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Thermodynamic analysis reveals large overlooked role of oil and other energy sources in the economy

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Posted January 5, 2015

The laws of thermodynamics are best known for dealing with energy in the context of physics, but a new study suggests the same concepts could help improve economic growth models by accounting for energy in the economic sphere.

thermodynamics and economics 1

A newer model of economic growth includes not only capital and labor, but also energy and creativity as production factors. Energy is placed on equal footing as capital and labor. Credit: R. Kümmel. The Second Law of Economics: Energy, Entropy, and the Origins of Wealth A newer model of economic growth includes not only capital and labor, but also energy and creativity as production factors. Energy is placed on equal footing as capital and labor. Credit: R. Kümmel. The Second Law of Economics: Energy, Entropy, and the Origins of Wealth

In neoclassical growth models, there are two main contributing factors to economic growth: labor and capital. However, these models are far from perfect, accounting for less than half of actual economic growth. The rest of the growth is accounted for by the Solow residual, which is thought to be attributed to the difficult-to-quantify factor of “technological progress.”

Although neoclassical growth models help economists understand economic growth, the fact that they leave so much economic growth unexplained is a little unsettling. Even Robert A. Solow, the founder of neoclassical growth theory, stated that the neoclassical model “is a theory of growth that leaves the main factor in economic growth unexplained.”

Read more at: Phys.org

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