Adam Smith on Globalization
Posted by Stuart Staniford on December 21, 2005 - 5:44am
Topic: Economics/Finance
Tags: globalization, hubbert peak, oil prices, peak oil [list all tags]
So I went into the bookstore down in Mountain View at lunchtime in search of serendipity. The book that found me was an annotated version of Adam Smith's "The Wealth of Nations", which of course I have never read in the original. It's a fascinating read for a peak-oiler for several reasons. Firstly, it's just an engaging and well-written book. Secondly, it's still viewed as the founding text of economics, and one can see many of the thought strains that still shape that discipline already. Thirdly, it was published in 1776. The steam engine ("fire engine" to Smith) had been invented, but was very inefficient and not yet used in transportation. The spinning Jenny had been patented six years before. The industrial revolution was largely in the future. Although coal was starting to be used in bulk for heating and smelting iron, still, the fossil fuel era was only just beginning. The economy that Smith describes is largely powered by wind, water, and biomass.
I heartily recommend it to those of you who believe peak oil means a return to a pre-industrial, localized economy. Of particular interest to me was the following quote (below the fold), since I am not amongst those peak-oilers who think global trade is likely to end after peak oil (at least not soon).
(I'll resume the population analysis tomorrow when I have time).
Smith is discussing how trade allows a larger market, and thus more specialization and division of labor, and so greater wealth creation. He writes:
As by means of water-carriage a more extensive market is opened to every sort of industry than what land-carriage alone can afford it, so it is upon the sea-coast, and along the banks of navigable rivers, this industry of every kind naturally beings to subdivide and improve itself, and it is frequently not till a long time after that those improvements extend themselves to the inland parts of the country. A broad-wheeled waggon, attended by two men, and drawn by eight horses, in about six weeks time carries and brings back between London and Edinburgh near four ton weight of goods. In about the same time a ship navigated by six or eight men, and and sailing between the ports of London and Leith, frequently carries and brings back two hundred ton weight of goods. Six or eight men, therefore, by the help of water-carriage, can carry and bring back in the same time the same quantity of goods between London and Edinburgh as fifty broad-wheeled waggons, attended by a hundred men, and drawn by four hundred horses. Upon two hundred tons of goods, therefore, carried by the cheapest land-carriage from London to Edinburgh, there must be charged the maintenance of a hundred men for three weeks, and both the maintenance, and, what is nearly equal to the maintenance, the wear and tear of four hundred horses as well as of fifty great waggons. Whereas, upon the same quantity of goods carried by water, there is to be charged only the maintenance of six or eight men, and the wear and tear of a ship of two hundred tons burthen, together with the value of the superior risk, or the difference of the insurance between land and water-carriage. Were there no other communication between those two places, therefore, but by land-carriage, as no goods could be transported from the one to the other, except such whose price was very considerable in proportion to their weight, they could carry on but a small part of that commerce which at present subsists between them, and consequently could give but a small part of that encouragement which they at present mutually afford to each other's industry. There could be little or no commerce of any kind between the distant parts of the world. What goods could bear the expence of land-carriage between London and Calcutta? Of if there were any so precious as to be able to support this expence, with what safety could they be transported through the territories of so many barbarous nations? Those two cities, however, at present carry on a very considerable commerce with each other, and by mutually affording a market, give a good deal of encouragement to each others' industry.
walking along the tow path under the control of two men or a man and his wife could pull 50 tons of goods at twice the speed of carts on rutted roads with no risk of storm and often to the doors of factories or mines.
It is perhaps a cautionary tale that in times of change even the most perceptive can get it wrong. We should be cautious in guessing what form of transport if any will replace oil based vehicles.
By "biomass" you must include whale oil which is what was used for lighting before petroleum or gas was used for lighting.
Not that I think we would slip back that far either, but there were practices back then which we couldn't revert to today.
It was the best of times, it was the worst of times ... it was the Age of Enlightenment
Adam Smith saw a new "machine" emerging, a social machine that would encourage specialization and thus take us to a new age of prosperity.
Smith did not see the dark side of his machine. Specialization brings on tunnel vision.
Tunnel vision leads to blind-sided group think among those people (sheeple) who come to accept certain things as "self evident" truths that need no further investigation or questioning.
One of the "self evident" truths of our "modern" society is that growth and prosperity will continue (with compounded interest) forever.
Peak Oilers are some of the few who realize that this myopic viewpoint is fraught with danger. It may be the best of times, but it is also the worst of times. Water is evaporating from our half-fool glass.
