null Episode 14: Biophysical Economics

Episode 14: Biophysical Economics

00:44:57
January 2021
Episode 14: Biophysical Economics

In this roundtable discussion, Mellon’s head of Small Mid Cap Equity Research explores the emergent field of biophysical economics with Professor of Economics and Sustainability at Wells College, Kent Klitgaard.

Rafe Lewis: Hello, and welcome to the first 2021 episode of Double Take, the Mellon podcast. I'm your co-host, Rafe Lewis, Mellon's Director of Investigative Investment Research. I hope and trust you had a restful and peaceful winter holiday, because well, it doesn't necessarily feel like peace and rest will come easily in 2021. And I just want to point out as usual over the last nine months, we are recording this podcast from our home offices due to the pandemic. So please excuse any dog barks, sound quality issues, doorbell rings, et cetera.

Jack Encarnacao: Yes, Rafe. And I'd like to echo the well wishes on the new year. I'm your other co-host and Investigative Researcher here at Mellon, Jack Encarnacao. And on today's episode, we delve into an emergent theme that we believe will garner more and more attention from investors in the months and years to come. It's a big new year and so we're going to start with a big idea. The topic is biophysical economics. And no, that's not somehow a way to accurately price hip replacements. Rather, biophysical economics is a nascent economics framework and is emerging at a time when investors are increasingly implementing factor analyses that take into account environmental, social and governance risks in any given investment.

So here's one definition of biophysical economics that hopefully gets us started. Biophysical economics is the study of the ways and means by which human societies procure and use energy and other biological and physical resources to produce, distribute, consume and exchange goods and services while generating various types of waste and environmental impacts. Biophysical economics builds on both social sciences and natural sciences to overcome some of the most fundamental limitations and blind spots of conventional economics. It makes it possible to understand some key requirements and conditions for economic growth, as well as related constraints and boundaries.

Rafe: So that was probably a lot for some of you to mentally unpack as you're riding your exercise bike, or walking your dog while listening to this podcast. But do not worry. We're going to spend the rest of this episode understanding the history, the rationale, the impact and the future of biophysical economics. It should be intriguing for those of you who've been watching the birth and maturation of biophysical economics too, so in other words, not just total layfolk like Jack and I, as we try to spin it forward and understand how this framework could fundamentally alter how investors and analysts value assets going forward.

And to help us wade through this intellectual thicket, we have two big brained individuals, Patrick Kent, Senior Portfolio Manager here at Mellon, and a Co-Founder of a biophysical economics institute that's still in stealth mode, and Kent Klitgaard, Professor of Economics and Sustainability at Wells College in the glorious Finger Lakes region of my beloved former home state of New York. A couple more thoughts to set the table here before we get into what is a little unusual for us. At Double Take, we try to conduct often two separate interviews, one with our in-house thinker and one with our outside of Mellon guru. Not so today. This will be more of a free flowing discussion among Kent, Patrick, Jack and myself. So in other words, there could be a little crosstalk, it could be lively, it's going to be different, and we hope that you enjoy it.

Jack: It could be lively, it will be lively. It will be lively.

Rafe: Let's hope it's lively.

Jack: Yes. It will be lively. We can say that for sure. So Patrick, let us start with you. You're a career investor, a guy who's managed a sustainability fund in the past. So, we need you to help us in layman's terms. First of all, lay out for folks what biophysical economics means. What biophysical even means. What does this all entail?

Patrick Kent: That's great because I listened to that definition and that was a mouthful.

Jack: Yes, correct.

Patrick: So, let's start really basically. Biophysical economics is about biology and physics, right? Biophysics. So, integrating the natural sciences into economic thinking. Economics, the economy, as we know, it exists in a physical world that is governed by physical laws, and yet it doesn't take into account many of those in its theories. It's for the traditional neoclassical economics, for the most part, is an abstraction. Now it's not really based in biophysical reality.

Rafe: So the ivory tower is not made out of ivory.

