Ceteris Paribus

A common phrase in economics is ceteris paribus, a Latin phrase that essentially translates into “holding all else constant.”  In modeling economic analysis, extraneous factors are abundant.  However, in order to achieve relevance from the resulting conclusions, limitations on the factors must be in place.  By only allowing one factor to change, the direction correlation between the factor and the corresponding output is easily observed.  However, such a clear cut relationship is not always the case in economy.

One of the most overlooked and underplayed factor driving the economy is human will.  Explaining human behavior continues to be a century old challenge.  While the general assumption when studying economics is to either maximize profit or minimize cost, analysis becomes difficult when the parties no longer react in such a rational way. 

Female shoppers have long since been criticized for their compulsion for shoe shopping. Their male counterparts receive equal criticism for their desire for faster, louder cars, snowmobiles, jet skis, or essentially, anything fast and loud.  Simple assumptions do not account for this “irrational” behavior. Neither do these assumptions correctly summarize the entire male and female shopping populations.

But why is this important?  Most of the blog entries so far have focused on renewable energy sources in some facet.  But in reality, the entries have only scratched the surface on entire picture of adjusting from depleteable fossil fuels to cleaner, greener options.  Although graphs and models show an even line with a clear switch point, the reality of the transition will be much more obscure. 

What the entries, and most studies, do not account for is human will.  Although many US citizens support the idea of more environmentally friendly options, many are still not willing to change their consumption habits any times soon.  Eventually the price will be too high for the current energy sources, and price will continue to be an incentive to change behavior.

Caution is needed when using price as the only driving factor, however, in regards to changing behaviors.  Entrepreneurs are continuously looking for opportunities to profit, whether by tweaking current systems slightly, or developing entirely new concepts.  Human ingenuity will continue to play a large part in the transition towards more renewable energy use.  Just as cell phones and home computers where unheard of just a few decades ago, the potential leader in renewable energy may not be discovered yet, at least the technology necessary to efficiently harness our renewable sources. 

Forecasting helps provide insight into future outcomes, yet predicted scenarios do not always come to pass as anticipated.  Malthus argued that the world population would grow past its carry capacity and we could no longer feed our growing population.  As the population double, the farmland did not.  Interestingly enough, the amount of food production more than doubled during that same time, thanks to continuous innovation and technology.

Renewable energy may see a similar story.  Its adoption as the main source may be close in the future or still several decades off.  Whenever the transition, human will and ingenuity will continue to challenge the studies conducted under ceteris paribus.