Corynomics

My friend and esteemed colleague at South Dakota Magazine online, Cory Heidelberger, has developed his own theory of economics. I owe it to Cory and the world to say just how daring and innovative it is. It has been presented in his many posts on the Keystone XL project and recently in a post in reply to yours truly.

Here are some highlights. Conventional economics holds that when a country imports some raw natural resource, say crude oil, and then refines it domestically, and then sells it abroad, that is a very good thing. The term for that is "value added", and it is the most important source of national wealth.

According to Corynomics, refining something and selling it to other countries is a very bad thing. That is because then the other country gets something good from us. It is especially bad is the purchaser of the refined material is China. I think we can infer an unstated Corynomic principle: that trade deficits are very good, since the other country is selling more value-added products to us than we are to them. I told you the theory was daring! A lot of fundamental economic models will have to be put on the dust heap.

According to conventional economics, increasing the supply and flow of some resource, say crude oil, will result in lower prices for that resource in an open market. Again, this is a fundamental principle. According to Corynomics, however, increasing the supply and flow of some resource will actually increase the price of the resource. So the Keystone XL pipeline will result in an increase in the price of gas.

If all that isn't daring enough, Corynomics includes a novel theory of economic development. I pointed out that federal subsidies per megawatt hour for wind and solar power dwarf federal subsidies for fossil fuels and nuclear power. Cory has this reply:

But let's focus on one major flaw in Dr. Blanchard's thinking (shared, it appears, by anti-government crusader Rep. Paul Ryan): apply his anti-subsidy reasoning with consistency throughout American history, and we might still be burning tallow and cow patties in our sod huts and taking the kids to town by horse…

The federal government intervenes in the energy market to help new industries get on their feet, expand our energy supply, and reduce costs in the long term. The federal government has provided "seed money" of this sort for every major form of energy we use today, including and especially fossil fuels. Coal, oil, natural gas… heck, even wood (made more cheaply available through big 19th century land grants) received federal support in their developing years that made energy cheaper and more abundant. Many of those subsidies continue to this day.

According to conventional economics, the driving forces in development are private industry and innovation and the ultimate source of energy is untapped natural reserves. Government can contribute, of course, in two ways. Government secures property rights, which is a vital encouragement to industry and innovation. Government can also subsidize innovation, but that means moving wealth from existing productive enterprises to developing ones. Government can't make one thing cheaper except by making something else more expensive. In fairly short order, the subsidized enterprise needs to show a return, if government subsidies make sense.

Corynomics sweeps all this away. No form of energy production, including burning wood apparently, would have gotten off the ground without government subsidies. I do have to wonder about the structure of subsidies among those hunter-gatherer bands that discovered fire.

Such is the power of government subsidies that we don't have to ask whether the new technology will really, ever, produce more energy than it consumes. It would be rude to ask how many acres of land need to be covered by solar panels and wind towers to replace more than a fraction of the energy the nation will need in the future. It would be unforgivable to wonder why biofuels, which have depended on subsidies, are still dependent. Government subsidies are the source of all real economic power.

I am genuinely impressed by the daring of Corynomics, but I am not altogether convinced by it. Can one really believe that wood would not have been burnt for fuel without land grants? Can one believe that coal, oil, and natural gas would not have been exploited by people looking for opportunities without a little green from Congress? Cory apparently believes both things. I can believe neither. 

I believe, for example, that the industrial revolution owes a lot to dissidents from the Church of England who went in search of new forms of power precisely because they were excluded from the official economy.  Viable sources of power are, well, viable.  That's where all real power comes from, and all subsidies just move it around. 

Now: would the wind industry or the solar industry exist today in their present forms without massive government subsidies? I say no. Is there any reason to believe that these technologies will ever supply more than a fraction of the power we need? I know of no reason to think so.

Corynomics may be the right economics, if not for this world or for this kosmos, maybe for some parallel universe. At this position in the space-time continuum, it looks like proof of what I have argued: that the left in general and Cory in particular have no energy policy.

