Energy in the theory of production

The fundamental role of energy as a factor of production is investigated. In this paper, capital K, labour L and work of production equipment—productive energy S—are considered to be important production factors. However, in contrast to some theories, the author does not consider the variables K, L, S to be independent; energy and labour inputs act as substitutes for each other, while capital K and work (L and S) are complements. Equations of production dynamics as a set of equations for variables (output Y, value of production equipment K, labour L, energy S, and two technological variables λ and e connected with labour requirement and energy requirement, respectively) are established. The time path of output is determined by the exogenous quantities: the potential labour supply and the availability of energy resources. This theory is an extension of the conventional two-factor theory of economic growth. In the previous theory, capital played two distinctive roles which are separated in the present theory: capital as value of production equipment and capital as a substitute for labour. In the latter case, capital is the means by which the labour resource is substituted by energy rather than a production factor itself. Empirical evidence from the US economy is used to estimate the validity of the proposed mechanism of economic growth.

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