How energy conversion drives economic growth far from the equilibrium of neoclassical economics

Abstract

Energy conversion in the machines and information processors of the capital stock drives the growth of modern economies. This is exemplified for Germany, Japan, and the USA during the second half of the 20th century: econometric analyses reveal that the output elasticity, i.e. the economic weight, of energy is much larger than energyʼs share in total factor cost, while for labor just the opposite is true. This is at variance with mainstream economic theory according to which an economy should operate in the neoclassical equilibrium, where output elasticities equal factor cost shares. The standard derivation of the neoclassical equilibrium from the maximization of profit or of time-integrated utility disregards technological constraints. We show that the inclusion of these constraints in our nonlinear-optimization calculus results in equilibrium conditions, where generalized shadow prices destroy the equality of output elasticities and cost shares. Consequently, at the prices of capital, labor, and energy we have known so far, industrial economies have evolved far from the neoclassical equilibrium. This is illustrated by the example of the German industrial sector evolving on the mountain of factor costs before and during the first and the second oil price explosion. It indicates the influence of the 'virtually binding' technological constraints on entrepreneurial decisions, and the existence of 'soft constraints' as well. Implications for employment and future economic growth are discussed.

Economic Growth in the USA and Germany 1960–2013: The Underestimated Role of Energy

“…They are the limits to capacity utilization 2 and automation and result in the destruction of the equality of output elasticities and factor cost shares. This has been shown explicitly by optimizing profit and time-integrated utility subject to these constraints (Kümmel et al 2010(Kümmel et al , 2014(Kümmel et al , 2015.…”

Hypothesis for a Risk Cost of Carbon: Revising the Externalities and Ethics of Climate Change

“…For Fig. 1 The embedded economy diagram of Raworth (2017) shows that the economy is part of an open system that dissipates energy and externalizes entropy as waste heat and matter (reproduced with kind permission of the author) example, Kümmel and Lindenberger (2014) found that primary energy supply was a dominant factor in economic production in three major developed economies; and Lawrence et al (2013) found that the global per capita distributions of energy consumption and carbon dioxide (CO 2 ) emissions are converging on a common exponential distribution without being directed to do so using public policies. The HMH takes a new approach in biophyiscal economics by deriving a policy for a global carbon reward based on a reversal of the carbon tax, whereby the Second Law is used to justify a condition of time-asymmetry in the dominant social agreements/responses that comprise these two policies (refer Sect.…”

The Impact of Entropy Production and Emission Mitigation on Economic Growth

“…In the second half of the 20th century, the cost shares have been roughly 30% for capital, 65% for labor, and 5% for energy in highly industrialized OECD (Organization for Economic Cooperation and Development) countries, and therefore energy plays hardly any role in mainstream economics. Contrary to that, the KLEC model yields output elasticities that are for energy much larger and for labor much smaller than the cost shares; for details on the development of the model, its mathematical proofs, and its quantitative results, see [1,10,29,30] and references therein. In the following, we only reproduce its basic equations.…”

“…They, and Y 0 , have been determined by SSE (sum of squared errors) minimization. The resulting output elasticities of the production factors for Germany, Japan, and the USA, and more econometric details, are given in [1,10].…”