Energy Efficiency and the Elasticity of Demand: How Physicists, Not Economists, Rediscovered the Human Factor
By Deborah Poskanzer
“Economics is what economists do.” This aphorism has been attributed to Jacob Viner, a forbear of the Chicago school of economics.[1] The implicit belief that economists could deploy their superior analytical capabilities to master any issue was part of the institutional culture of economics in the mid-twentieth century. The other discipline to voice such an expansive (not to say arrogant) turf claim was physics: “It’s what physicists do”. The particle physicist Marvin Goldberger was only half joking when he wrote that ‘physicists can not only do anything, but they can do it better than anyone else.’[2] The two disciplines shared not just a superiority complex, but also a list of technical terms such as “efficiency” and “equilibrium.” Thus there was a particular irony when economists and physicists jostled for authority on energy demand during the energy crisis of the 1970s.
The shortages and inflation resulting from the OPEC embargo of 1973 transformed energy forecasting from an obscure speciality into a global preoccupation. In 1974 alone, major studies came from the (US) National Academy of Engineering, IIASA, the US Atomic Energy Commission, the OECD, and countless political scientists, environmentalists, engineers, and demographers. However, a more diverse circle of experts did not necessarily lead to more diverse forecasting methods. Economics continued to rule, in particular through the assumption that the relationship between economic growth and energy demand was inelastic. The projections of energy use over time looked much the same as those produced before the embargo: straight lines signifying the lockstep progress of GNP and energy use. Restoring pre-crisis stability and growth would require returning to pre-crisis consumption; conversely, reducing demand to match diminished supply would mean deprivation and economic contraction. At the grass roots, ordinary consumers did in fact adopt energy-conserving measures, but at the expert level of long-term policy, conservation was ridiculed as “freezing in the dark”.
There were two notable dissents from this conventional wisdom: A Time to Choose, by the Ford Foundation, and Efficient Use of Energy, from the American Institute of Physics (AIP).[3] Both studies understood that the true product delivered to society was not raw energy itself, but the services that energy could provide: transportation, convenience, thermal comfort, hygiene, cooking and illumination. Technical improvements (either future innovations or wider use of existing technologies) would mean that the same services could be delivered using less energy, while evolving norms and lifestyles would change the desired level of services. Forecasts of demand over time incorporating these factors arrived at much lower figures. In one case of duelling scenarios in California, the discrepancy between the “business as usual” scenario of the power companies, and the efficiency-based scenario proposed by scientists was 15 GW, the equivalent of 15 nuclear power plants. The passage of time proved this and other efficiency-based projections to be far more accurate (and the California nuclear plants were never built). More importantly, it became clear that the supposedly rigid bond between growth, well-being and energy demand was in fact quite elastic.
Physicists authored both the AIP study and the sections of the Ford Foundation report on efficiency. In one sense this is unsurprising: thermodynamics, the study of the relationship between energy and heat, is part of the core knowledge of physics. But this explains neither why physicists cared about the problem (enough to leave behind successful careers in pure research), nor why economists didn’t. The explanation lies rather in two key differences — one methodological and one cultural — that distinguished the professions at the time.
Both economists and physicists based their claim to authority what is loosely called the scientific method. But the two communities had entirely different approaches to an important step of this process, the sourcing of empirical data. A physicist faced with a question for which data is insufficient would find a way to generate it, typically by means of an experiment. At the time of the energy crisis, however, the independent generation of data by academic economists was extremely rare.[4] Instead, they drew on data generated by others, thus creating a bias in favour of well-recognized problems with large data sets (such as market/price/supply mechanisms) and against new, potentially paradigm-breaking ideas. A joke amongst critics of market efficiency mocked this bias:
Two economists were walking down the street. The young economist saw a $20 bill on the sidewalk and said, ‘Look, a $20 bill!’ His teacher, without even looking, replied, ‘Nonsense. If there were a $20 bill lying on the street, someone would have already picked it up by now.’
In the early 1970’s energy efficiency had the role of the $20 bill. If efficiency measures were cost-effective, why hadn’t the market already discovered this? The lack of data on appliance performance or consumer behaviour led most economists to dismiss the concept, but prodded scientists to investigate further.
The second difference between the two fields was around professional ethics in a period of political strife. The neo-colonial conflicts in Asia and Africa sparked a global debate over how individuals and institutions could behave morally vis-à-vis immoral wars. On US campuses, the widespread assumption was that scientists and engineers were the key actors enabling the war in Vietnam: most antiwar protests targeted research facilities, while enrolment in engineering and the natural sciences dropped. For physicists in particular, this led to a re-evaluation of their societal responsibilities. In addition, the cohort coming into professional leadership in the 1960s and 1970s had been mentored by the generation whose creation of nuclear weapons left them haunted by their part in the possible destruction of civilization. They were sensitized to the importance of behaving as moral actors both inside and outside the laboratory.
In contrast, economics — and economists — did not suffer this kind of public disapprobation. Professional self-assurance — that they were already doing good by doing their research — remained intact. The difference can be seen in the activities of the professional societies: during the Vietnam era the American Physical Society launched numerous committees and action groups for social good; the American Economics Association had none.
An earlier post on this blog described economists’ reframing of energy futures, from moral stewardship to abstract commodity.[5] When scientists began to emphasize services rather than supplies, it shifted the interpretation of the energy problem away from market forces and back to social good. Similarly, the research on end-uses of energy put the focus back on culture and human behaviour, foreshadowing later developments in behavioural economics. In many ways the “discovery” of energy efficiency brought us full circle, by reintroducing moral and human considerations.
Notes
[1] Kenneth E. Boulding, Economic Analysis (New York: Harper, 1955). Cited in R. H. Coase, Essays on Economics and Economists (Chicago: University of Chicago Press, 1994). 35.
[2] Marvin L. Goldberger, “How Physicists Can Contribute,” Physics Today Physics Today 23, no. 12 (1970).
[3] Ford Foundation. Energy Policy Project., A Time to Choose: America’s Energy Future; Final Report (Cambridge, Mass.,: Ballinger Pub. Co., 1974); Kenneth William Ford and Society American Physical, Efficient Use of Energy : (the Aps Studies on the Technical Aspects of the More Efficient Use of Energy) (New York: American Institute of Physics, 1975).
[4]Daniel S. Hamermesh, “Six Decades of Top Economics Publishing: Who and How?,” jeconlite Journal of Economic Literature 51, no. 1 (2013).
Deborah Poskanzer is a writer in Berkeley, California, specializing in energy behaviour and consumption.