Jack: Not based (in) biophysical reality. That is to say, classical economics assumes that growth will continue past what the natural world tells us it can support.

Patrick: Well, right. Or that there's even a concept like growth equilibrium, right? A growth equilibrium doesn't exist in the natural world. Growth equilibrium is like a heat death. That is means no change, which means nothing's happening. Right?

So systems don't grow at equilibrium, that's a false construct and an oxymoron. So therefore, we sort of need to rethink what even makes an economy grow. And to do that, I think we need to sort of understand what makes systems grow in general. And, usually that's energy and material inputs. And so, you could almost say that systems don't necessarily just grow that equilibrium. What they do is they expand and contract, which is of course, something we've seen economies all the time, but if they are growing it's because there's a sort of imbalance of inputs.

Jack: Let's speak to some of those inputs. I mean, essentially I think of a human being with his or her hands can only produce so much energy, can only do so many things to produce energy with their hands. And when it comes to using technology and innovations, to be able to have that person produce that much more energy, that's obviously a multiplier. But there's still a limit. There's still a wall there, and it sounds like what you're saying is this equilibrium notion just does not comport with what we all know to be biophysical limits on what people can produce themselves, or even with the assistance of machines, that we have to think more about those limits, those walls.

Patrick: Well, we have a tendency to focus on innovation and innovation driving productivity. We have to ask yourself like, what is innovation itself? And part of that is really about overcoming sort of thermodynamic, I would say, not overcoming barriers, but take increasing sort of the efficiency with which we do things, or creating more energy available to increase the scale of the system. Right? So when we think of most all of the critical human technological advancements over time in history, going back up through all of recorded history, as far as we know, are generally about energy capture and approving the efficiency of its use. That could start with very literally sharpening a stick into a spear, which concentrates the force behind the point, right? Or releasing the chemical bonds in wood through combustion, which generates heat and light.

So, establishing sort of a knowledge of photosynthesis, which allows us to sort of direct that sunlight towards the things we want to grow versus the thing and clearing away the things we don't want to grow, right? Those are all uses and flows of energy and materials that are the modern economy, right.

And over time, we continue to sort of build the knowledge and know-how of how to change these stocks and flows of energy. I mean, you brought up a great point. When we look at the scale of the modern economy, just try to put it in the context of what could a human being do without the sort of the support structure of the modern economy. I mean, let me ask you this. If you fill up your car with gasoline and drove it till it ran out, how many friends would it take to push it back to where it started?

Jack: Right. A whole heck of a lot.

Patrick: Right? So-

Jack: You just couldn't.

Patrick: Right. Well, the scale of that modern energy support goes way beyond what a human being is native ability and what they're capable of. Right? And that may be obvious, but it's maybe leads to some not so obvious conclusions. One person's sort of efficiency at converting energy or available energy into work. So mechanical work, be that typing a note or talking on the phone or driving a car or digging a ditch, whatever you're doing, that's mechanical work that we do. And so, creating that sort of muscle work that we do with one, we're not terribly efficient engines at converting energy to muscle work. We only do that at about sort of 20%, maybe. So, the peak output of a human being, if I worked you six days a week, every week from sunup to sundown, you might produce maybe, 375 kilowatt hours of energy per year.

Rafe: As Jack's manager, I can say he puts out more than that, but yes, generally.

Patrick: Yeah. I mean, he does give 110%.

Jack: Here on double take it's always present company excluded. That's correct.

Patrick: That's right. That's right. So, but multiply that by the total population of the world, and then you reach a max theoretical output of all the work we could possibly do. That's probably about two petawatts of energy, which is a lot of energy.

But compare that to the total current global annual energy consumption, which is 160 petawatts. So like-

Jack: Those numbers, again, Patrick? I want those to sink in.

Patrick: Maybe two petawatts, if everybody was working to do all this work, six days a week, from sunup to sundown, every week of the year, right. You've may be produced two petawatts of total work. Now compare that to 160 petawatts of current energy consumption globally.

Jack: Wow.

