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Green Economy Reader pp 39–53Cite as

Gaps in Mainstream Economics: Energy, Growth, and Sustainability

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Part of the book series: Studies in Ecological Economics ((SEEC,volume 6))

Abstract

This chapter begins with a review of the state of neoclassical economics, insofar as it deals with energy. The main point is that useful energy (exergy) is an essential ingredient in the formula for economic activity, especially growth. Conventional neoclassical theory asserts that the only two “factors of production” are capital and human labor, and that raw materials are “produced” by some combination of capital and labor. Of course this is literally impossible, but the impossibility is avoided by asserting that the process of “resource extraction” is a “value-added activity”, where the value is added by the combination of capital and labor. This is an accounting trick, because both capital and labor are unproductive without an exergy input. So energy (or work) must be a third factor of production. This being so, social stability depends on growth (for now, at least), future economic growth depends on the availability of exergy. But long-term environmental sustainability also depends on decarbonization. The good news is that decarbonization will employ a lot of capital and labor, which promote growth. But the investment must be seen to be profitable. Fortunately this is possible.

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Notes

  1. 1.

    Textbooks refer to “reversible” processes, but only in idealized situations, for explanatory purposes.

  2. 2.

    It should be noted that the idea, still popular among some ecologists, that the al nutrients are recycled by the ecosystem is false; fossil fuels, iron ore, limestone and phosphate rock are just some of the examples of biological waste products that have become “ores” for humans. They were not recycled biologically.

  3. 3.

    G-R denied that energy and mass are inter-convertible and proposed an unnecessary “Fourth Law” of thermodynamics, conservation of matter. He also concluded, incorrectly, that solar power is too diffuse to be an effective substitute for fossil fuels. This error was due to his lack of understanding of technology.

  4. 4.

    In those days, “optimal controls” (borrowed from missile technology and classical physics) were “hot” subjects for theoretical economists e.g. (Pontryagin and et al. 1962; Mirowski 1989).

  5. 5.

    Inflation rose further in the 70s and still further when the second oil crisis erupted as a consequence of the overthrow of the Shah of Iran in 1979 and the following Iran-Iraq war. The Federal Reserve, under Chairman Paul Volcker “killed” the US inflation by raising interest rates to more than 20 % in 1982. This resulted in another deep recession. But oil prices began to decline sharply, partly due to reduced demand, and that kicked off the Reagan boom.

  6. 6.

    To reiterate a point made earlier in footnote 2, the statement that energy is essential (and undervalued) is not equivalent to an assertion that energy is a measure of economic value. It is not.

  7. 7.

    The word “destruction” seems odd, but it is accurate. Energy is conserved (first law of thermodynamics) but the useful component (exergy) is not conserved. It is used up (destroyed) in every activity or process.

  8. 8.

    The mathematical arguments are too complex for explanation here. For details see (Ayres et al. 2013; Kuemmel et al. 2010) (Ayres et al. 2013; Kuemmel et al. 2010).

  9. 9.

    This is a rule-of-thumb, not a law of nature, and there are many exceptions. However it is a helpful place to start thinking about likely future cost trends.

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Authors and Affiliations

  1. Economics and Political Science and Technology Management, Management and the Environment, Emeritus, INSEAD, Boulevard de Constance, 77305, Fontainebleau, France

    Robert U. Ayres

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Correspondence to Robert U. Ayres .

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  1. Environment Europe Ltd, Oxford, Oxfordshire, United Kingdom

    Stanislav Shmelev

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Ayres, R.U. (2017). Gaps in Mainstream Economics: Energy, Growth, and Sustainability. In: Shmelev, S. (eds) Green Economy Reader. Studies in Ecological Economics, vol 6. Springer, Cham. https://doi.org/10.1007/978-3-319-38919-6_3

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