Thermodynamic laws, economic methods and the productive power of energy

Abstract

Energy plays only a minor role in orthodox theories of economic growth, because standard economic equilibrium conditions say that the output elasticity of a production factor, which measures the factor's productive power, is equal to the factor's share in total factor cost. Having commanded only a tiny cost share of about 5 percent so far, energy is often neglected altogether. On the other hand, energy conversion in the machines of the capital stock has been the basis of industrial growth. How can the physically obvious economic importance of energy be reconciled with the conditions for economic equilibrium, which result from the maximization of profit or overall welfare? We show that these equilibrium conditions no longer yield the equality of cost shares and output elasticities, if the optimization calculus takes technological constraints on the combinations of capital, labor and energy into account. New econometric analyses of economic growth in Germany, Japan and the USA yield output elasticities that are for energy much larger and for labor much smaller than their cost shares. Social consequences 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.…”

The economic growth enigma revisited: The EU-15 since the 1970s

“…We take the view that useful energy is an important factor of production. We reject the standard assumption that the output elasticity of each factor must be equal to the cost share of that factor in the GDP (Kümmel et al, 2010). We also reject the usual assumption that the functional relationship between GDP and capital, labor and useful energy is (log) linear (as is the case with the Cobb-Douglas production function).…”

From Theory to Econometrics to Energy Policy: Cautionary Tales for Policymaking Using Aggregate Production Functions

“…Second, according to Kümmel [56][57][58] and others, the CSP is valid only for equilibrium economies comprised solely of profit-maximizing firms in the absence of technological constraints-conditions that are seldom, if ever, present. It might seem absurd that mainstream economics employs the CSP, which is based on assumptions that have never been true, are not now true, and never will be true, but such "ideal" cases are common in many fields.…”

“…(See Acemoglu [59] for a neoclassical derivation of the CSP. See Kümmel et al [57] for a derivation involving shadow prices and for an excellent discussion of issues surrounding the CSP. )…”