Patrick: So really, what it says is if you do the kind of the back of the envelope math, each person has sort of 80 energy assistants helping them to accomplish the storing and processing and matter acceleration work of stepping on your gas and moving your car and towing something someplace, or moving your stuff or driving a delivery truck, or sending a message, sending an email.

I mean, any one of these things takes energy. And every piece of that work then is converted at an efficiency rate. And so, as I say, human beings are probably very, very low in terms of the efficiency with which we can convert energy to work. The calories we take in to the output is actually not that high. Right? But, you can see through first the industrial revolution, but then all too, as we start to think about electrification, these are not just about the, let's say the environment, moving to electrification, for example. It's also about just efficiency and about converting energy to work.

Neoclassical economics really just concerns itself solely with sort of utility and self-interest as the driving components. It's a social science, not really a hard science. It doesn't conceptualize an explicit role for energy in what we call the production function. Right. And that's, I think some of the source of some of the fragilities around the theories.

The growth theory really focuses on labor and capital and the quantity of the total output of the system. And as I say, it's much more of an abstraction. There's no real room for useful energy or to throw another word in there, entropy, right? It's considered to just be a circular system where individuals and businesses exchange income. But in there, as I said before, there are expansions and contractions, but mostly because it's just kind of mathematically convenient that we assume this kind of growth equilibrium. It doesn't really come from observation outside of a very short time of human history.

Rafe: All right, Patrick. Well, that was extremely helpful. And it turns out as a layman, I needed a layman's definition. So I'm feeling a lot better now as we move on into the podcast, but help me with another key aspect of this, which is, so you are our in-house evangelist at Mellon, when it comes to biophysical economics. You also happen to be a portfolio manager for opportunistic strategies and have a hand on the tiller with a lot of the small mid cap stocks. So tell me, how are you applying biophysical economic theory in a day-to-day sense with your investing?

Patrick: I think a couple of ways. I mean, one, I'd say that biophysical economics for me is a, since it's a very different way of maybe looking at some of the economic function that goes on in the world. It allows us to sort of maybe see themes and emerging themes that may not be obvious to others. Right? An example of this would be, I think most people listening to this would probably be familiar with sort of the growth in renewable energy as part of the grid. And, but do we understand some of the maybe biophysical constraints of that, right? It's not really, it's something where you could just take out fossil fuels and put in renewables. Other things have to happen there, and it's going to have other second order effects on the grid and on where capital needs to go.

That creates some, some long dated themes. And so, how does that translate maybe for, and this would kind of get to the second part, how does that translate for looking at, from a bottom up, at stocks. And say, when you're trying to understand the intrinsic value of a business, is what we do with every single company we're looking at on the opportunistic side, it's to look at what we think the cashflow is of this business will be over, not just the most immediate or forecast period and what we think is kind of more normalized, and then we have to have some assumptions about what it may grow at beyond maybe the next few years that we can really see. And to raise our confidence in that forecast one way or the other, it helps to have sort of a theme behind it that we know will have some legs.

And, even more importantly, if we know that there's kind of biophysical reality, that is going to assert itself, okay. And I say, I'll tie this back to the renewables and grid, because as renewables become part of the grid, it's just a reality that the energy output per unit of infrastructure is much lower. So it means that the picks and shovels and other things that are going to have to happen around that, have a long runway of growth. Almost as long as renewables themselves. And so there are other businesses that will benefit from that, and should be reflected in their intrinsic value.

Rafe: So, to understand the long-term cashflow generating potential of a company, the long-term profit generating capabilities of a company, you need to understand kind of small as sustainability of the inputs and outputs.

Patrick: That's a great way to say it too, because, I can say small s or large S, right? Because as I think all of the finance community and investment community has started to embrace big S sustainability, it is something that oftentimes is not very well defined. Like what does it mean?

Rafe: It feels to me like, like biophysical economics is kind of really popping now in a sense, because earthlings have figured out that, and resources are finite, the ability to pump carbon into the atmosphere is finite. And therefore we need a new framework maybe, to be able to appreciate these limitations.

