was nearly eclipsed by a fascination with the equalities suggested by shared consumption patterns and "freely chosen" consumer "lifestyles."
As we saw in Jam Today, Tyranny Tomorrow there’s significant resistance to the idea that freedom is not just about the freedom to consume. In truth, though, if freedom means anything it’s about the freedom to choose, and one of the choices we can make is not to consume. It’s one hell of an ask, though, and not one that WS Jevons saw much prospect of::
"If we lavishly and boldly push forward in the creation and distribution of our riches, it is hard to over-estimate the pitch of beneficial influence to which we may attain in the present. But the maintenance of such a position is physically impossible. We have to make the momentous choice between brief greatness and longer continued mediocrity."
Of course, that was 150 years ago.  It ain't happened yet, of course.  But one day ...



5 comments:

  1. "if you believe that the world’s resources are really finite then a reduction in economic growth is an inevitable consequence"

    You need another belief for this to be inevitable: that economic growth is resource-bound. It is not. If resource intensive activities become more costly, non-resource intensive activities become relatively cheaper and preferred. So you end up with say more lawyers and fewer carmakers, and growth in legal services can go to infinity no problem. This can be observed today when you look at how the relatively richer spend their money: their expenditure on resources does not grow linearly with income.

    I tried to cover this in a blog some time ago:

    http://commentisglee.wordpress.com/2012/01/31/the-growth-industry-fallacy/

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  2. With the same certainty you might suggest that in western europe they preserve coal for the economy of the future.

    When all naive countries will burn they fuel the only place where it is left will be western europe.

    There is an uncertainly ahead, but it always being the case. I do not believe it is possible to change it by frugal life style or modesty. It will not work in the consumerism society.

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  3. Where do prices enter the discussion? I don't believe it's possible to run the resource-based economy off a cliff by running out of anything. The price will go to infinity before that happens. I'm sure I'm stupid and missing something extremely obvious. If the information about resource limitations is not already in market prices, then nothing informational ever will be. It's a rather common meme.

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  4. "The idea that freedom is all about the freedom to choose to consume whatever you want is a relatively recent invention, developed when producers realised that consumers already had all they actually needed"

    I'm amazed to find you retailing this kind of dishonest lefty claptrap. You should be ashamed. This is not and has never been proposed by any serious defender of liberty. Obviously, the freedom required to respect self possession includes but is not confined to freedom to consume what you can pay for.

    You also seem to have fallen into another typical lefty arrogance: of regarding people as stupid. The fact that fuel efficiency leads people to consume more fuel is not a market failure, it's a market *success*. It may be news to you, but life is not about conserving resources. People use resources to do things that enrich their lives and if they can do more such things cheaper then it is a GOOD thing that they can and do.

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  5. I'm amazed to find you retailing this kind of dishonest lefty claptrap. You should be ashamed. This is not and has never been proposed by any serious defender of liberty. Obviously, the freedom required to respect self possession includes but is not confined to freedom to consume what you can pay for.

    It’s not a political point; it’s a psychological one.

    Freedom entails not just the freedom from external constraints (Berlin’s negative liberty) but also the freedom from internal constraints (positive liberty). As this is a blog all about behavioral bias, the unconscious drivers of our behavior, the context of this is that without understanding and having some controls over ourselves we’re actually not capable of exercising negative freedom. Far better we educate ourselves than allow our leaders to “nudge us” in the directions they want us to.

    The fact that fuel efficiency leads people to consume more fuel is not a market failure, it's a market *success*.

    No it's not. If you set out to achieve one thing and achieve the exact opposite it's a failure. That it has positive side-effects is not the point being made.

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