Business and indeed most people believe that economies must and will grow for much the same reason they believe in God or in the power of Prayer. It is politically proper. But what justifies the assumption that growth is automatic? The answer is, simply that the easiest assumption about the future, ceteris paribus, is that it will be like the past. Businesses, politicians with this mindset are possibly in for a shock.
Peak oil
Energy Security
Carbon Constraints
Limits of assimilative capacity
Competition for scarce resources
Technology asymptotes It is important to recognise that there is no quantitatively verifiable economic theory of growth. This presentation is about energy, technological progress and economic growth. The engine of economic growth is a positive feedback loop involving the substitution of energy and machines for human labour. Historically this industrialisation process leads to cost reduction, lower prices, increased demand, higher profits, investment, R&D, production experience and – once again – lower cost. Since all economic activities involve transformations of natural resources into products, energy and information services, they are ipso facto inefficient, by the Second Law of thermodynamics. Consequently they consume exergy. Hence the economic system can be regarded as a materials processing system driven by useful energy (exergy). The first stage of the processing sequence is the conversion of crude exergy inputs – such as sunlight, wind, flowing water and fossil fuels – into something called ‘useful work’, the product of exergy inputs times conversion efficiency. To explain past economic growth, we use the production function approach. With the usual cost-share assumption the output elasticity of each factor of production is its exponent in the familiar Cobb-Douglas function, but to account for actual historical growth it is necessary to include an exogenous time-dependent multiplier (called total factor productivity). In fact, with the cost-share assumption most of past growth is unexplained, and for purposes of forecasting, it is simply assumed. We drop the traditional cost share assumption (which we believe is unjustified). With useful work as a third factor of production in a non-traditional production function (known as LINEX) we can explain historical growth for the USA and Japan since 1900 without the need for an exogenous multiplier. We have extended the approach to forecast US growth in the coming decades and for developing countries.
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