Patrick: I think that's right. I mean, I got involved in sort of ESG sustainability impact going on almost 10 years ago now, because I thought it was something that the investment community we would begin to see and be important. It would become more important. And I think it has, and I kind of feel that biophysical economics is very similar. That this is something that's not in the mainstream yet, but I think as we are trying to understand sustainability, because that's certainly how I came to some of these ideas, is through doing the research around sustainability and impact investing, that I think these are ideas that are sort of time is coming in a sense, right? That we need a better understanding of what drives productivity and what drives innovation. And what does that even really mean?

I think that's, that's why biophysical economics is going to be important. From the perspective of Mellon, what I think it really does is what I've kind of alluded to here, which is, it really creates a framework by which we can not only sort of understand our thematic investing, but even have a platform to create more themes, right? Because where you see the points of friction between the biophysical economy and the real economy, or the biophysical economy and the sort of abstract economy, that's where I think you can find sustainable secular themes.

Maybe I'll give you one quick example about that. Because as I said earlier, electrification of transport is something that I think most people believe is sort of happening because of the environmental benefit. And I think that it is, to some degree, but I gave a presentation a few years ago called the inevitability of electrification, because when you look across the sort of the energy efficiency of every sector in the economy, it tracks very closely with how much electricity has penetrated as a percentage of the energy input of that industry.

So whether it's commercial, industrial, residential, and then transportation, you see that transportation is the lowest conversion efficiency for energy to work. And it also has the lowest penetration of electricity. And the reason partly behind that is because electricity is very high quality energy. It converts to work at very, very high efficiency, right? It's at 90% plus versus say like, we've been working on the combustion engine for a hundred years, over a hundred years, and at best you're going to sort of get 30, 35, 40, 45% conversion efficiency. And it gets sort of exponentially harder to improve it from there.

Where you're starting with something that's electrified, your conversion from energy to work is already over 90%. So to me that says there are certainly lots of sub to look at inside of say, like EVs or the electrified trucks, or any of these, any other ways that we want to look at mobility. But the reality is that this seems like an inevitability, just because of the energy efficiency of it.

Rafe: Kent, why don't we turn to you as the academic at the table, because I think it'd be really interesting for some of the folks out there to hear the history of biophysical economics. What is the origin story here? Has it always existed really in some form, and it's just being rebranded here? Or is this truly a novel approach to economics?

Kent Klitgaard: Well I think it is a novel approach to economics. I mean there's a whole field of biophysics, which is more physiological. It was the brain child of John Desmond Bernal, the historian of science back in the 1920s. But I think biophysical economics, I think it started to appear in the late 1980s, the early 1990s, when just the idea that the economy is not an entity in and of itself. First, it's embodied with nature, right? The economy is a wholly owned subsidiary of biophysical systems. And as such, it has to obey the laws of science, thermodynamics especially, and it has to be consistent with other approaches. I mean nobody, right? The Republican party is not going to solve our economic problems by repealing the second law of thermodynamics. I mean it simply isn't going to happen. We are constrained by nature's law and a good economic theory...

... reigned by nature's law, and a good economic theory needs to take that into consideration. And so I think biophysical economics is very close to another related discipline called ecological economics, that once again started to appear in the late 1980s and early 1990s, when the idea of the embedded economy. And I think the idea is that a good economic theory that takes care of the embedded economy, while I certainly do my share of mathematics and abstraction, I think many of the fundamental tenants of mainstream neoclassical economics are inconsistent with other social sciences, especially the behavioral science. When you pause it, there is this rational economic person, homo economicus, who is individualistic, has self-regarding preferences, never does anything altruistic, maximizes everything, and deals in a world of powerless firms, facing all knowing consumers who are willing to work and get no profit.

So you're a financial analyst. You work for Mellon. So I know that equilibrium, which was a concept pretty much appropriated from physics, it's a state where there is no internal tendency to change, so as finance guys, why don't you tell me this? If I were the CEO and I came before the board and said, "I am so proud to report, once again, consistent with the assumptions of neoclassical economics, that we made no profit once again. I'm so proud of that," would you have a tendency to want to change me?

