The Economic Growth Engine

The Economic Growth Engine

How Energy and Work Drive Material Prosperity

Robert U. Ayres and Benjamin Warr

The historic link between output (GDP) growth and employment has weakened. Since there is no quantitively verifiable economic theory to explain past growth, this unique book explores the fundamental relationship between thermodynamics (physical work) and economics.

Chapter 1: Background

Robert U. Ayres and Benjamin Warr

Subjects: economics and finance, energy economics, environment, ecological economics

Extract

GROWTH AND THE NEOCLASSICAL PARADIGM This book is about technological change and economic growth. It is generally acknowledged that the latter is driven mainly by the former. But the motor mechanism is surprisingly obscure and the nature of technological change itself is poorly understood. Part of the problem is that neoclassical microeconomic theory cannot account for key features of technological change. In this chapter we briefly review and summarize some of the difficulties and their origins, beginning with the neoclassical economic paradigm. It has been informally characterized by Paul Krugman as follows: At base, mainstream economic theory rests on two observations: obvious opportunities are rarely left unexploited and things add up. When one sets out to make a formal mathematical model, these rough principles usually become the more exact ideas of maximization (of something) and equilibrium (in some sense) . . . (Krugman 1995) This characterization is drastically oversimplified, of course, but it conveys the right flavor.1 At a deeper level, the neoclassical paradigm of economics is a collection of assumptions and common understandings, going back to the so-called ‘marginalist’ revolution in the 19th century. Again, to convey a rough sense of the change without most of the details, the classical theory of Smith, Ricardo, Marx and Mill conceptualized value as a kind of ‘substance’ produced by nature, enhanced by labor and embodied in goods. Prices in the classical theory were assumed to be simple reflections of intrinsic value and the labor cost of production. The newer approach, led...

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