Defining limits: Energy constrained economic growth
Willem P. Nel *, Gerhardus van Zyl
1. Introduction
This paper critically reviews the role of energy in economic growth theory and analyzes the impact of energy constraints on economic growth. A structural understanding of the role of energy in the economy, both from a historical and a contemporary perspective, is essential in this endeavour. Economic theory is principally based on deductive premises, which are calibrated to empirical evidence. A possible exception to this approach is the theory of economic growth in which the principal variables, labour (L) and capital (K), only weakly explain growth in economic output, while residuals are explained in terms
of Total Factor Productivity (TFP). Deterministic evidence for TFP has been illusive, leading some
researchers to doubt the rationale for such a factor and to present arguments in favour of quality weighted K and L that would eliminate residuals and the need for TFP . Further, statistical empiricism holds true only in the paradigm for which it was calibrated. This is a fundamental divergence from scientific methodology, which relies on structural dependencies to formulate analytical principles. The vision of continued exponential growth in economic output is therefore plausible, provided the various elements of the growth regime (including the availability of material and energy resources, technology change and innovation, capital formation, accumulation of human capital and infrastructure, political stability and ideological framework) are maintained and strengthened Some of the elements listed above are physically exhaustible, subjected to the law of diminishing returns and could conceivably lead to constraints in economic output. Economic theory proposes that scarcity of a production input is a regular economic challenge that is overcome by price incentives that stimulate innovation, leading to the development of alternatives and substitution. This does not hold true for essential economic inputs. Statistical empiricism in economic theory has been challenged in the past. Leontief cautions that the statistical inferences
derived from empiricism could lead to isolating abstraction in economics from where attempts to explore a structural understanding of production would be difficult to accomplish. Daly provides a number of examples in growth economics in which he argues abstraction has led to the fallacy of misplaced concreteness as formulated by Alfred North Whitehead [1861–1947]. Norgaard contributed insights that are particularly relevant to exhaustible resources summarising that ‘‘a global view [on sustainability]
must incorporate knowledge from the natural sciences and information generally beyond that provided by markets to avoid being myopic”. We address these concerns by reformulating the role of energy in economic growth theory to reflect the structural role that it plays in economic output.