Once long ago, I did a study of European energy use and real economic growth that showed its real annual growth rate average of 6 percent, yes 6 percent, seems impossible now, was achieved by real average growth rate of energy consumption of 17 percent, also a seemingly impossibly high figure! Small wonder then that when these numbers or the real effect of these numbers were absorbed by those owning crude oil, there was a shock that eventually resulted in the oil cartel. Of course, Libya was the country providing the oil!
The world has not reacted to the link between energy use and economic growth in a way that realizes high economic performance in advanced economies. Instead, the emphasis of policy makers has been on the risks of inflation arising with expansion of the money supply. The link between money and inflation was understood, but the link between real economic growth and energy production was not.
I produced a short thesis at one of my universities using factorial analysis in which the energy factor dominated real growth and the professor, a Harvard trained individual failed me on it saying that it was not economics. He threatened to fail me all together if I did not write in my exams exactly what he had taught in class.
The idea was that economics could not be a science of the world in which one actually thought! I passed my year, but I realized that I did not belong in university economics programs where one did not think, but instead produced meaningless mathematical theory or restricted empirical analysis that said yes to what the conventional wisdom would support. Don't swim against the current stream was the mantra if you wished to graduate with a decent recommendation.
The world is in a worse mess now, and real thought has not occurred. Economic policies that emphasize low inflation will not produce growth, nor will it solve the energy supply problem. The reason is that to solve the energy problem, the price and profit mechanism as an incentive will not work directly.
It will work indirectly, but that will take time because governments are more interested in promoting and financing shoot-em-ups than in helping third world countries and solving issues of starvation and disease. Look at how the US and UK have slashed the energy research science and physics budgets while spending more on uniforms and meals for troops.
What will work is the dynamics of the copy cat mechanism that I researched at Cambridge University. What governments need to do is pick a winner such as battery driven vehicles or green concrete and go for it in the biggest way without any concern for inflation. Spend, spend, spend on selected technologies like they do for the Olympics and make a huge loss. The cost does not matter.
What will happen is that private interests have to follow or go out of business. If governments produce something and really produce the best of that something, not the communist worst something, but the best, the capitalists will follow. The resulting inflation will be in the technological volcano of the sector the government chooses to spend its money. Once the innovate product is well established and there are no competitors, the government then cuts its losses and auctions the business off the highest bidder without giving protective monopoly rights. This will result in copy cat industry following. The whole shebang is now in the private sector and the costs the private sector were unwilling to bear at the beginning are what they truly were in the first place a social cost to the community. If the community wants a higher real economic growth rate and something soon it can get it b y a mix of private and public enterprise.
The caveat is that the government has to spend in the appropriate direction of technology if it wishes to reap rewards that really benefit the wider community. Unfortunately, the spending now is for stuff it will not privatize well or when it does leads to shoot-outs, such as shoot-em-up technologies that when they do filter into the private sector set such a monstrous example that we continue in the mess that we are in. Why teach companies to proce shoot-em-up or blast-them-away technologies when we can get them entrepreneurs into build-em-right and save-the-starving technologies.
