Energy return: ratio or net value (revised)

Quite a while back we had a discussion of the idea of Energy Return On Energy Invested (EROEI) as a measure of the viability of solar and wind energy. I did the numbers for solar (including battery backup) and came to the conclusion that EROEI was at least 10 and therefore not a problem.

The issue has come up in an email discussion I’ve been having. Thinking about it, I concluded that using a ratio of energy generated to energy invested is incorrect. As a starting point, I assume that we want to consider energy separately from market goods in general. Producing new energy requires inputs of both energy and market goods (including labour and capital). Think about this example

Technology A uses 1 Mwh of energy input and $180 of market inputs to produce 10 MWh of energy output

Technology B uses 1 Mwh of energy input and $600 of market inputs to produce 20 MWh of energy output

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A whirlpool of speculation around GameStop squeeze

That’s the headline the Canberra Times gave to my article on the implications of the recent short squeezes on Gamestop and AMC . It’s uninformative, but maybe more clickworthy than WallStreetBets and financialised capitalism, the title I gave to the early version posted here. With a bit esprit d’escalier and ignoring word constraints, I’d now go for “You wouldn’t let a bookie manage your home finance, so why let a casino plan our national investment”.

Canberra Times is paywalled, so I’m putting the text over the fold. We should soon resume the standard model where articles are published first in Inside Story (free), then reproduced (with a new headline, natch) in the Canberra Times

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WallStreetBets and financialised capitalism

It’s been hard to miss the chaos that’s arisen from a bunch of Reddit users (on sub-reddit WallStreetBets) getting together to squeeze shortsellers on stocks including GameStop and AMC Theatres. Most of the attention has been confined to the stockmarket action, but I was struck by this piece in The Bulwark[1], making the point that the process has enabled AMC to issue high-priced shares, repay debt and thereby stave off impending bankruptcy.

I don’t have a view on whether AMC should go bankrupt or not, but this is the kind of decision about capital allocation that is driven, in large measure by stockmarkets. The efficient markets hypothesis says that stockmarkets do the best possible job of estimating the value of assets, and thereby guides the allocation of capital. In the absence of the WallStreetBets push, it appeared that the market judgement was that it would be better to steer capital away from AMC, and into some other activity. Now, it’s the opposite.

One possible response is that WallStreetBets is an episode of craziness that will soon pass. But once you strip away newsworthy bits like the role of Reddit and the scale of the price movement, this kind of squeeze (or conversely, short-selling raid) is available, and potentially profitable, to any group of traders who can mobilize the necessary few billion (using options, those billions can be magnified a fair way). That’s part of the reason why stock prices are far more volatile than would seem justified by the arrival of new information relative to future earnings.

If stock prices are more volatile than underlying value, the two must differ most of the time. That undermines the claim that financial markets do a better job of allocating investment capital than would, for example, a central planning board. Even if you don’t want to go that far, there’s no obvious reason why limiting stock trading to (say) once a week would impair the allocation of capital to an extent that would outweigh the savings from cutting the financial down to a small fraction of its present size.

fn1. A Never-Trump website, well worth a look.

Ergodicity economics and rank-dependent utility

Slightly behind the pack, it seems, I’ve suddenly started hearing about “ergodicity economics”, presented as an alternative to expected utility (EU) theory. Commenter James asked me about it here, and I also received from a colleague a copy of a paper in Nature, by Ole Peters, who appears to be the main developer of this idea. The essential idea of ergodicity is that the long-run distribution of outcomes for a dynamic process should match the uncertainty of the process at any point in time. You can get something more precise in Wikipedia. Expected utility starts with preferences over uncertainty at a point in time. Peters argues that things are better understood in terms of evolution over time. I haven’t followed all of the details of this argument as yet.

What piqued my interest is that the discussion involves a lot of discussion of probability weighting and particularly the idea that extreme low-probability outcomes may be overweighted. The most famous expression of this idea is the cumulative prospect theory put forward by Kahneman and Tversky in 1992. Their original prospect theory applied the same weighting function to all events, which raises a number of difficulties. These were resolved using the idea of rank-dependent probability weighting which I proposed in a paper in 1982 (under the name ‘anticipated utility’ and now usually called rank-dependent utility or RDU) .

The underlying reasoning is that, in a dynamic process repeated over time, taking low-probability extreme risks will (very probably) catch up with you. I’m pretty sure I made an argument of this kind in support of RDU back in the 1980s, but I haven’t been able to locate it for now.

This is one of many independent rediscoveries of the rank-dependent approach, with a variety of motivations. I think this reflects the fact that the RDU is, in some sense, the natural generalization of EU.

The Big Apple

That’s the title of my latest piece in Inside Story, expanding my earlier discussion of intangibles and monopoly to take account of Apple’s startling market valuation of $2 trillion. As I observe, this can’t be accounted for in terms of big profit gains

Admittedly, Apple’s business hasn’t been harmed by the Covid-19 pandemic, but neither has it greatly benefited — earnings in the June quarter were only about 10 per cent higher than in 2019, yet the stock price has doubled in less than six months.

It’s mostly about the combination of secure monopoly power and long term interest rates near zero, which increase the value of any stable source of income, like monopoly rents

What should the post-coronavirus economy look like?

The New Daily asked me to write a bit on the question “What should/will the post-coronavirus economy look like?

Here’s what I sent

The Covid crisis has demonstrated the inadequacy of crucial aspects of our social and economic system, particularly relating to employment and unemployment.  Before the resurgence of neoliberalism in the 1970s, Australian governments accepted responsibility for maintaining full employment, and provided support for all those unable to engage in paid work, whether through age, disability or unemployment on an equal basis.  The full employment goal was not always achieved, but it remained central to public policy.  


Over the period since the 1970s, government has passed the responsibility for economic management to the Reserve Bank and required a primary focus on low inflation. The treatment of benefit recipients, except the old, has been steadily less generous and more punitive. Meanwhile governments have focused obsessively on largely meaningless measures of budget balance.


The failures of this approach have been evident for years, but it has taken the Covid crisis to lead to any change. Within a matter of weeks, dogmas that have been in place for decades have been abandoned.


The most important requirement for the post-coronavirus is that we should not attempt to return to a pre-crisis ’normality’ that was unsustainable in almost every respect: social, economic and environmental. Rather, the income support measures adopted in response to the crisis should be maintained, and the government should accept the maintenance of full employment as its core economic responsibility.