Comments

[caheidelberger]

As usual, Ken, you give me much to rebut. For the moment, let me focus on just one of your points, the argument about whether Keystone XL will increase the price we pay for gasoline. That's not just Corynomics; it's magnapetroleonomics. TransCanada itself has said in official documents that they anticipate clearing the glut of oil in the Midwest by shipping it to the Gulf with Keystone XL will increase the price producers can get for West Texas Intermediate. The Koch brothers and everyone else in the industry recognize that Keystone XL's business case comes from closing the price gap with Brent crude. Building Keystone XL will add 15 cents per gallon to our gasoline (give or take a nickel). It sounds counter-intuitive, but it's what every oil market analyst but you is saying.

[Donald Pay]

Yeah, this is just repackaged economic acid reflux taken from the Cato Institute and other Koch-funded supporters of the Keystone XL pipeline. Cory, don't put a lot of effort into refuting this nonsense. KB, are you on the Koch payroll, too?

[Bill Fleming]

KB thinks the oil industry is an exercise in free market economy?

[Ken Blanchard]

KB thinks that the law of gravity applies even at Bill Fleming's house and that rises the in world price of oil have something to do with rising demand in India and China. I do not know what Corynomics thinks.

KB thinks that ad hominem arguments involving the Koch brothers have no more logical force than ad hominem arguments generally. He also thinks that the basic principles of economics are not some fraud perpetrated by the CATO Institute.

Finally, KB thinks that an oil glut in one part of the country might conceivably lower prices locally if it were more expensive to move the oil toward higher demand. To suggest that the glut is a good thing is to advocate hording, which is apparently another great innovation of Corynomics. I am troubled, however, by a contradiction. According to Corynomist Fleming, oil is not subject to the law of supply and demand so how is this supposed to work?

KB also thinks that Cory's local price argument is an argument in favor of Keystone because it means that the country as a whole has oil that cannot now be efficiently moved to where there is a demand for.

[Bill Fleming]

Oil prices have been artificially fixed for decades, KB. I assumed you knew that. Same with supply and demand at the refineries. Same with produce coming out of the agribusiness farms in the San joaquin valley, etc, etc.

[Bill Fleming]

For the good professor's edification:
http://auto.howstuffworks.com/fuel-efficiency/fuel-consumption/gas-price3.htm

[Bill Fleming]

Excerpt from above link:
The single largest entity impacting the world's oil supplies is the Organization of the Petroleum Exporting Countries (OPEC), a consortium of 13 countries: Algeria, Angola, Ecuador, Indonesia, Iran, Iraq, Kuwait, Libya, Nigeria, Qatar, Saudi Arabia, the United Arab Emirates and Venezuela.
Together, these 13 nations are responsible for 40 percent of the world's oil production and hold the majority of the world's oil reserves, according to the Energy Information Administration (EIA). [source: EIA]. When OPEC wants to raise the price of crude oil, it simply reduces production. This causes gasoline prices to jump because of the short supply, but also because of the possibility of future reductions. When oil production dips, gas companies get nervous. The mere threat of oil reductions can raise gas prices.

In April 2001, OPEC decided to reduce its collective production by one million barrels per day. This was at the same time that American consumers saw gas prices rise, hitting an average high of $1.71 per gallon on May 14, 2001.

OPEC increased its production in June 2005, when it raised to 28 million barrels per day with an increase of 500,000 barrels per day pending changes in oil prices. In September 2005, it made all of its member countries' "spare output" available, an estimated 2 million barrels per day. However, in November 2006, OPEC again reduced its rate of production by 1.7 million barrels per day to keep the price from falling below $50 per barrel [Source: Joint Economic Committee ]. OPEC's production for the second quarter of 2008 was an average of 36.87 million barrels per day [source: EIA].

[Bill Fleming]

in short, the price of oil (and by extension) is what OPEC says it is. Period. End of story.

(...unless of course you want to Nationalize your energy.)

[Bill Fleming]

above should read "...(and by extension, gasoline)..." sorry.

[duggersd]

Bill, you have a short memory. Even OPEC cannot keep supply of oil low for a long period of time. While they supply 40% of the oil, they do not supply 60% of the oil. I remember one time, I believe in the 80's, when OPEC countries saw the price of oil being rather high and "cheated" on their production. Higher prices also encourage other producers to increase production. It also encourages production of such things as shale oil which will also have an effect on the price of oil. Short term, yes. Long term, you cannot mess with the laws of economics without the laws of economics messing with you.

