How Energy and Work Drive Material Prosperity
10. 10.1 Conclusions, implications and caveats 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...
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