Methodological Overview - Economics and Ecology: United for a Sustainable World - page 11

The same analysis must be applied to energy. If, for example, General
Motors buys a tire from Goodyear to put on a Chevrolet, part of the purchase
price must be allocated to compensate for prior expenditures on energy by
Goodyear, and indeed even earlier by the owner of the rubber plantation;
the collection, processing, and shipping of the raw materials; the creation of
the tire; shipping of the tire to the supplier; and thus to Goodyear, Chevrolet,
and finally the new owner of the automobile. This is clearly the reality, even
though the tire does not, on the surface, appear to represent a direct pur-
chase of energy in all its various forms along the way to its new owner.
Although it is not our purpose here to critique the work—and the poten-
tial mistakes—of these early economists, one point is instructive. By assum-
ing nothing is of value until human effort is expended on it, they essentially
assumed the bounties of nature, such as forests, water, minerals, and the
life-giving endowment of incoming sunlight, were free. Of course, they
were groping for a rationale to affix pricing in a marketplace, and a so-
called “free good” did not compute in the calculation of a fair price. This
early ignoring of nature's services and their essential, real value to human-
kind exemplifies our critique of the “money-centeredness” of today's typical
economic analysis. In fact, this early uncoupling of economics from the eco-
system services underpinning the flow of energy that drives the economy
is a seminal error, which still contributes to the tendency of economists to
think only in terms of how dollars flow, as opposed to the systemic flow of
real energy—and of other valuable land-based resources—of which dollars
are symbolic.
By using an input-output analysis, the new—and dramatically increased—
estimate of inflation pointed out that the energy sector was responsible for
about two-thirds of the inflation we were experiencing. In other words, in
the absence of the price disruptions caused by Oil Shock, the rate of inflation,
compared to the late l960s, would have increased from 4 percent to between
6 percent and 7 percent as opposed to the 12 percent we experienced. Given
that economists (in the language of the day) were ascribing some inflation
to the delayed impacts of simultaneously waging Lyndon Johnson's war on
poverty and the war in Vietnam, this would appear plausible. The Consumer
Price Index was approaching that level by the precise time of the OPEC oil
embargo in October 1973.
This recalculation of the role played by the energy crisis in explaining the
highest historical rate of inflation in the United States to being responsible
for about 65 percent of the impacts from an initial estimate of less than 10
percent indicates something more profound than just a slight underestima-
tion. It suggests that the economists, like pretty much everyone else, did not
understand the role of energy in our overall economic structure.
Two observations are significant. First, the tools customarily employed
are overly linear, seeking simple, symptomatic cause and effect, and do not
adequately represent a systemic point of view, which not only recognizes but
also accounts for the importance of holistic relationships. Second, as was just