SUMMARY The economy as an energy system -> Economic growth with energy -> Bringing

Energy Back into the Economy

M. Shahid Alam

(Alam, 2009) based on his working papers (Alam, 2005, Alam, 2006) developed a framework to

analyze the economy as an energy system, and discuss the role of energy along the

development of the modern economies from pre-Malthusian stagnation period to nowadays.

In this paper, the inconsistencies of the neoclassical economic framework are discussed,

especially its reticence of features of labor and capital (exogenousness) and the fact that is in

total isolation from nature and its energy. On the other hand ecological economics brings back

the role of nature and the thermodynamic rules to the economy and understand the economic

subsystem as a part of the world system in interaction with other functional systems of that

are contained in itself (former system: world subsystems. (Alam, 2009) emphasizes that “Once

we focus on energy, the economy must be seen as a system of energy flows, a succession of

energy conversions that starts with nature and culminates in the production of goods, services,

and wastes.”

The paper presents a summary of the classical and neoclassical economies with respect to

energy. Even though the former did not recognize energy as an input, it did recognize the role

of land (in other words nature) as both an enabler and limiter of economic activities. In

addition, classical economist classifies the economy into sectors and the use of labor and

capital according to their role with respect to the land, and finally recognizes the finiteness,

variability. On the other hand the neoclassical economist dropped the land from the macro-

economic analysis and reduced it as an intermediate good for which cost was the only real

contribution/detriment to the economy. Technological change and in minor significance rising

capital accumulation are seen as the motor of economic growth, though it is not specifically

defined and can be as diffuse that its main causes are faded. in the case of labor and capital

their function is as well simplified and cannot be introduced to the models by adequate

weighting. Neoclassical economy cannot therefore explain the “near-stagnation and endemic

poverty of organic economies before and after 1800”

ENERGY AS AN ENERGY SYSTEM

It is claimed that the function of labor and capital are easier definable under an energy based

economic (EBE) framework, since their function can be ultimately defined in terms of their role

with respect of energy. Both “factors of production” performs two functions: “(i) convert

energy flows, changing their form and direction to make them usable in other activities; and (ii)

they control [direct manipulate] the application of usable energy flows to produce goods and

services. In other words, capital and labor supply usable energy and determine the manner in

which it is used.”

The first function, convert energy flows, is explained in terms of thermodynamics. Three types

of conversion are performed organic (photosynthesis, food into kinetic energy…), inorganic

(sun, tidal energy, fossilization, chemical degradation, gravity movement) and mechanical

(related to human-made devices to convert energy into usable form for economic activities).

With respect to the latter, man-made converters are more versatile in terms of capacity to

convert many types of energy into any other type else. This versatility has been the cause of

proliferation of technological innovation on devices to use the converted energy.

Regarding the second function, managing energy flows, the humans have a distinctive role on

it, both by directing in combination with the other inputs (machine, animals, materials) and by

improving the current technological framework of energy systems through research,

innovation, learning and adaptation.

Having defined the role of labor and capital in an EBE, the paper discusses the sources of

growth in this economy.

1) A way is by changing the way in which labor is used to accopmplish both functions.

Therefore the “nature of the labor input changes with growth”. This should be

reflected in dynamic modeling of the economic in which labor varies according to the

stage of development of certain economy. a switch in the way things are done in the

economy, may implies human will be more devoted to energy management activities

(e.g. innovation)

2) Changing circumstances of the environment/politics/resources availability

3) Switch between organic to inorganic/mechanical energy for economic activities. As

discussed in point 1), labor modifies its nature and capital can be more efficiently used

by the infusion of inorganic/mechanical energy.

4) Impetus by which new sources forms of use of energy can generate impetus for

technological change.

The taxonomy of the economies: renewable and non-renewable economies. Most modern

economies are non-renewable inorganic economies which depend on fossil fuels, hence fossil-

economies.

(Alam, 2009) presents a rationale of the evolution of the modern world economies from the

perspective of EBE. “Once energy is recognized as central to the economy, this forces us to

examine the contribution of energy to this growth acceleration.”

In the near-stagnation period the sustained growth was based on the limitations of the land

(diminishing returns of land finiteness), significant improvements could have been made by

substitutability between land and capital though it was limited by the technological framework.

Another way to improve was to raise subsistence wage over time. However the main growth

mechanism for that period was specialization through which, with same production factors,

output was increase. Specialization provided new skills and facilitates industrialization

(mechanization). With respect to energy, the economy was limited by limited availability of

energy resources and variety.

The energy limited characteristics of that period economy was eventually overcame by the

introduction and switch into fossil fuels, which make disappear the previous limitations of

energy flows related to land(nature) limitations. This fossil sources of energy in those days

seemed as infinite since the rate of extraction was significantly lower than the absolute

resources, this accompanied by the development of new technologies of extraction, created a

seemingly-infinite resource with falling prices.

The introduction of energy into the system generates capital accumulation, which in turn

opens new doors for subsequent growth cycles of innovation, feedback and more capital

accumulation. Hence capital to extract, convert and harness energy kept growing. The

abovementioned growth cycles were characterized for a rising marginal productivity of factors

of production as well as for the changing in nature of these factors (from converting to

managing energy flows) as seen for example in the agriculture sector. Moreover the

availability of vast amounts of energy with falling prices boosted other energy-intensive

industries that were limited by energy cost and availability, e.g. transportation, mining, steel,

by which the infrastructure, housing and transportation sectors intensely changed. The

mechanization, infrastructure development led to proliferation of technology innovation and

development into other activities and products. By these means, main economies became

transformed from to organic to fossil-based in relatively a short period of time following the

industrial revolution, disregarding Malthus pessimistic predictions.

Concluding remarks

The economy consists of streams of energy-producing and energy-using activities;

energy is central to this economy because it drives all economic activities

In this economy, capital and labor perform supporting roles, extracting, converting,

directing and amplifying energy to produce goods and services.

Failure of neoclassical and classical economist because of their incapability to

understand energy-economic relationships.

The neoclassical economist fails to recognize the technological change directed to

harnessing of growing supplies of energy.

We cannot assume that labor is a homogenous factor in the context of growth. This

calls into question the analysis of sources of growth.

They failed to explore the manifold ways in which the lifting of constraints on energy

supplies, resulting from the switch to fossil fuels, stimulated successive rounds of

innovation and the growth of capital and skills.

ALAM, M. S.2005. The economy as an energy system [Working Paper]. Boston, MA: Northeastern University, Department of Economics. Available from: http://www.economics.neu.edu/papers/ [Accessed: Abr 2011].

ALAM, M. S.2006. Economic growth with energy [Working Paper]. Boston, MA: Northeastern University, Department of Economics. Available from: http://www.economics.neu.edu/papers/ [Accessed: Abr 2011].

ALAM, M. S. 2009. Bringing Energy Back into the Economy. Review of Radical Political Economics, 41, 170-185.