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.
Highlights
Thermodynamics and economicsOn 23 October, 2009 a press release3 appeared, titled: ‘The Financial Crisis: How Economists Went Astray
In the absence of technological constraints, all of positive K, L, E space would be accessible to the economic system, the Lagrange multipliers μη, μρ and the generalized shadow prices si would be zero, and the equilibrium conditions (14) would turn into the cost-share theorem: on the rhs of equation (14) the numerator would be the cost pi Xi of the factor Xi, the denominator would be the sum of all factor costs, and the quotient, which is equal to the output elasticity εi, would represent the cost share of Xi in total factor cost
The reproduction of economic growth in Germany, Japan, and the USA during up to four decades with small residuals, and output elasticities that are for energy much larger and for labor much smaller than the cost shares of these factors, are the principal results of the KLEC
Summary
On 23 October, 2009 a press release appeared, titled: ‘The Financial Crisis: How Economists Went Astray. The observation that since the Industrial Revolution technological progress has manifested itself in increasing numbers of energy-converting devices and information processors, driven by increasing energy inputs and improved by innovations, suggests that ‘technological progress’ results from the cooperation of the production factor energy with capital, labor, and human creativity, as indicated in figure 1 This is the pre-analytic vision that has guided the research presented in this paper. Econometric analyses of economic growth in Germany, Japan and the USA during the second half of the 20th century are the subject of section 3 They result in output elasticities that are for energy are much larger and for labor much smaller than the cost shares of these factors. ‘Summary and outlook’ points out social and ecological problems that arise from the pivotal role of energy in economic growth
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