Saturday, October 22, 2011

The Oil Drum: Energy and Economic Growth 1980-2009

The Role of Energy in Economic Growth

Ecological economist David Stern recently wrote a paper on the importance of energy for economic growth aptly titled 'The Role of Energy in Economic Growth'. His overview paper follows a long chain of biophysical research on this topic from Schumpeter in the 50s to Georgescu-Roegen in the 70s to Herman Daly, Charles Hall, Cutler Cleveland etc. in the present day. This type of thinking - that energy is its own special input to the production function and is non-substitutable (we can't make stuff without energy), is still outside of mainstream economic discourse, who follow the classic exogenous growth model (Solow) where labor and capital are all that matter. But if energy is special, and has declining marginal returns (i.e. fossil fuel depletion), that has enormous implications for future growth prospects and the modus operandi for our institutions. Yet it is still widely assumed in economic/financial circles that energy is just the same as other commodity inputs and that a high enough price will create its own energy supply in perpetuity.

Incorporating the premise that energy is separate and unique in the production function is a necessary (but not sufficient) change we have to make to our economic theories. Professor Stern's paper, written for economists, is a step towards bridging the assumption chasm that underestimates energy's role in our human ecosystem. I invited David to write a short overview of his paper (guest post), which is below the fold.


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