A Revisit to Energy Efficiency

Did we get efficiency wrong?

There is an anecdotal story that is used as a moral example in my country Greece. The story's heroes are a trader, Hoxha, and his donkey. Someone may ask what Hoxha has to do with Greece but, for better or for worse, the Greek people were under Ottoman rule for four centuries, so the story became part of the Greek culture as well.

Photo by The Cleveland Museum of Art on Unsplash

Back to the story, Hoxha was a caravaner trader who traveled a lot and used his donkey to transport himself and his goods but, being stingy and miserly, he wanted to squeeze every bit of “efficiency” from his business to “maximize profit”. At a point in time, he observed that his donkey was “eating too much” and he decided to put his “employee” on a diet. Needless to say, the initial results of the new “corporate policy” were “promising” as more money stayed in Hoxha’s pockets, but soon afterward the poor animal was unable to carry heavy loads. Hoxha decided that the donkey was just “lazy” and applied an even more stringent diet program. Eventually, the poor animal died from starvation, and Hoxha started complaining about his “business partner's lack of entrepreneurial spirit”, how the donkey was responsible for the “damage caused to his business”, and that the state should compensate him for his losses since his endeavor was “critical to the economy”.

The morals of the story are plenty and obvious:

Cutting down expenses is a two-bladed sword and soon enough the associated payback will surface,
profit maximization does not go hand in hand with business longevity,
cutting down employee salaries has nothing to do with business efficiency, and
failed business executives often seek state protection to “pull their business out of the mud”.

If someone claims that the story, although entertaining, is outdated, he/she can only take the quoted phrases of the story and make a simple internet check of how often they are repeated in our days, especially as a pathetic excuse to cover up for greed and irresponsibility, also using the company employees as leverage to force government protection.

From the plethora of subjects that can be expanded from the story above, the most fascinating (at least to me) is efficiency.

Efficiency is not about profit margin

Efficiency is the ability to do things well, successfully, and without waste. Although the definition is excellent, there is a tendency to provide a slightly different definition in each scientific realm. For example, although in physics efficiency is the ratio of useful work per quantity of energy, in economics efficiency is defined as the extent to which waste or other “undesirable features” are avoided. This slight deviation in the definition of efficiency is related to the concept of money, also known as currency. My favorite analogy of how money fits into the economic engine is the one with electric current.

Photo by Veroniki Thetis Chelioti on Unsplash

As some of us remember and some have forgotten, the power or energy generated per unit of time in an electric circuit is the product of voltage difference and electric current, or:

But what does this have to do with the economy?

Economic growth and people’s happiness?, Part 2

Part 2

Part 2medium.com

In the article above, the Solow-Swan model was used to establish another argument. In the case of the Solow-Swan model, Y is the economic production of a system, K is the capital used, L is the labor, and A is a knowledge factor that augments labor (represents the education of the labor population).

If we ignore α (the elasticity of output concerning capital), then Y is analog to energy E, K is analog to voltage, and AL is analog to electric current. The resemblance between the two power laws is staggering, however, there is also a great difference between them.

Capital is the sum of facilities, equipment, and stockpile of raw materials and ready products, which is a set value and should be not subject to depreciation, apart from the case of aging and lack of maintenance. Capital, while directly analog to the voltage difference in an electric circuit, is represented by money, which (as the name “currency” implies) is by design similar to electric current, and is used to depreciate the value of capital.

If we think about it, it is not only the term “currency” that makes money similar to the electric current but a whole spectrum of properties around it. The prime macroeconomic tool for every economy on the planet is the so-called money supply, or how much money the central bank prints every year and feeds the market. We know very well that too little money means economic stagnation (no power in the circuit), and too much means inflation (short-circuit). The optimal money supply means an efficient market, which is strikingly similar to the matched electric circuit, where the generated power is matched to the absorbed power. This can be summarized as the following:

The entire economic structure aims to maximize the profit margin (i.e. the money left in the pocket after sales and expenses), using as a metric an asset (money) that is by design useless when is idle and dangerous when it flows uncontrolled in large quantities. If economy is viewed as an engine, it is the only one that deviates from the primary design principle of all engines, that is to minimize wasted energy or maximize efficiency.

To keep the analogy with electric circuits, efficiency in an alternative current electric circuit is the ratio of active power (the power used) to apparent power (the power generated), also called the power factor. The circuits that operate under the difference between the current generated and the current used are highly inefficient and are one step closer to catastrophic failures, with short circuits being the prime cause of failure.

