Georgescu-Roegen/Daly versus Solow/Stiglitz Revisited

There are two key issues which are not fullyelaborated in the papers in a recent special issueof Ecological Economics (The contribution ofNicholas Georgescu-Roegen, Vol. 22, No. 3,1997): (i) the operational meaning of substitutionin production function; and (ii) the effect of tech-nological improvement on resource utilization. Inthis piece we examine these two issues based on:(i) Georgescu-Roegen’s conceptualization of pro-duction process; and (ii) Jevons’ paradox.Neoclassical production functions, whether forindividual firms or the aggregate economy, as-sume that any factor can always be substituted forany other factor (except the cases of fixed coeffi-cients and:or the existence of limitational factors).The implication or entailment of this assumptionis that an increase in the input of any factoralways yields an increase in output. This is thebasis for Solow’s contention that ‘‘[t]he world can,in effect, get along without natural resources’’(Solow, 1974).However, those neoclassical economists adopt-ing the substitution assumption have not paid dueattention to the essential distinction between flows(˚quantities of materials qualitatively trans-formed in the process) and funds (˚agents trans-forming a given set of inflows into a given set ofoutflows) in the material production process(Georgescu-Roegen, 1971). Neglecting this dis-tinction results in a systematic indifference to thebiophysical foundation of economic activities. Infact, according to Georgescu-Roegen (1990), fordesigning a blueprint of a factory process anexpert has to consider a set of three relationships:(i) the normal rate of output (