This is the second post in a series written by Paul Bennett, PhD candidate in economics at George Mason University.
Will the E-Cat Create Jobs?
This is very difficult to predict – at least in the short run. There is some evidence that technology improvements initially have a negative effect on the overall economy, but the theory and empirical evidence also predicts that after a period (which can be anywhere from a month to a year) the economy recovers to its previous level and then expands beyond the original level.
Unfortunately the E-Cat is not your typical technological shock. In a typical technological shock, the new technology allows a product to be made with less manpower than the old technology. The initial dip is caused by two effects:
(a) the staff who used to be employed by the old factory are laid off because the new factory can produce the current demand for the good with fewer staff, and
(b) the inventor of the new technology uses his monopoly position to keep the price of the good close to the price using the old technology and thereby reaps the reward for his genius.
As time passes, the economy seeks a new equilibrium. This new equilibrium will have a higher real value of human labor than the previous equilibrium (before the technology improvement). This must be so because the good that previously took 5 people-hours to produce can now be produced with 3 people-hours.
The E-Cat is different from the above typical technology shock for two reasons:
(a) the cost of oil is not very sensitive to technology: the price is driven by a number of factors that are unrelated to the cost of extraction and distribution or the human effort required to perform these functions,
(b) the size of the shock to the economy could be so disruptive that it could take a very long time to recover from it: the Great Depression lasted for at least five years and it is not clear that it would have ended then if the Second World War had not occurred, and
(c) the product (energy) is such an enormous factor in the economy that a reduction in its price creates a stimulus even before we start adjusting the equilibrium.
I do not know how many people are employed in the oil, coal, and fission industries, or how many people will be needed to produce the equivalent amount of energy using E-Cat technology. It is therefore difficult to assess what the impact will be. Because the owners of oil reserves are currently reaping such enormous profits just from the fact that they can withhold oil from the market to obtain the maximum profits, it is not clear that the E-Cat cannot produce power more cheaply than using oil even if E-Cat power were to require more human labor per watt-hour than the same power produced from oil.
The new technology will certainly create new jobs, but it is not clear that these will exceed the ones it destroys in the old technology sectors, or that the people laid off can easily fill the new positions. The profits made by the current owners of oil reserves will vanish, but the profits made by Mr. Rossi and his investors may be set at a level that only reduces the consumer price of power by a small amount. On the other hand if Mr. Rossi and Co. can produce power for a real cost that is significantly less than the cost using oil and they can effectively protect their patent, they will become so rich that it is difficult to imagine that the rest of the world will allow them to keep their money (Mr. Rossi could easily become the world’s first trillionaire!). Ultimately, the economy will benefit from the introduction of the E-Cat, but it is not clear that this will happen very quickly – except for Mr. Rossi.