Thermodynamic laws, economic methods and the productive power of energy

Kuemmel, R., Ayres, R.U., & Lindenberger, D. (2010). Thermodynamic laws, economic methods and the productive power of energy. Journal of Non-Equilibrium Thermodynamics 35 (2) 145-179. 10.1515/JNETDY.2010.009.

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Abstract

Energy plays only a minor role in orthodox theories of economic growth, because standard economic equlibrium 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.

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