The 50%-gone point is very short lived.
Step back has nailed it. Exponential growth is a fool's paradise.
Local production and sales will succeed exactly to the extent that they can provide the things people need and want on a competitive basis. In other words, the basic formulation won't change, just the numbers that get plugged into the equation. The large volume manufacturers and distributors will do everything they can to control costs, making them even more formidable competitors in a time of rising energy costs.
The only way I see us converting to a highlyo localized economy is if transportation costs get vastly more expensive than they are now--as in 50 or 100 times higher--and whole sectors of the economy and even political system collapse into little fiefdoms. I don't believe for a second that that will happen.
Right now, because of vast pools of cheap foreign labor, workers in the developed countries are already experiencing such a pressure. Higher energy costs will put even more pressure on those in the West while ensuring that cheap labor in the developing nations never gets its two-car garage and white picket fence. China and the rest of the developing world will fall short of the Promised Land.
Looking at Walmart employees in the West, is this not already happening?
A small shop, walking distance from downtown, can sell things to people who don't want to pay for the gas needed to drive to the edge of town. People may well pay extra for that.
That same shop might well be close enough to a rail terminal that goods can move from train to warehouse to shop without needing to be trucked at all; if they do need to be trucked, they can be moved just a few blocks in a small truck, rather than several miles in a large truck.
There are lots of similar savings available to the small, local business: All businesses used to take advantage of them. It simply turned out that just-in-time delivery was cheaper, in a world of cheap energy. In a world where energy is expensive (and, especially, where energy isn't absolutely reliable), the older business structure may well turn out to be the cheaper choice.
And I agree with the previous poster in that WalMart and the other big-box stores will continue to enjoy a strong economic advantage over local privately-owned stores. Don't forget, unless you live on the very outer edges of the deep suburbs or in an outright rural area, it is often the case that a MalMart is just as close to your home as many of the smaller stores. And even if it isn't, the one-stop shopping feature in and of itself can be an energy-saver for the consumer. While I certain am no fan of WalMart and the like, I don't see their demise in the foreseeable future.
Having said that, on the subject of economies-of-scale, I don't think we should assume that efficiency, cost-effectiveness, or whatever other benefit you want to discuss automatically continues to improve indefinitely with increasing size. In many things (e.g., buildings, ships, organizations, etc) there is a certain size beyond which efficiency, cost-effectiveness, and other benefits starts to decline. The reason usually is that the size itself becomes an obstacle and and difficultly and becomes more trouble than it's worth. I stongly suspect that some of our economic and social systems are already at or beyond that point.
I would add that what limits size is flexibility. Economies of scale continue until conditions change (as they eventually do), then the larger organizations have more inertia and find the conditions they had optimized for no longer held.
I think General Motors is one example in the news. If, say, China suddenly returned to its "Great Leap Forward" or Red Guard policies, then Walmart would need to change and rapidly. With such a huge built structure, it would difficult.
BTW, I picked up a copy of the "Wealth of Nations" recently too - haven't started it yet - have to finish the biography of Mussolini first.
And quite frankly the idea that Mal-Wart will be the paradigm of the post-peak era is pure malarkey. If there ever were a system doomed by peak oil, it would be the big Wart.
Let us count the ways:
1. Fuel prices. Skyrocketing. Cost of business model---YIKES!!! Sure ocean vessels are efficient, but then what do we do then? Do we move to the docks? NO. They have to drive it to the stores.
2. Road maintenance. EXPENSIVE! The energy cost of maintaining IMMENSE stretches of roadway is enormous. If fuel is expensive, then jobs are scarce. Natural gas running out, feedstock running out. Factory jobs gone. Knock-on job losses. High unemployment means a shrinking tax base. Poor highway repair, high truck maintenance cost on top of fuel cost all spells no go.
3. Roads clogged with out-of-work economists fleeing for their worthless lives all loudly proclaiming, "Let the invisible hand take care of it, Amen."
Methinks the art of wishful thinking is not dead.
http://www.history.rochester.edu/steam/brown/chpt5.html
" If, we can diminish only one single farthing in the cost of transportation and personal intercommunication, and you at once widen the circle of intercourse, you form, as it were, a new creationÑnot only of stone and earth, of trees and plants, but of men also; and, what is of far greater consequence, you promote industry, happiness, and joy. The cost of all human consumption would be reduced, the facilities of agriculture promoted, time and distance would be almost annihilated; the country would be brought nearer to the town; the number of horses to carry on traffic would be diminished; mines and manufactories would appear in neighborhoods hitherto considered almost isolated by distance; villages, towns, and even cities, would spring up all through the country; and spots now as the grave would be enlivened with the busy hum of human voices, the sound of the hammer, and the clatter of machinery; the whole country would be, as it were, revolutionized with life and activity, and a general prosperity would be the result of this mighty auxiliary to trade and commerce throughout the land."