The concept of “growth” goes hand in hand with “profit margin” for a very good reason. A large business dominates the market, allowing all sorts of methods for manipulation, and most importantly allowing the compression of the profit percentage during hostile actions. It is no coincidence that the phrase “bigger is better” dominates the rhetoric of the entire industrial age. However, the drawbacks of this strategy are evident. Huge factories demand huge expenses even to stay idle, manufacturing is not viable unless a minimum quantity of products is sold, and large manufacturing investments are extremely difficult to repurpose and rearrange for the production of a different line of products. This is not unrelated to the feeling we all got that “this or that product line was not released to satisfy the needs of the customers, rather than the customers satisfy the needs of the product line”.

Many more examples can highlight profit margin as a problematic metric of prosperity, however, this is not an effort to challenge the merits of economic theory. Money, in its modern form, is the result of thousands of years of evolution, and most probably is the best possible representation of capital thus far, however, the connection of efficiency with profit margin is at the root of the problems of the modern economy.

Efficiency is about not wasting energy

The struggle to maximize profits is not new in human civilization, and most probably will not disappear any time soon, if only due to human greed. The relevance of profit maximization, however, is also due to a series of valid arguments that have nothing to do with the vices of human nature.

A business without profit eventually leads to bankruptcy.
Without profit, there is no motive to run a business.
Businesses experience good times and bad times. Without profit overhead during the good times, who will pay for the damages during the bad times?
The market is not a kindergarten, it is a jungle. If you don’t eat your competition, the competition will eat you.
Achieving “this kind of efficiency” needs investment, commitment, and risk of failure. Who can guarantee that the customers will make all this risk worth it?

All the arguments above are valid and worth taking into consideration, however, we are living in an era where the hunt for profit margins is getting more difficult with each passing year. The consensus is that every trick in the book has been used, every sector of the economy is congested, the only opportunities for profit are behind flashy exotic technologies (such as cryptocurrency), and countries that their economy is just starting to be exposed to capitalism (such as China three decades ago). In addition, all potential profits come hand in hand with the exceptional risk of losing everything.

The point is that the profit maximization adoption strategy (capitalism in a broader sense) is more or less like a technology adoption, it started centuries ago and has reached its peak, having little to offer anymore. In addition, it is closely linked to the concepts of “growth” and “expansion”. For years businesses and governments have been seeking growth as the metric for prosperity, relating growth to all aspects of society, hence territorial growth, GDP growth, population growth, energy production and consumption growth, housing growth, and of course growth to all metrics that make our lives miserable, wars of ever-increasing fatalities, substances abuse, obesity, time wasted in traffic, expenses to live in a decent house, expenses to provide for the children, etc.

We have already witnessed many signs that the old strategy has reached its limits, but since the alternative political proposals failed to release humanity from the dead-end, we were under the impression that, at the end of the day, the “profit margin/growth” strategy is the undisputed way to go, and that all problems can be solved with minor adjustments.

Until now, no social or political movement proposed the concept of efficiency, but when this happens, it will include business, government, and academia, in fact, all facets of life.

A new utopic future

Imagine a society that primarily defines its needs and goals to achieve for its citizens and then plans on how to achieve them in the most energy-efficient manner. It seems difficult to grasp, yet even more difficult to achieve, but this society would get rid of all energy-wasting curses that plagued humanity for ages.

A nation would not have to expand to secure more resources while wasting the resources already in possession by inefficient use. Taxation would be to finance needed infrastructure and people would appreciate that their taxes were put to good use. Politicians would struggle to convince the citizens of the efficiency of their proposal over that of their opponents, instead of auctioning for benefits to the public.

People would spend money to fulfill their actual needs, not to temporarily satisfy their vanity. Vacations and luxury items would be redefined based on personal fulfillment and not useless vanity competition. Career selection, health insurance, housing selection, and children's education would be selected after a holistic approach with efficiency as the principal guideline. No one would have the audacity to claim that lemons and oranges imported to Europe from Latin America are a sign of an efficient market, because it is simply not the case, instead is the sign of a heavily twisted market.

Finally, the planetary problem of global warming would most probably never become an issue, since two centuries of fossil fuel burning (before cleaner forms of energy were introduced) would take place with efficiency as the prime factor, instead of inventing new habits to burn fossil fuels just to satisfy the “growth” of the fuel oil production and distribution industry.