A paper shows that the failure to describe modern economies adequately is not due to the introduction of calculus into economic theory by the so-called 'marginal revolution' during the second half of the 19th century, when the mathematical formalism of physics decisively influenced economic theory. Rather, the culprit is the disregard of the first two laws of thermodynamics and of technological constraints in the theory of production and growth of industrial economies.
Energy is ten times more important than its cost
If one foregoes cost-share weighting and determines the output elasticities of capital, labor, energy, and creativity econometrically, one gets for energy economic weights that exceed energyʼs cost share by up to an order of magnitude, and the Solow residual disappears. The production factor energy accounts for most, and creativity for the rest of the growth that neoclassical economics attributes to 'technological progress'.
According to the cost-share theorem, reductions of energy inputs by up to 7%, observed during the first energy crisis 1973–1975, could have only caused output reductions of 0.35%, whereas the observed reductions of output in industrial economies were up to an order of magnitude larger. Thus, from this perspective the recessions of the energy crises are hard to understand. In addition, cost-share weighting of production factors has the problem of the Solow residual. The Solow residual accounts for that part of output growth that cannot be explained by the input growth rates weighted by the factor cost shares. It amounts to more than 50% of total growth in many countries. Standard neoclassical economics attributes the discrepancy between empirical and theoretical growth to what is being called 'technological progress' or, sometimes, 'Manna from Heaven.' The dominating role of technological progress 'has lead to a criticism of the neoclassical model: it is a theory of growth that leaves the main factor in economic growth unexplained', as the founder of neoclassical growth theory, Robert A Solow, stated himself.
New Journal of Physics - How energy conversion drives economic growth far from the equilibrium of neoclassical economics
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Energy is ten times more important than its cost
If one foregoes cost-share weighting and determines the output elasticities of capital, labor, energy, and creativity econometrically, one gets for energy economic weights that exceed energyʼs cost share by up to an order of magnitude, and the Solow residual disappears. The production factor energy accounts for most, and creativity for the rest of the growth that neoclassical economics attributes to 'technological progress'.
According to the cost-share theorem, reductions of energy inputs by up to 7%, observed during the first energy crisis 1973–1975, could have only caused output reductions of 0.35%, whereas the observed reductions of output in industrial economies were up to an order of magnitude larger. Thus, from this perspective the recessions of the energy crises are hard to understand. In addition, cost-share weighting of production factors has the problem of the Solow residual. The Solow residual accounts for that part of output growth that cannot be explained by the input growth rates weighted by the factor cost shares. It amounts to more than 50% of total growth in many countries. Standard neoclassical economics attributes the discrepancy between empirical and theoretical growth to what is being called 'technological progress' or, sometimes, 'Manna from Heaven.' The dominating role of technological progress 'has lead to a criticism of the neoclassical model: it is a theory of growth that leaves the main factor in economic growth unexplained', as the founder of neoclassical growth theory, Robert A Solow, stated himself.
New Journal of Physics - How energy conversion drives economic growth far from the equilibrium of neoclassical economics
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