Sunday, January 03, 2010

The problem of induction and the blindness of fools

The problem with the future is that it's not always like the past. In fact, were this statement not true, history would indeed be "bunk" just as Henry Ford once said. But, of course, history is a chronicle of what changed and therefore led to a future that was different from the past.

So, it is puzzling that such an obvious truism is so easily dismissed when it comes to the future of oil and energy in general. Enter one Porter Stansberry, an investment newsletter writer, who knows that "peak oil is an economic impossibility." In the linked interview he likens oil to copper. We have found substitutes for copper, namely optical fiber, so we will certainly find substitutes for oil in the quantities we need at the time we need them. He insists though that we won't need them for a very long time.

Stansberry is correct when he states that "[i]t does not naturally follow that a limited supply of oil would limit our production of energy." There are certainly many other known ways to extract energy from the environment. Perhaps some of them such as widespread deployment of thorium-based molten salt reactors might validate Stansberry's observation. But then he states:

The idea that we would lose the ability to create energy in an economic way, in my mind, is absurd. The entire history of the human population is nothing but falling prices for valuable commodities-not measured in dollars, but measured in real terms. I have no doubt in my mind that by the time I'm dead the price of energy in real terms will be far less than it is today.

Here he makes sweeping general statements about the past. It is not true that commodity prices have been falling in real terms for all of human history. There have been sustained bouts of rising prices. It is true that real prices for many commodities have been on a roughly downward trajectory from the beginning of the industrial revolution. This is in part due to the rising availability of cheap fossil fuel energy used to obtain those commodities, whether it is metal from ever lower grades of ore or rising farm productivity largely abetted by fossil fuel inputs such as nitrogen fertilizer from natural gas and pesticides and herbicides from petrochemicals.

So, in one respect Stansberry's analysis suffers from failing to distinguish between sources of energy such as fossil fuels and materials which do not provide energy such as copper. Fossil fuels, our main sources of energy, are the prime movers in the industrial economy. We cannot simply substitute some other materials for them without careful discernment. There are many factors to consider such as energy density, portability, energy return on investment, the requirements of the existing infrastructure and so on.

Still, Stansberry may be right in what he asserts about the future or he may be wrong. But one thing he cannot be is certain. It is a truism that no one can prove anything about the future. So, we often choose to extrapolate current trends. This is what Stansberry does, and it is where he moves from logic to mere supposition. Stansberry, like so many of us, falls into the trap of the problem of induction.

The problem of induction is simple to illustrate. Whenever we notice a recurring pattern in events, we often assume that that pattern will persist, and we sometimes make unwarranted claims usually in the form of a general rule:

Karl Popper (1902- 94) was critical of the inductive methods used by science. The empiricist David Hume (1711-76) had argued that there were serious logical problems with induction. All inductive evidence is limited: we do not observe the universe at all times and in all places. We are not justified therefore in making a general rule from this observation of particulars. Popper gives the following example. Europeans for thousands of years had observed millions of white swans. Using inductive evidence, we could come up with the theory that all swans are white. However exploration of Australasia introduced Europeans to black swans. Poppers' point is this: no matter how many observations are made which confirm a theory there is always the possibility that a future observation could refute it. Induction cannot yield certainty.

And, yet on something as important as energy policy, people with the views exemplified by Stansberry hold sway. They do not accept that their view could be in error. To do so would imply a much different energy policy than the one which most countries are now following. Most policymakers stick to Stansberry's view even though there is considerable evidence that fossil fuel production, particularly oil, may begin to decline soon. And, they seem not to understand that existing alternatives suffer from problems of scalability and energy density and face the all important rate-of-conversion problem.

But, one does not have to know anything with certainty in order to decide on policy. In fact, policy is always based on incomplete information about the past and guesses about the future. What policymaking requires, especially in critical areas such as future energy supply, is humility and therefore caution. The amount of caution required depends on the plausible dangers we face. The range of possible outcomes for oil production five, 10, even 20 years hence is so wide as to require excessive caution when planning the world's collective energy policies.

If the optimists such as Stansberry are correct, then policies suggested by that excessive caution will have put global society on a sound road to an alternative energy economy. That would reserve much of the remaining hydrocarbons for high-value uses such as fertilizers, plastics and pharmaceuticals rather than mere burning. If the optimists are wrong, then such policies will be the difference between stability and chaos, between life and death, for the billions that inhabit the Earth.

These are the consequences that might result from the blindness of fools who do not understand basic logic. And, we cannot count on nature to suffer such fools gladly.


Anonymous said...

This essay is so sensible, practical and full of common sense.
It is a wonder that 'we the people' cannot grasp the energy situation and take appropriate action. It must be that 'energy is to us' just like 'water is to fish'.

Daniel said...

It is self-evident that your cautious words are true. I, like you, of course think that energy will become substanially more expensive in the future and that we will experience the death of rationalization during the first half of this century -