Growth, more than freedom of capital

We have been discussing a lot of economics through the political viewer lately. And I certainly have laid my point of view out there, but I also like the theory discussion. I like to think and know how stuff works or how someone interprets what they see. I believe discussing theories leads to better political discussion. With that, I hope this might inspire some tangent topics into the political here at AB.

This is a paper out of France by Robert U Ayres & Benjamin Warr titled: Accounting for Growth: The role of physical work

They suggest the increasing extraction of work from energy do to the increasing development of energy use is the missing factor that explains our growth.

“However the major result of the paper is that it is not `raw’ energy (exergy) as an input, but exergy converted to useful (physical) work that – along with capital and(human)labor – really explains output and drives long-term economic growth.” “However, if we replace raw energy as an input by `useful work’ (the sum total of all types of physical work by animals, prime movers and heat transfer systems) as a factor of production, the historical growth path of the US is reproduced with high accuracy from 1900 until the mid 1970s, without any residual except during brief periods of economic dislocation, and with fairly high accuracy since then.”

There key concept is the definition of exergy.

“The formal definition of exergy is the maximum work that could theoretically be done by a system as it approaches thermodynamic equilibrium with its surroundings, reversibly. Thus exergy is effectively equivalent to potential work. There is an important distinction between potential work and actual work done by animals or machines. The conversion efficiency between exergy (potential work), as an input, and actual work done, as an output, is also an important concept in thermodynamics. The notion of thermodynamic efficiency plays a key role in this paper.
To summarize: the technical definition of exergy is the maximum work that a subsystem can do as it approaches thermodynamic equilibrium (reversibly) with its surroundings.”

This summarizes their theories development:

The supposed link between factor payments and factor productivities gives the national accounts a direct and fundamental (but spurious) role in production theory. In reality, however, (as noted in the introduction) the economy produces final products from a chain of intermediates, not directly from raw materials or, still less, from labor and capital without material inputs. In the simple single sector model used to `prove’ the relationship between factor productivity and factor payments, this crucial fact is neglected. Allowing for the omission of intermediates (by introducing even a two-sector or three-sector production process) the picture changes completely. In effect, downstream value-added stages act as productivity multipliers. This enables a factor receiving a very small share of the national income directly, to contribute a much larger effective share of the value of aggregate production, i.e. to be much more productive than its share of overall labor and capital would seem to imply if the simple theory of income allocation were applicable [Ayres 2001a].

If this is true, then we have a bigger problem concerning how to keep this boat floating than subprime lending and fed rates. We have a policy problem. And that speaks to all the work Cactus has done about presidents.

Related to Cactus’ work, this chart from the this paper is interesting. It is the unexplained portion of growth by their theory.

Note that this phenomenon begins right about where we see the lowest point of the top 1% share of income, just after we see the split of productivity from wages and the beginnings of the supplyside policies and a change to a net debtor nation. The authors suggest some of this is do to conservation.

“We conjecture that a kind of phase-change or structural shift took place at that time, triggered perhaps by the so-called energy crisis, precipitated by the OPEC blockade. Higher energy prices induced significant investments in energy conservation and systems optimization.”

They further refine the explanation with:

“The marginal productivity of capital has started to increase whereas the marginal productivity of physical work – resulting from increases in the efficiency of energy conversion – has declined slightly.”

Could this marginal capital productivity increase be a result of our policy focus on capital as the driver of growth? Money from money? Are we seeing in their explanation that part of our growth that is borrowed from our future, thus artificially created?
As I read this paper it made me think about the European economies who have been focusing on alternative energy development, wind in Denmark, solar in Germany, (Japan), wave generation in England and northern parts, geothermal in Iceland/Greenland. This paper to me suggests that this coming election has at the core of all our topical issues (health care, war, inflation) energy. As the authors conclude keeping in mind peak production issues and the declining output of Saudi’s fields:

“From a long-term sustainability viewpoint, this conclusion carries a powerful implication. If economic growth is to continue without proportional increases in fossil fuel consumption, it is vitally important to exploit new ways of generating value added without doing more work. But it is also essential to develop ways of reducing fossil fuel exergy inputs per unit of physical work output (i.e. increasing conversion efficiency). In other words, energy (exergy) conservation is probably the main key to long term environmental sustainability.”

Is China in trouble? There is a start of a discussion about peak oil and it’s potential effect here.

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