The Sledge on the Slope or: Energy in the Economy, and the Paradox of Theory and Policy

Energy conversion in the production of goods and services, and the resulting emissions associated with entropy production, have not yet been taken into account by the mainstream theory of economic growth. Novel econometric analyses, however, have revealed energy as a production factor whose output elasticity, which measures its productive power, is much higher than its share in total factor cost. This, although being at variance with the notion of orthodox economics, is supported by the standard maximization of profit or time-integrated utility, if one takes technological constraints on capital, labor, and energy into account. The present paper offers an explanation of these findings in the picture of a sledge, which represents the economy, on the slope of a niveous mountain, which represents cost. Historical economic trajectories indicate that the representative entrepreneur at the controls of the sledge steers his vehicle with due regard of the barriers from the technological constraints, observing “soft” constraints, like the legal framework of the market, in addition. We believe that this perspective contributes to resolving the paradox that energy hardly matters in mainstream growth theory, whereas it is an issue of growing importance in international policy.