Jack: Patrick, take that one.

Patrick: Well, I mean, Kent is sort of, I think, highlighting a couple of the inconsistencies of the different sort of economic schools of thought that currently exist with the reality. I think what Kent's saying, and Kent, correct me if I'm off base here, is that there are certain assumptions around economic schools of thought, certainly neoclassical economics, that in neoclassical economics, as the underpinning of sort of the modern financial thinking, and the modern financial system, has some inconsistencies with nature and reality. And one of those would be sort of this idea of a growth equilibrium, which doesn't exist really as a thing anywhere, right? Certainly systems contract and they expand, but nothing just sort of stays in an equilibrium state of growth. Equilibrium state would mean sort of heat death. Nothing's changing, to sort of the point I think partly that Kent was making.
        
Rafe: That's a pretty good segue in a way, because what I'm hearing from you guys is, as I try to synthesize what you're both saying, is it feels to me like biophysical economics and ecological economics were kind of both born of this realization that started to happen in the 1980s. That A, you had climate change starting, right? B, that there was not an infinite number of organic and physical assets that we could tap such as oil, that these things were going to come to an end, and that sustainability was kind of now a necessary framework for us to build into our thinking, not only in economics, but you name it. Politics and every other discipline. Is that a fair assessment?

Patrick: I think that's right. Kent, maybe I'll ask a question to Kent directly, and then he can tell you, because I think it will answer a bit of what you're getting at there, Raph, which is, Kent, would you say that if you look back over the history of sort of different schools of economic thought, and as they've evolved over time, neoclassical economics really has only been the dominant school of thought over the last less than 100 years, or about around 100 years.

Kent: A little bit more. Pretty much starting in the 1870s.

Patrick: Okay. But I guess my point was more that there are ... Would you say that if you go back further than that, economics was much more a study of absolute scarcity, and became one of relative scarcity, and maybe it's actually moving back toward one of some absolute scarcity?

Kent: I do believe that is true. And I really think that in the whole period of what was called classical political economy, pretty much from the 1750s until the 1870s, the primary way we managed to get our energy was through photosynthesis. So basically the ownership of land was the basis of wealth, and if really all you had to fall back on was one year's solar flow, that energy would be quite limited. And so consequently, given a very rigid class structure, if you owned, you didn't work, if you worked, you didn't own, that the fate of most people was a lot of long hours of physical labor for a bare subsistence. And so the idea of kind of limits to growth in the limited amount of photosynthetic capacity made classical economists distinguish really, really carefully in between value and use, that something indeed is useful, and if it wasn't useful, it couldn't be bought and sold, and then value in exchange. And they were completely separate, and usefulness had nothing to do with exchange value or price. That was all based on the amount of human labor time that was embodied in production.

And so around the 1870s, in three different places in the world, in Switzerland, in Austria, and in England, William Stanley Jevons, Leon Walras, and Carl Menger came up with the idea that this labor theory of value is dangerous, because workers now believe that since they made everything, they deserve the whole product. There are a whole bunch of people who called themselves Ricardian Socialists, named after David Ricardo, who had put the labor theory of value together. And so there was just all over the world, this headlong push to get rid of it. And so the distinction between absolute scarcity and relative scarcity kind of disappeared with getting rid of the labor theory of value, and kind of now usefulness or utility became the basis of value and price.

And so I think that also it was that time that the implementation of fossil fuels, both in metallurgy and in mechanized factories, especially cotton mills, were able just to produce so much additional value, so much additional product, that-

Additional value, so much additional product, that now the belief and the reality that we could kind of transcend that, kind of [inaudible 00:20:10] limits of nature with the basis of economic theory. And I think one of the things that biophysical economics looks at is what happens when those limits of nature start to reassert themselves? That when energy is no longer cheap and we can... Which I think will have the biggest impact on agriculture, because right now, we take about 10 calories of energy to produce one unit of food. I mean, modern agriculture is pretty much turning oil into food by means of land, but all our transportation has been transcended.

