Who Really Knows Why the Economy Grows?

Efficiency: it's not just trendy, it's indispensable. (2009 Honda Civic Hybrid)

Efficiency: it's not just trendy, it's indispensable. (2009 Honda Civic Hybrid)

Dumb question, you say. Of course economists know that an economy grows because, over time, workers get more productive (and there are more of them) and capital gets invested in new machinery and equipment that work better than the old stuff. Right?

 Well…sort of. Nobel economist Robert Solow owes part of his reputation to his studies analyzing the drivers of economic growth. This brilliant man, building on decades of earlier thinking by many other brilliant economists, labored long and hard to produce the work that won him the Nobel prize—which concluded that capital and labor accounted for…one-seventh of all economic growth. The mere 85 percent or so that remains, now called the Solow Residual (or total factor productivity or just “technological progress”), is not explained in conventional economic theory.

 But the authors of a new book think they have filled in this theoretical gap—and the implications are profound. Robert Ayres and Ed Ayres, whose book Crossing the Energy Divide: Moving from Fossil Fuel Dependence to a Clean-Energy Future (Wharton School Publishing) is due out in January, argue that economic growth is driven, not by just two factors, but by three: labor, capital, and energy—or more specifically, “the increasing thermodynamic efficiency with which energy and raw materials are converted into useful work.”

 In other words, roughly, economic growth depends to a very large extent on the services obtained from the energy the economy uses. Economic growth rates were low in the days before the Industrial Revolution because the total energy available to any economy was limited by the amount of sunlight captured by farmers’ fields, which supplied food for both people and draft animals. Except for a few windmills, that’s about all there was. Learning how to make machines that ran on coal changed all that by tapping a vast new source of energy.

 This insight into the role of energy in economic growth is not just of academic interest. One result is especially critical to modern society: When energy is abundant and cheap, as it has been for decades now in the industrialized world (in the form of readily extractable coal and oil), an economy can grow lickety-split even if its overall energy efficiency is very low. And ours is absurdly low: the payload efficiency of a car, for instance, is typically about 1 percent. However, when energy becomes scarce and expensive, unless service efficiencies rise sharply, in effect you strangle one of the key factors underlying economic growth.

 As it happens, many experts believe that we are entering a period of constraints on energy supplies, as evidenced by the prospects of peak oil and the growing suspicion that there is less coal readily available than we thought. This, and the imperative to address climate change, puts a premium both on shifting rapidly to renewable energy and on working very hard to get more efficient in our energy use—including wringing as much service as possible out of the fossil energy we must use during the transition. And in fact the second main thrust of Crossing the Energy Divide is how to do that. At least in the United States, there are staggering gains to be had relatively cheaply and quickly, especially from more widespread adoption of energy recycling.

 (Full disclosure: Ed Ayres is the former editor, now retired, of World Watch Magazine; Robert Ayres, a physics-trained economist, is his brother.)

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