keen
The Deadly Wisdom of Economicshttps://www.theepochtimes.com/the-deadly-wisdom-of-economics_4583336.htmlThe war in Ukraine has emphasized Western Europe’s dependence upon Russian energy exports, and a group of mainstream economists decided to consider what might happen to the German economy if Russia effectively reduced the supply of energy to Germany by 10 percent.
Their conclusion, in a working paper entitled “What if? The macroeconomic and distributional effects for Germany of a stop of energy imports from Russia”? (in German, with an English appendix),
was comforting: a 10 percent fall in energy would only reduce GDP by one-sixth as much: “economic losses from a -10 percent energy shock could be up to 1.5 percent of German GNE … GNE losses of an embargo on Russian energy are small.” (Bachmann et al. 2022a, pp. 2,8).
In a Vox editorial, Bachmann and his co-authors observed that there had been “Public fear-mongering about the catastrophic consequences of an energy embargo from lobby groups and affiliated think tanks.” But they rejected this “fear mongering” because it “does not hold up to academic standards” (Bachmann et al. 2022b).
Which is a pity, because the
empirical data shows that, at the global level, the relationship between changes in energy and changes in GDP is 1:1. Figure 1 plots the annual change in energy against the annual change in global GDP between 1970 and 2017, and one fits the other like a glove. If energy falls by 10 percent, then on the historical record, GDP will fall by the same amount.Figure 1: Chart showing the relationship between change in global energy in percent per year, and change in global GDP in percent per year. The two series are virtually identical. (Steve Keen)
So who are you going to trust—the empirical evidence, or assurances from economists that contradict the empirical evidence?
...
The key one for this paper is that
the Neoclassical model assigns a trivial role for energy in production. Bachmann notes that in the simplest version of the model, the so-called “Cobb-Douglas Production function … a drop in energy supply of … 10 percent … reduces production by … 0.4 percent.”
This is sheer nonsense.
In the real world, energy is critical. Energy enables workers and machines to turn raw materials into useful products, and without energy, nothing will happen. As I put it in an academic paper, “labor without energy is a corpse; capital without energy is a sculpture” (Keen, Ayres, and Standish 2019). You also can’t substitute for energy: if you don’t have energy, then you can’t use something else to make the machines work.
What if Germany is cut off from Russian energy? | CEPRhttps://cepr.org/voxeu/columns/what-if-germany-cut-russian-energy