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.
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