This very principle led to the establishment of Granges in the late 1800's in the U.S, which led to other changes. Rail became the fastest cheapest way to move goods to and from agricultural areas.
Rail was so good (because of speed) they drove all the horse and water freight companies out of business. Then they had a monopoly and they charged "what the market would bear" for delivery rates. Granges worked as COOP's to counter this, not entirely successfully, so that rail owners couldn't dominate individuals in the negotiating process for freight rates.
At about this time the automobile came along and was a viable threat to rail shipping, because of speed. Rail had become the enemy and was broken up and displaced by trucks, cars and planes, never to recover as a viable efficient long distance transport in the U.S., except for commodity volume raw materials.
Inland water has never recovered except on the Mississippi, and it main tributaries, as a way to move goods. Again, inland water is used to move bulk commodities.
In all of these transitions speed has been the driver, not just energy efficiency of freight. Trains were both an increase in speed and efficiency over horses. But trains were only an increase in speed over water, not efficiency. Today it is hard to argue that it is more efficient to ship a package by jet, instead of rail, across the U.S. from an energy standpoint. But it makes perfect sense from a time standpoint.
Before cheap fossil fuel (mostly petroleum) became abundant, speed was always balanced with energy cost to ship. After cheap oil the only part of the equation that is relevent is speed. The difference in energy cost is so small as to be negligable when balanced against satisfying a paying customer.
What happens when energy gets really scarce again? How will the decision trees gets parsed? These are the questions that can't be answered today because energy as of 12/21/05 is still really cheap worldwide. If you are really forced to choose between manufacture and transportation, which gets the energy? When you can't use a very limted energy for three things simulaneously which takes precidence?
These were questions that business and individuals used to be able to answer. Maybe, if you can't afford the shipping you don't buy or sell to far off places? Maybe you keep as much finished goods as possible in the local environment? Maybe more people will make their own finished goods from less refined stocks? Who can say at this time. Interesting days are ahead.
This passage was found at paragraph I.19 in the editor's introduction at
http://www.econlib.org/library/Smith/smWN.html
Click on Table of Contents at above site to see a hyperlinked Table of Contents.
above from:
http://www.blupete.com/Literature/Biographies/Philosophy/Smith.htm
For a total Smith experience, just Google it
It is also useful to remember that Smith was a member of the elite of his day — some of his early work sponsored by a lord, traveling abroad as the tutor for a duke, and eventually appointed to lucrative positions by members of the nobility — which affected how he saw the world. Delong provides an interesting estimate of the economic output of the world in 1750: population 720M, per-capita output $178 (in 1990 dollars). Compare that to the world in 2000: population 6.3B, per-capita output $6,540 (in 1990 dollars). In 1750, the difference between "developed" and "undeveloped" countries was narrow. The difference in per-capita output of Britain and India, for example, was smaller (in percentage terms) than the range covered by today's "developed" countries. A return to anything approximating Smith's 1750 Britain over a period shorter than centuries probably represents a crash of monumental proportions.
That said, I'm still on Stuart's side here (or at least I think I am). Peak Oil won't stop trade — but it will probably scale it back, particularly for bulk goods. There will be more places where it is cheaper to grow wheat than to buy from the US, or to use lower-quality local coal than to buy from Australia. We have the enormous advantage over Smith's Britain that we have largely mastered electricity, so that industry need not be tied so directly to locations with falling water. And we have alternatives besides falling water and such for generating electricity. Still, even in Smith's time, economic growth was tied to the ability to apply more energy to the problems (think about the evolution towards clipper ships for wind-powered transport). Separating energy and economic growth is the challenge we will face going forward.
A big container ship can today be built by the Russians (if they had their commercial act together) using four reactors from their subs that could half the trans-Pacific transit time and have lower fuel costs. Each sub reactor is about 30 MW shaft power - four of these would develop 120 MW which should drive an 80,000 tonne ship at 25 knots+.
I'm neither a naval architect nor have direct experience in the nuclear navy so someone with more expertise could certainly improve on these ballpark estimates.
