The Economic Growth Engine
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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.
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Chapter 10: Conclusions, Implications and Caveats

Robert U. Ayres and Benjamin Warr


REFLECTIONS AND CAVEATS At the end of this book, we need to ask ourselves how far we have progressed towards several objectives. The first, which was clear at the outset, was a deeper understanding of the relationship between the laws of physics (thermodynamics) and economics. Another goal, also clear at the outset, was to develop a more realistic approach to explaining the relationship of ‘technological progress’, thermodynamic efficiency and economic growth. A third, which was only a glimmer at the beginning, might be characterized as a step toward integration of neoclassical and evolutionary perspectives on endogenous economic growth. We think we can claim some progress on all three fronts, particularly the first two. As regard the third, the much criticized aggregate production function approach seems to be able to explain real-world behavior that cannot be explained by the restrictive assumptions of the formal neoclassical model. The formal model makes a series of unrealistic assumptions, including utility (profit) maximization, perfect information, perfect competition and optimal growth in equilibrium. The aggregate production functions seem to imply unlimited substitutability among the factors, which is clearly unrealistic. On the other hand, the fixed proportional input relationships required of Leontief’s input-output framework are equally unrealistic because no substitution is allowed. We suggest that the use of a three-factor LINEX aggregate production function constitutes a significant step toward reconciling these incompatibilities. It permits both substitution (in the long run) and complementarity between aggregate capital K and aggregate labor L (unlike the two-factor Cobb-Douglas...

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