What is value? how do we determine it in economic systems? That’s the big question for this post, and I can tell you that you are gonna have your mind blown. Well, maybe.
It all starts with a little tiny concept I’ve been working on that unites the idea of variety in cybernetics with the concept of entropy in thermodynamics. I won’t get into the nitty gritty of this until later, but the main idea is that the way we calculate entropy in thermodynamics DIRECTLY USES VARIETY, and this is the fundamental connection between the two sciences. Basically, if we have the model right, variety determines entropy, and two systems interacting must have their varieties (and by association, entropy) be equal to one another to achieve equilibrium (read: stability).
That’s really tangential to the whole business of determining economic value, but it is related in a way. In the human environment, we are dealing with energy as this fundamental unit of exchange between two systems. This is something pretty well grounded in physics, and I hypothesize that it can be used to determine the value of products in an economy. Some really nice folks over at the DMSG (That’s the Dialectical Materialism Study Group, check them out HERE! No, really… Big favor, CHECK THEM OUT) believe this is the case as well, and can be a way to upturn our current notions of value in many ways.
So, my idea was to really get down into the nuts and bolts of the problem. To do this, we need to be able to model how industries manufacture products for people.
In a phrase, how much energy does it take to produce widget X?
STEP ONE: ALL MATERIALS OF ALL PRODUCTS AT SOME POINT COME FROM THE NATURAL ENVIRONMENT.
This is demonstrably true, and is a very crucial component in the idea of Vertical Integration, which means that a firm or organization that is involved in manufacturing goods owns every step of the process:
That’s the one on the left. Cattle eat grass, and that grass becomes cattle over the long term. Natural resources are gathered into raw materials:
It takes energy to make this happen in terms of transportation, labor, and also a little bit of waste heat (read: entropy) as a consequence. That’s the first step, right there at M_0. We now have raw materials from nature.
STEP TWO: RAW MATERIALS ARE PROCESSED INTO PRIMARY MATERIALS FOR MANUFACTURING.
This is an easy jump. Just as we processed materials from nature to get the raw materials, the raw materials can be processed into what I call primary materials. This can be visualized as say, taking big ass trees and cutting them down into planks of wood. The process looks like this:
As you can see, we have the energy expense from M_0 to P_1, energy is used in processing, waste heat is created from the processing, and energy is expended for anything from transportation, labor to store and prepare for whatever subsequent processing is next.
STEP THREE: PRIMARY MATERIALS ARE PROCESSED INTO SECONDARY MATERIALS, TERTIARY MATERIALS AND SO ON…
Another easy jump. Just as in Step one, we are seeing energy expended, entropy added, and additional energy expenditure used to create the secondary materials. One might think of this as taking those planks of wood from Primary materials and forming them into anything from 2x4s to plywood and so on. Those secondary materials are used in the tertiary processes, such as say turning the wood into commonly used components of a house or something.
The number of processes will vary from industry to industry. Some will have 5. Some will have 2. BUT the major idea is that all along the way, energy is being used to work this material into something else, just as we see here. In this model, all n-ary materials M_n are directly produced from materials present in M_n-1. The process is a chain.
STEP 4: MATERIALS ARE USED FROM THE PROCESSES AT THE END POINT IN THE FORM OF END USER PROCESSING.
This is the part where after all the super awesome components are created, starting from the raw materials from nature, you get your birdhouse, iPhone, or whatever. God help you if you actually got an iPhone. This process in itself requires the same transport/labor energy expenditures as well as the process energy expense to get the product made and into your hands. Depending on the situation, this could in fact require materials from any of the n-ary processed materials, and so the case you see here is an end user product requiring material from each, and this imparts an “operations” energy cost.
You now have your product.
STEP 5: WASTE PROCESSING.
Nothing lasts forever. After you have gotten the functional use from your product, this system says, “HEY! Bring in on back to waste processing so we can get some use outta a portion of that material again!” The same goes for every little bit of waste produced from every process along the way in the manufacturing process.
This of course takes energy expenses to gather and transport, and additional process energy expense for the materials in question. Entropy is released and we find that we have a portion of the raw materials left to bring back to M_0. Note a said a portion of these materials. Everything has a loss, and that includes anything from metal recycling to wood reclaiming.
STEP 6: THERE ARE MULTPLE INDUSTRIES SERVING THE SAME CONSUMERS AND TAKING RESOURCES FROM THE SAME NATURAL WORLD.
Strangely enough, not every industry has their own little personal Earth by which they can extract resources. As it happens, we need to be able to SHARE those resources to ensure we use them to the necessary ends of getting the people what they need. So, we remove the consumer and natural resources from the industry diagram entirely like so:
Those “blue squigglies” between each industry suggests a coordination between them, since in principle it might be the case that Industry 1 requires some product that Industry 2 produces and so on. In this scenario, Industry 1 effectively becomes a consumer of Industry 2.
OKAY COOL, WHAT DOES ALL OF THIS MEAN?
In short, mapping all of the processes back to a terminal point, and “thermodynamically” mapping the course by which resources are acquired and reformed. From this perspective, we can begin analyzing the “energy cost” of any given object.
Be aware that this is a proposed model of organization which would be compatible with the Viable System Model. Each of these industries would in effect be a System one of the models, which entails value production and operations of a larger recursion. If this sounds weird to you, I highly recommend taking a look at the WIKIPEDIA ARTICLE for additional explanation of the VSM to understand what I’m getting at. Additionally, I also recommend reading Brain of the Firm by Stafford Beer for more in depth information.
