The Key Role of Energy in Economic Growth

by

Robert U. Ayres, Paul E. Brockway, Emmanuel Aramendia

• LAST REVIEWED: 25 September 2019
• LAST MODIFIED: 25 September 2019
• DOI: 10.1093/obo/9780199363445-0121

Introduction

Most articles on energy and economics focus on aspects such as the price of petroleum, the cost of electric power, or the demand for domestic air conditioning or industrial heat. Those topics are about the factors driving producers to invest in different sources of supply, and the factors affecting demand. Instead, this article is about how energy acts as a crucial factor of production and as a driver of, or barrier to, economic growth. It also explains how it happens that conventional economic theory neglects the role of energy, and discusses the implications of that neglect in terms of explaining past economic developments and forecasting the future. This article presents the key thermodynamic-based concepts for studying the relationships between energy and the economy, and finds that upcoming energetic constraints mean the neo-classical illusion of a global, perpetual economic growth machine will fail, and most likely sometime soon.

General Overviews

The role of energy in economic growth requires understanding from various strands. First, on the side of energy, Smil 2017 provides a very good starting point for understanding energy use in a global, historical context. Related to the concept of energy, Sciubba and Wall 2007 provides an excellent explanation of the second thermodynamic law and the definition and historical use of the term exergy (as potential work). Second, on the side of economics, Coyle 2015 provides a good history of the development and use of economic output, specifically gross domestic product (GDP). The statistical linkage between energy and economic growth is well reported, for instance in Csereklyei, et al 2016. A brief history of the development and use of production functions—used by mainstream economists to add up economic growth—is given by Mishra 2010. The flaws in mainstream economics is well laid out by Keen 2011 in the author’s classic book Debunking Economics. Third, on the side of the impacts of energy use, the IPCC 2014 provides the most comprehensive report on the impacts of rising greenhouse gas emissions, which occur mainly from fossil fuel burning. The economic impacts of energy-related greenhouse gas emissions is best covered in Stern 2006. Last, bringing these strands together, few comprehensive summaries of the thermodynamic (exergy) based role of energy in economic growth exist as books. The two most relevant are Foxon 2017 and Ayres and Warr 2010.

• Ayres, R. U., and B. Warr. 2010. The economic growth engine: How energy and work drive material prosperity. Cheltenham, UK: Edward Elgar.

  This books present a theory of growth based on energy, measured most precisely as useful exergy, namely the energy available for producing work within an economy. It is shown that such a theory of growth can account for 20th-century economic growth in both the United States and Japan, without resorting to exogenous technological progress, conversely to neoclassical growth theory.

• Coyle, D. 2015. GDP: A brief but affectionate history—Revised and expanded edition. Princeton, NJ: Princeton Univ. Press.

  This book recounts the history of GDP indicator, from its invention in the 1940s and its evolution until current times. The strengths and weaknesses of this indicator are discussed, and it is concluded that although GDP might have been an appropriate indicator in the 20th century, it is proving increasingly inappropriate.

• Csereklyei, Z., M. Rubio, and D. I. Stern. 2016. Energy and economic growth: The stylized facts. Energy Journal 37.2: 223–255.

  DOI: 10.5547/01956574.37.2.zcse

  In this article energy and GDP data from 1971 to 2010 for a panel of ninety-nine countries are reviewed. It is found that there is long-term evidence of relationship between energy use per capita and GDP per capita, and that the energy use per capita has tended to decrease in countries that have become richer, but not in other countries. Other findings include that energy use per capita has tended to rise and that the energy quality has tended to increase.

• Foxon, T. J. 2017. Energy and economic growth: Why we need a new pathway to prosperity. London: Routledge.

  This book provides a review of the role of energy in economic growth and in the waves of industrial change. The history of energy sources and technologies is presented, as well as the ecological challenges associated with the current economic growth paradigm, and the needed low carbon energy transition is discussed.

• IPCC. 2014. IPCC Fifth Assessment Report: Climate change. Cambridge, UK: Cambridge Univ. Press.

  IPCC reports are a comprehensive review of the most recent scientific literature related to climate change. The First Assessment Report (FAR) was published in 1990, the Second Assessment Report (SAR) in 1995, Third Assessment Report (TAR) in 2001, Fourth Assessment Report (AR4) in 2007, and most recently the Fifth assessment Report (AR5) was published in 2014.

• Keen, S. 2011. Debunking economics: The naked emperor dethroned? London and New York: Zed Books

  In this book, mainstream economic theory is sternly questioned, as numerous flaws and inconsistencies are presented and discussed. Keen discusses the reasons of the recent economic crisis and what ought to be done in order to better the economy’s situation.

• Mishra, S. K. 2010. A brief history of production functions. IUP Journal of Managerial Economics 8.4: 6.

  In this work, the history of production functions and aggregate production functions is presented. This includes notably the beginning of the concept, the different functional forms that were suggested as the early Cobb-Douglas proved limited, and attempts to include energy flows in APFs. The main limits and criticisms addressed to the aggregate production function approach are equally presented, including the Cambridge Capital Controversies and the underlying identity criticism.

• Sciubba, E., and G. Wall. 2007. A brief commented history of exergy from the beginnings to 2004. International Journal of Thermodynamics 10.1: 1–26.

  This article presents a comprehensive review of the exergy concept. The historical development of the concept is described, as well as its main applications, which includes very diverse fields such as engineering, complex systems analysis, life cycle analysis, and societal systems analysis.

• Smil, V. 2017. Energy and civilization: A history. Cambridge, MA: MIT Press.

  DOI: 10.7551/mitpress/9780262035774.001.0001

  This book provides a historical review of the relationship between energy and society, and of how energy has shaped society across the ages, from foraging societies to the current fossil fuel–based industrial society.

• Stern, N. 2006. The economics of climate change. London: Cambridge Univ. Press for H. M. Treasury U.K.

  This book, also known as “The Stern Review,” represents the most extended and well-known work discussing the economic impacts of climate change. Available for purchase online.