[Bill Fleming]

Sorry duggerSD, what I remember is, that in addition to what OPEC does, the people on Wall Street speculate (gamble) on what they think OPEC et al might do next which also influences the prices and messes with the market. There is a lot of manipulation and chaos between the oil in the ground and the price at the pump, and to say that it's all demand driven when your commodity is the only game in town is being either hopelessly, willfully ignorant or intentionally corrupt and deceitful, take your pick. In a closed market, he who has the gold makes the rules.

[Bill Fleming]

KB, don't you think its about time you stopped letting Big Oil blow smoke up your ass? ;^)

[Bill Fleming]

DuggerSD, remember how much your long distance calls used to cost? The cost of information in general? Remember how it went from costing that much to its current state of being almost free?

We need to be working on that with energy now. That needs to be the new energy policy. It WILL be developed. And to KB's point, the ones who figure it out will become the next global suppliers of energy. Now, do you want that to be the US? Or India, or China?

I think THAT might be Cory's energy policy, KB. Something like that anyway.

[Ken Blanchard]

Bill: and I assumed that you weren't an idiot. I stand corrected.

[Bill Fleming]

Never assume, KB.

Also, never try to win an argument with an ad hominem remark.

They are too easy to counter, and I am a far more poetic writer than you are, my friend.

Just a fact.

[Bill Fleming]

What KB and DuggerSD fail to grasp is that the demand is for energy, not necessarily for fossil fuels.

Their argument is the equivalent of insisting that there will only ever be a market for computer programs based on the DOS operating system because after all that is the installed base industry standard worldwide.

No vision, nor any desire to have one.

Pathetic.

[duggersd]

I remember what my long distance calls cost. I also know I do not have a telephone in my home any more. I have a cell phone. Private business is what made cell phones possible.
The pathetic thing is waiting for government to do something. Apple and Microsoft revolutionized home computing.
As for energy, if you want to invest in wind power, more power to you. Use you "vision". My brother bought stock in an oil company and has made good returns. The only way you make money in wind is if the government gives you money.
In the area of supply, yes people speculate on oil. They also speculate on corn, wheat, oats, and whatever else there is as a commodity. People also speculate that after advertising their sales volume will increase. All of these things affect the markets. BTW, speculators also get burned. Perhaps you forgot about that.

[Donald Pay]

The research has been done, duggersd. Oil and gas has gotten more direct government subsidies than wind and solar, and that's not counting all the indirect subsidies coming from externalities. The lesson is well established, and it was established first in the oil and gas industry---if you want an energy source to become viable, the government must provide considerable subsidies initially. Your brother has invested in an industry that has gotten and still gets breaks and subsidies. You may think he's investing in a "private business," but that just shows your ignorance of the oil business.

[Ken Blanchard]

Bill: no, you aren't. But I apologize for my intemperate remark. You are no idiot, but you do say silly things. I have no doubt that oil powers try to manipulate the market. Everyone tries to manipulate every market. The idea that oil prices are not subject to the law of supply and demand is just plain silly.

Donald: you say "if you want an energy source to become viable, the government must provide considerable subsidies initially." Apparently you are another Corynomist. Do you REALLY BELIEVE that coal and oil would not have been exploited without government subsidies? Do you agree with Cory that the same is true for wood? I can only wonder what other amazing things you believe.

Even if it were true that no source of energy can be developed without government subsidies, that doesn't mean that any subsidized form of energy will be economically viable. Do I need to mention ethanol? I ask again: is there any realistic prospect that solar and wind energy will ever supply more than a fraction of our energy demand? No. So where is the energy going to come from?

[Stace Nelson]

Professor Blanchard,
You, Sir, are one sharp man.

[Bill Fleming]

"So where is the energy going to come from?"

The sun, radiation, and gravity, where all of our energy comes from.

[Bill Fleming]

...coal, natural gas, and oil are all stored solar energy.

[Ken Blanchard]

Yes, Bill. We are finally in agreement. Fossil fuels are stored solar energy in such a form and in such richness as we can efficiently harvest it. Wind is not. Solar may be one day, but not now or in the foreseeable future.

[Ken Blanchard]

Stace: maybe, maybe not. But thanks.

[Bill Fleming]

"Solar may be one day, but not now or in the foreseeable future."
http://en.wikipedia.org/wiki/Solar_vehicle

This could happen anytime, KB.
All that is needed is a cultural decision to stop using gasoline engines in transportation vehicles.