15 July 2010 [Publications]
Matter and energy conservation laws in economics

Annals of the New York Academy of Sciences published our paper on economics. This paper corresponds to PNPI Preprint No. 2754 printed in 2008. The PNPI Preprints are official publications of our institute that are shared with many scientific libraries of the country and beyond. Our manuscript was submitted 27 December 2007, i.e., it happened well before the global economic crisis broke out.

In the end of 2007 we wrote:
"Mean energy expenditures [in the USA] are 7% GDP. During the energy crisis of the 1980s, the twofold rise of energy expenditures resulted in economic instability when annual GDP increment dropped to the lowest negative values recorded during the entire period. When the energy expenditures returned to mean values, annual GDP increment and economics as a whole stabilized. This indicates that current energy expenditures (7% GDP in U.S.A., ~10% GDP on a global scale) represent the permissible threshold, beyond which economics starts to disintegrate."

When we wrote those words, the latest available data regarding the U.S. energy expenditures corresponded to year 2005, when an oil barrel cost around 55 dollars. Therefore, when in 2008 the oil prices rose more than twice compared to the 2005 level, a global economic crisis became inevitable.

Schematically, the problem consists in the following. Property over oil (or other energy resources) can be compared to property over air. Humans cannot live without air. Therefore, the air proprietors could make other people pay for the air a maximum price just compatible with the viability of those who pay. (That is, one gives away everything one earns for the right to breathe the air one does not own.) The key difference of life essentials that tells them apart from all other products is that the demand for them is saturated irrespective of the price.

Let us imagine a population of 100 individuals, of which 10 people are the air owners. They make the rest 90 pay for breathing. Ninety people work and pay for the air with the products of their work (mobile phones, PCs, bread, new medicines). The ten air owners (let us call them the vacant population, or vacantees as compared to the workers) do not do anything useful for the civilization. They have plenty of time which they spend, among other things, to rapidly increase in numbers raising another vacant generation. In contrast, the ninety work intensely, both men and women, they develop science and technologies; they upbring not numerous but well educated progeny capable of performing further progress. The ninety workers give ten per cent of their production away to the air owners. Still they are at the same time able to increase their productivity thanks to the new technologies they develop.

However, if the population growth of the vacantees is fast and, consequently, the air price goes up quickly, the economic development of the workers halts. The vacantees take everything for the air and zero the economic growth potential of the workers. An economic and societal crisis breaks out. The workers can no longer sustain their economic infrastructure; the plants are closed. The number of goods produced per unit time diminishes. Then the vacantees realize that there is now not so much they can take from the workers. They thus have to lower the air price. As the air price goes down, the workers feel better... This, in short, is the scenario of the global economic crisis, how it starts and how it develops.

In an economic system that allows for property over life essentials like air or water the fundamental laws of energy and matter conservation are violated. For the vacantees, the goods appear from nothing (not in exchange for labor), while for the workers an essential part (10%) of the produced goods disappear as if taken by a black hole. This causes the observed instability.

The remaining 90% of goods are necessary to maintain the workers in the modern population. The workers buy these 90% goods using the money they have got by selling all (i.e., 100%) the goods. This causes the price to rise by 10% and constitutes the observed inflation. (For example, let the workers produce annually 100 cars that cost 1 dollar each. They give 10 dollars to the vacantees in exchange for air. The vacantees buy 10 cars for these ten dollars. In the result, the workers again find themselves with 100 dollars. But now they can buy for them only 90 cars. Thus, the car price rises annually by 10%.)

Modern civilization pays the oil vacantees about 10% GDP (the same percentage characterizes developed countries like USA). Economic growth under normal conditions does not exceed a few per cent GDP. From this it is immediately obvious that a twofold rise in oil prices would zero the economic growth or make it negative. Curiously, none of the economic analysts relate the world crisis to the abnormally high oil prices that preceded it.

Discussion of these problems with the citizens of developed countries (the workers) bring about negative emotions in the latter. These emotions are aimed to unconditionally protect the principles of free market economy in their modern interpretation. No realization exists that these principles guard the right of the vacantees over oil (the air of modern economics) and that a global control over oil price formation is necessary. The workers have been caught into the trap of their own concepts which, as we show, contain a fundamental error.

Breathing costs in animals (e.g., how much power the body spends to compress and decompress the lungs) do not exceed 1% of the total energy budget of the organism. Feeding 10% vacantees appears instead as an intolerable burden for modern civilization. Under such burden it is practically impossible to give anything for the solution of environmental problems. Masked under the free market label, the mechanism of oil price formation in effect represents a severe taxation forcefully imposed on the working core of the civilization. As anything else, the current economic situation should be seriously analyzed on the basis of the fundamental laws of nature.

One can read more here, in details here, and the paper in full here.