GOT IT, SO HOW DO WE CALCULATE ECONOMIC VALUE BASED ON THIS MODEL?
Good question. This can get “in the weeds” really quickly so we are going to take this one step at a time. Take a look at step one. From nature to M_0, there was an “operations” energy expenditure. Call this:
Special Note: For the purposes of this model, we are measuring energy in Joules.
Take a look at Step 2. There was an operations energy from the raw materials to the processing step of the primary materials, applied processing energy, and then an applied operations energy to primary materials. Call these values:
,
and
respectively.
So, let’s say we were only interested in the energy costs of the material made at Step 2. The total energy cost of a single product/material at this stage could be written as:
We can generalize this equation to give us the total energy cost at the n-ary material as seen in Step 3:
I know. Scary. Don’t be afraid. Hold my hand if you need to. All you need to know is that this equation helps us know how much energy it costs to get to the final materials processing part as seen in Step 3.
Moving right along…
Okay, so in step 4 we see we added the additional parts of the manufacturing process that meets the end user. As laid out above, the we assume that the final product might entail using materials from each portion of this process, and this is a special case. That being said, it also represents the maximal amount of energy required to get the final product created. Granting all of that, we can derive the total energy cost of producing the product and getting it into the hands of our people with the following:
Let’s call each of the operations energy costs from each material step
Let’s call the processing energy cost from End User Processing:
and let’s call the operations cost from End User Processing to the consumer:
So, the total energy cost for the production of a product from nature to user would be:
No pressure, right? This isn’t the end of the story. Let’s say that the consumer uses the product until the end of its life cycle, and then sent it to material processing. The cost of processing this product will be like this:
Call the operations energy cost to gather and transport said product to waste processing:
And call the actual processing cost:
Total waste processing cost for this product would be:
Then the regained materials are sent back to the beginning, starting the cycle over.
So, the entire life cycle energy cost of a product would be simply:
See? That was only mostly painful.
BUT there is one more thing we need to consider. For any materials within the product, only a percentage of it will be salvageable. This unsalvageable material must be taken into the account in terms of cost. In the aluminum industry, anywhere from 75 to 90 percent of aluminum is recoverable. some of it is lost in the recycling process in the form of slag, vapors, etc. In order to recover that lost aluminum, additional mining and processing of ore must be done to return the total amount we started with.
So, let’s make a simple example. You have an aluminum spoon of 20 grams with a total energy lifecycle cost of X. After processing the spoon, the total recoverable amount of aluminum is 16 grams, if we assume an 80 percent recovery rate.
In this example, the materials cost the consumer “pays” for the use of the spoon is 16 grams of aluminum, in which they received 20 grams originally. There is a net loss of 4 grams of aluminum. Here’s the kicker: there is an energy cost per gram in terms of mining and processing that has to be made up to “balance the books” so to speak. Let’s say this cost is Y joules per gram. This is the cost to get the materials from nature in order to get that material back into the industrial system. That additional energy might be relatively small in comparison to the rest of the costs, but it is one that is necessary to really “close the loop”.
When I say “close the loop”, what I’m really saying here is that we are considering ALL energy costs, including loss recovery, and this is as a matter of fact the cost of the spoon. So, the energy cost of the spoon (including material recovery energy costs in this example is:
That’s a spicy meatball, especially the Y portion. As it turns out, the aluminum we have in our system is aluminum we do not have in nature. Ostensibly, since the Earth is finite, the amount of aluminum on Earth is finite. So, the more aluminum we have in our system, the higher the recovery energy costs. This is related to some work done by economist Nicholas Georgescu-Roegen, and essentially the act of extraction means that there is less to extract. The less there is to extract, the more energy will be expended to find the ore necessary to replace our losses. As a result, there are two things we can glean from this example:
1.) The more we have in our coffers, the more we energy we need to get more.
2.) Because of (1), it becomes clear that there is a fundamental limit to economic growth – directly linked to our ability to recover and find more resources.
Isn’t that CRAZY?
So, let’s REALLY bring it full circle from the beginning of this selection with entropy. As you can see, every part of this industrial system I devised has loss via heat. The amount of energy we put into the system is only so useful because of the 2nd law of thermodynamics: entropy must always increase no matter what.
The “industrial system” I propose is in “thermodynamic disequilibrium” with its context environment (EARTH). The entropy of our system is lower than the environment, and this is essentially how useful work is done in our system. The introduction of energy and matter from the environment is how we do this.
What’s happening from a cybernetic standpoint is that the variety of the environment is being attenuated. On the other hand, the variety of the industrial system is being amplified though feedback, which is essentially what this whole system is doing to begin with. We amplify our variety in order to keep it requisite with the environment, per Ashby’s famous law.
If we didn’t do this, and let things go “willy nilly”, eventually our variety would equalize with the variety of the environment, reaching stability at the expense of system. The machines would shut down, the people would stop working, and moss would start growing on the sides of the building. This is because variety is in fact a part of Boltzmann’s equation for entropy. As Variety increases, so does entropy. As Variety decreases, so does entropy. It’s an amazing thing. These realizations are the reason I do this. I’ll actually go into this deeper in another post.
Any case, you’re probably tired, eyes glazed over from all the fancy symbols, so I’ll cut it off here.
Thanks for sticking it out!
