The economic growth engine: how energy and work drive material prosperity
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The first-named author of this book is one of those rare inter-disciplinarians: a first-rate economist whose understanding of how the economy works is informed at the deepest level by an appreciation of the economic importance of energy and materials, that is, by the physical and energetic basis of all economic activity. This book is an exploration based on that perspective of the importance of energy – or exergy as it is more correctly called – to the economic growth experienced by different economies over the last few centuries. The book brings together a number of different literatures, the most important of which is that on theories of economic growth and the related subject of technical change. The book is critical of growth theories which fail to recognise the importance of resources to economic activity. It is an empirically observed fact that economic growth has led to increased use of natural resources, including energy. But, the book argues, is it not just as likely that the increased use of energy has actually driven economic growth? Several rather technical chapters in the book are devoted to explaining the construction of a new data-set for the USA and Japan which can test this hypothesis. The authors then utilise this data-set to run some regressions of a production function which includes exergy as a factor of production, from which they conclude that there has been mutual causality between exergy use and GDP growth. So far so good. However, the authors then go on to argue that, because economic growth has been to some extent driven by energy use in the past, this must go on being so in the future. Moreover, because of the global depletion of fossil fuels, there will not be enough exergy to go on driving economic growth through increased use of it. Rather, ‘future economic growth depends . . . on an accelerated increase in the output of useful work from a decreasing exergy input, that is, increasing exergy-to-work conversion efficiency’ (p. 218). This conclusion does not seem to me to follow from the identification of growing exergy use having been a historical driver of economic growth. The reason for this lies in the book’s own earlier analysis of technical change, which is also identified as a key driver of economic growth (p. 51). Now technical change, as the book also acknowledges, derives from the increase in human knowledge. Indeed, it is the increase in human knowledge about how to use fossil fuels that has powered industrial society, rather than their mere existence – fossil fuels existed unused long before the industrial revolution. If fossil fuels become scarce and expensive, then future economic growth will depend not just on conversion efficiency, but also on the ability of humans to learn how to harness other energy sources (for example, renewables or nuclear power) more effectively or, indeed, to make technological advances in other fields. Indeed, the book seems to contradict its own later identification of conversion efficiency as being essential to future economic growth with the statement: ‘In our theory it is mainly innovations that increase the quantity and reduce the costs of “useful work” that have caused the economy to grow in the past. Future economic growth may depend on innovations in another area, of course: probably information technology and/or biotechnology’ (pp. 165–166). Perhaps because I perceive an excessive emphasis in the book on the importance of exergy use to economic growth, the long chapter that seeks to explain economic ‘catch up’ (a narrowing of the difference in GDP per head between the USA and other countries) in terms of growing exergy use is also not particularly convincing. However, this difference in opinion in respect of the book’s conclusions should not detract from the many valuable thoughts and insights that are to be derived from the process of getting to them. The book remains a masterful exposition of the importance of energy to economic activity and growth, and of the folly of theories of economic growth (and of economic activity generally) that leave it out of account, as is unfortunately still all too common.