As climate catastrophe looms, many are reviving the pioneering work of a pioneer in the field of sustainability, INSEAD Professor of Technology Management and Economics Robert (“Bob”) Ayres.
Ayres is considered one of the fathers of industrial ecology – the study of the flow of matter and energy in industrial and consumer activities. His remarkable contributions over the past half century have linked economics with science to illuminate the fundamental role Energy plays in our economies.
On June 29, INSEAD celebrated Ayres’ 90th birthday with a conference recognizing his lifetime achievement. Among the participants were several of the 15 renowned academics who have supported Ayres nomination for a Nobel Prize in Economics.
Ayres’ extensive research underscores the importance of energy as a key driver of the economy. Since the 1960s, he has consistently warned that standard economic models misrepresent and underestimate the role of energy in the economy and its growth, and the associated environmental and climate impacts.
His work shows that our economic and political systems have paid too little attention to the physical byproducts of consumption and production – including polluting waste and emissions. This oversight, including the lack of attention paid to minimizing the physical consequences of economic activity, has fueled the current environmental crisis.
Although published in reputable business journals, Ayres’ findings and warnings have not really caught on, nor have they been sufficiently integrated into mainstream economic thinking.
As Ayres turns 90, let’s take a closer look at some of his key observations.
Energy moves the world
Ayres has been emphasizing for decades that energy is indispensable for any meaningful work and is therefore a basic requirement for any economic activity.
Ayres sees energy as the only important driver of the overall economy. Without energy, he argues, labor and capital cannot produce anything. One of Ayres’ mentees and co-authors, Professor Steve Keen, summarized this on the “[email protected]’ Conference with a metaphor: ‘Work without energy is a corpse; Capital without energy is a sculpture.” Or to put it more simply: a person without food or a machine without fuel cannot do any meaningful work.
Mainstream economic models view “useful energy” as a product or “intermediate product” created through the accumulation of capital and labor. This results in capital and labor being attributed almost all of the value added in the economy, while the role of energy and its value added is marginalized.
To correct this error, Ayres introduces the thermodynamic concept of “exergy” – the proportion of energy flows that can be used productively. Ayres argues – in line with other eminent figures such as Nicholas Georgescu-Roegen and Herman Daly – that economics must explain the first law of thermodynamics, which states that energy transforms into various forms but is neither created nor destroyed by human activity becomes.
Ayres’ unique contribution was to calculate exergy measurements to gain a better understanding of the cycles of materials – such as carbon, nitrate and phosphorus – that are fundamental to life on Earth, and thus to a better understanding of the true economic cycle value of energy and resources.
Based on such an approach, Ayres and Benjamin Warr were able to explain the “Solow residual” – that part of economic growth that in Solow’s original growth model could not be attributed to increases in the capital stock and labor supply over time. They concluded that increasing energy use was the missing explanatory factor contributing to higher growth, higher productivity and a more complex economy.
Distinguish useful energy from wasted energy
From a thermodynamic point of view, energy consists of the sum of two components: a useful component (exergy) and a non-useful component (anergy). With each action or conversion, a fraction of the exergy is converted into anergy, but the total remains the same. So energy is not destroyed, but becomes less usable after every interaction in the global system, whether by humans or not.
Economists tend to think of markets as places where certain exchange interactions—like buying and selling—take place. Each party is said to be better off after the exchange if it’s voluntary. In theory, such an exchange has no impact on other “actors”.
But in the real world, “third parties” can be affected, making them better off or worse off. These unintended consequences are called externalities. Examples of externalities are the release of toxic waste (pollutants) into the environment or the spread of an infectious disease (such as Covid-19).
Ayres first sounded the alarm against these harmful by-products of production and consumption more than 50 years agoin a much-cited article in the American Economic Review entitled “Production, consumption and externalities“. Along with co-author Allen Kneese, Ayres pointed out that economic models of physical processes cannot neglect the physical properties of materials and transformation processes. The models must be “opened” to fully account for the material flows associated with economic activities.
In his work on matter cycles, Ayres relies on mass balance techniques to track the flow of matter in the environment. The method estimates emissions by calculating the difference between known material inputs to the process and its useful material outputs.
One of Ayres landmark studies used this technique to calculate pollution levels in the Hudson-Raritan Basin on the East Coast of the United States. Ayres used agricultural and industrial production data to reconstruct pollution accumulation in the basin. This conclusively showed that pollution levels were much higher than previously estimated by spot checks. This work inspired similar studies in river basins around the world, leading to significant policy changes.
The efficient use of resources
One of Ayres’ early contributions was a Book Released in 1972 on alternative technologies – including electric propulsion – as future replacements for internal combustion engines. Ayres found that the energy from fossil fuels converted into the powertrain of an ordinary car was extremely inefficient, but the auto industry and society in general accepted this waste as normal. Only recently has the industry adopted his observations by vastly improving the efficiency of internal combustion engines and radically switching to electric cars.
More recently, Ayres has been collaborating with Eric Williams shown the high inefficiency in the manufacture of semiconductor devices, which are now part of even the simplest industrial products. They found that geologically scarce metals like “rare earths” are being ruthlessly consumed without reclamation or recycling. This is just one example of an unsustainable and increasingly complex manufacturing process that uses a lot of energy and generates significant by-products.
Ayres makes it clear that the more complex the economy becomes, the greater the risk that it will become unsustainable. Reversing these trends is the greatest challenge facing our planet today. Applying Ayres’ findings on exergy and material flows will be crucial to guide current environmental and economic policies towards a more sustainable future.
*Reid Lifset, Honorary Fellow, Yale School of the Environment; Jeroen van den Bergh and Gara Villalba Mendez, Institute of Environmental Sciences and Technology, Autonomous University of Barcelona; Uwe Schulte, Senior Advisor of the European Governance and Sustainability Center, The Conference Board; Atalay Atasu, Ludo Van der Heyden, Luk Van Wassenhove and Prashant Yadav, Faculty of Technology and Operations Management, INSEAD. In collaboration with Brian Henry, PhD.
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