So what's going to happen to the economy once those limits reassert themselves, both in the sense of the availability of energy resources and the ability of the atmosphere to assimilate carbon? I read right before the podcast that accordingly to several different climate journals, in 2020, carbon emissions actually went down for the first time in a long time.

Rafe: No doubt a function of reduced economic activity and movement, right?

Kent: Right.

Patrick: It only took a 40% contraction in the economy to get a 6% reduction in carbon emissions.

Kent: And so kind of what I'm doing with biophysical economics is like, how do we get a society that can meet people's needs and reduce carbon emissions without a pandemic and a recession?

So I think a lot of what I do is I'm trying to look at the actual structure that we're living in. We're not living in an atomized economy where there's no technological advantages, that everybody makes the same thing. We live in kind of a world of globalized production, growing degrees and monopoly, the increasing financialization of the economy. If you look at profits from manufacturing, they're headed down and profits from finance is going up.

And so the economics part of biophysical economics kind of starts out with the idea that we need to analyze the world we're in, not this abstract world that's largely devoid of economic reality.

Patrick: And the strongest tether I think between the two to sort of what Kent's alluding to here is the energy return on energy invested. So just think back to what you were saying about the sort of late 19th century, early 20th century and the rise of fossil fuels, and certainly the earliest fossil fuel resources that were exploited were the highest energy return on energy invested resources.

So if you think sort of the early days of the energy industry, one barrel of energy that was invested in drilling would result in a hundred plus barrels of energy back out. And that's really been coming down over the 20th century. And when we think about sort of nature's constraints reasserting themselves and sort of thermodynamics, I mean, that's really the point.

Because I could imagine someone listening to the podcast would say, "Well, what constraint? We seem to have too much energy. In fact, just recently, there was negative energy prices looking at the the contracts." Well, I think what we'd say is like look at the futures market. And what I say is like, "Yes, but step back and look at the where the type of activity has gone," right? When we look at say even in the shale plays where they produced oil, if you look at the inflation adjusted price of oil over close to 100 years, it's really been about $20. And then now most recently, the industry has cardiac arrest at $40.

So it's telling you something has structurally changed. And I think that's where we sort of see this energy return on energy invested starting to assert itself.

I think if someone came up next week with cold fusion on a desktop that had an energy return, energy invested of a hundred plus, then lots of things become really feasible that are very, maybe even uneconomic today. Some of those resource constraints we worry about maybe in the declining quality of war grades around the world in say copper or gold or any of these things. I mean if you have unlimited energy, you can go back into the tailings of these mines, you could go back into landfills and they become mines.

You can sort of imagine, if energy is the constraint that allows you to transform and reform the world, then it is sort of the thing that would really make the difference. I think what I'm kind of looking at today is that we don't have desktop cold fusion at least yet. So I'm living in the real world of what we do have. And the fact is renewables today are a lower energy return on energy invested than say fossil fuels. As I say, it's not necessarily a bad thing. It just is a thing that need to be aware of, as you think about, again, the sort of second or third order effects of these decisions that are being made. It's not just a plug and play of remove fossil fuel, put in renewable. It has lots of other implications for economic structure, for example.

In a way, biophysical economics is kind of a theme of themes. They're not just these, these different themes around mobility or internet of things or smart cures or these ... we find that certainly all of those are themes, but the question is, so why are they themes and what are the themes of the future? And I'd say that that's where something like a structure like biophysical economics maybe helps to even generate what the future themes might look like.

Jack: So Patrick, bring us back to thinking about this in terms of public equity investing, in terms of setting out a framework that I presume would, what? Prepare someone invested in the markets for what Kent was talking about, nature reasserting itself. Is that the strategy, is that the framework to be at the vanguard of that and be prepared for that?

Patrick: Yeah, I think that's right. I think for me, the usefulness in biophysical economics is to help sort of reframe the production function itself. Because when you think about it, and Kent's probably going to have to correct me because he's the professor of economics, not me, but-

Patrick: Oh, now I'm in really dangerous territory then.