The commercial edge would be faster transit times, allowing more turnarounds and more paying tonnage per annum (hence more revenue) plus lower energy costs against the increased capital costs and manning costs for a nuclear ship.
I've been expecting some sort of announcement for some time - maybe there is some aspect I'm missing.
The trans-Atlantic market could also be served although the commercial edge is not as great in there.
Nuclear is coming none too soon to help replace coal and ng for electrical consumption, thus freeing coal for liquid fuels (and thereby staying on-topic) and ng for home heating. TVA communities with existing nukes have already voted in favor of new construction; my guess is that contracts will be let within three years in spite of the waste problem. ANd, the DOE could solve the latter overnight by promising Nevada to only store the small amount of short-lived non-actinide fuel at Yucca Mountain, taking possession of the hot actinides, which constitute maybe 99% of the waste, for burning in future breeders if and when conventional nuclear fuel becomes scarce.
They have been proposed as combined heat and power plants for siberian coastal towns. They should be good for power limited thirld world cities with a big middle class. And if the cutomers skip on their bills it can be towed away.
I guess one problem is the capital cost and maybe that the fuel has a higher enrichment level then regular nuclear powerplant fuel. Russian reactors also have a bad reputation even if their nuclear icebreakers have run well as far as I know.
I guess public opinion about nuclear ships will change a few years after people start to fight over who gets the next set of nuclear powerplants as a new neighbour.
My guess is that nuclear powered ships will be common when the fossil fuel prices are much higher. I see them in combination with electrified rail as a kind of "proof of concept" that large scaly long distance trade is sustainable for a very long time.
As the power required to propel a ship increases very roughly as the cube of the speed, dropping the design speed to say 20 knots would require only about 82,000 HP, just a tad over half of what it takes to go 25 knots. There is, of course, some optimum design speed that factors in such variable as capital cost, fuel cost, labor cost, and number trips projected over the service life of the ship. This is way super tankers lumber along as something like 15 knots or less.
However, as far as going to nuclear-powered cargo ships, I'm a bit skeptical that will come about any time soon, largely due to the cost. It's not just the cost of the reactor, but the very design of a nuclear-powered ship requires many more features than a conventional power plant (shielding, redundancies, etc). Furthermore, the technical expertise to safely operate a reactor at sea is a whole other level above that of conventional power.
Then, we have the issue of security. Would it be too far-fetched to wonder whether a nuclear-powered cargo ship would need extra security to prevent it from being attacked by either pirates bent on obtaining nuclear material for sale on the black market, or by terrorists intent on causing a major release of nuclear material?
Still, I don't think it is "if" as "when."
The major safety issue with nuclear electric power plants is ensuring that the core is ALWAYS covered with water - the equipment to provide that assurance is a large chunk of the capital cost of a nuke.
When a reactor is at sea, this is less of a problem!
It is true that current submarine cores are made of highly enriched uranium and are in no ways proliferation-resistant. One could use <20% enriched U-235 (the usual cutoff) at some performance and volumetric cost but a very large container ship would have advantages over a submarine in having more room for the layout.
As to vulnerablity, it is pretty difficult to lose a 80,000 ton ship. Reaction time to a boarding or hijacking would need to be considered in the design - on our subs, the reactor compartment is welded into the hull - you have to break the ship apart to get to the cores. Actual volatile and gaseous radioisotope inventory is small since 120 MW shaft equals maybe 450 MW thermal. The new big nuke plants are now rated at 4500 MW thermal so the whole ship would only have a tenth of the bad stuff at equilibrium.
Overall, it seems a couple of orders of magnitude LESS risky than LNG tankers.
We'll see how it develops - just know that alternatives to oil-fueled shipping are out there.
http://www.treehugger.com/files/2005/08/sky_sails_promi.php
If anything, I expect PO to drive us to more water modes of freight transit. Trucking will not go away because there will always be some industries that value speed and locational flexibility (i.e., not needing to be near the sea port or rail yard) far more than the cost savings that may be realized by lower fuel costs. But the firms that can organize in a way to shift more of their shipping to rail and water modes will be at a distinct advantage.
Still, this brings up an interesting issue, and that is: much of our problem with energy stems from trying to get energy into a liquid form so that it can be used for transportation. The presumption is that liquid fuels are necessary for transportation. Well, perhaps they are not.
I don't think that this question has been sufficiently explored.
Most any biomass will serve to make charcoal. Making the charcoal from fast-growing algae would be interesting.
http://abcnews.go.com/Technology/WhosCounting/story?id=1077586