Jack: Tread lightly.

Patrick: But I stop thinking about this, it's really sort of just thinking about the economy from two sides of sort of the scale, right? There's the production function and then there's a distribution function. And there are two different things at work there, and those are the two sides of the balance sheet.

And certainly when I think of the production function and as we look at sort of how assets are valued, how capital is allocated, where capital will be allocated or need to be allocated in the future, I think it's important to rethink the production function in terms of sort of these biophysical structures. And it's not just labor and capital in the abstract, right? We can now start to break it down into terms of sort of, what I would call, they're still working age population or labor is certainly the most important component, but then you have sort of information-laden capital let's say, and then you have sort of energy, that energy available, right? Which is a function of that energy return on energy invested. And then I'd even say maybe the efficiency with which that energy gets turned into sort of thermodynamic work.

And that all sounds very abstract, but I think the important thing for me from thinking about that for investing is for each thing that happens, we want to be thinking about not just first order effects, but second order or third order or fourth order effects. And I think where understanding some of these biophysical constraints helps is to sort of help you to extrapolate where maybe second order or unintended consequences can come from decisions that are made. And I'll give maybe an example just to make this as concrete as possible.

If we look at the square meters of infrastructure needed to produce energy in the utility space, if you are a coal fire power plant or a natural gas fired power plant, the square meters of infrastructure needed are actually quite a bit less than if you move toward renewables. That's not to say renewables are necessarily a bad thing. They're absolutely going to be continued to be grown and be part of the grid, but what we want to be thinking about is then what are all the associated other consequences of that growth, right?

And so I think while it is an energy source with a declining cost, it is also a lower energy return on energy invested than earlier fossil fuels, which means more capital will be flowing toward energy production in that space. Hopefully that makes sense.

Rafe: Patrick, can I follow up on that thought for a second?

Patrick: Yeah.

Rafe: And I'll throw it to you and to Kent and Jack, which is this, if we spin our society forward 30, 40 years here where you have a fully renewable grid, let's say, or you're fully on solar, wind and battery storage, is this an evanescent kind of economic framework to think about? Is this only useful biophysical economics as long as you have a constrained energy source?

Patrick: I have an opinion about that, but I'll kick it to Kent maybe to answer his view.

Kent: Well, I mean, I think a couple things. I do not think we are going to replace all the energy we generate from fossil fuels by renewables. I think that the future will be one of using less energy. And I think the average American consumer tends to be quite wasteful with energy. I grew up in a desert area. When I came back East into a humid climate, I was just simply appalled by the amount of water people used without paying any mind. And I think most people have grown up in this country with such abundance fossil resources that most people, unless they're quite poor and it becomes a money issue, don't think about the embodied energy…

…when I turn on my tap and do dishes under water, okay, that means that I'm using electricity to run the pump and I'm using natural gas or propane to heat the water. 

But often when people talk about sustainability, one of my first questions is what are we sustaining? I mean, are we sustaining capital accumulation and economic growth in our present consumption and investment patterns? Or are we sustaining living within the environment and living within nature's limits? And I don't think people will really be able to grasp that until nature's limits impose themselves a little more feverously than have been so far. But hopefully when that happens, even though I'll be long gone, biophysical economics will be there as a guideline on how to have a reasonable living within nature's limits. I don't think we have critically hit that threshold, but I do think probably within 100 years, the depletion of cheap fuels and the catastrophic climate change will largely be hitting at the same time. And I think people will be thinking differently when the conditions that they live in are different.

Rafe: Well, the Earth's resources may be finite, but my curiosity about the topic of biophysical economics is much closer to infinite. So on behalf of Jack and myself, we thank you for guiding us through this most interesting of discussions, Patrick and Kent. And folks out there, if you like what you've heard today, please consider subscribing to Double Take, where we hope to delve into a deep well of hot investment themes in the months and years to come. Stay safe out there.

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