A presentation held by professor Astrid Kander at Global Utmaning (Global Challenge) on the 19th of January 2012.

1. The role of energy for the industrial
revolution and modern economic
growth
Astrid Kander
2012-01-19

5. The intriguing finding

6. • Falling cost share is not consistent with
normal growth models, with Constant
Elasticity of Substitution (CES=1)
• If the price of one factor goes up there will be
a movement along the isoquant so that less of
that factor is used and the cost share will stay
constant.

7. Cobb –Douglas original production
function
• Y=AL α K1- α
• Y is GDP, L is labor hours, K is physical capital
(machinery and buildings) and A is the total
factor productivity (TFP).
• Alfa (α) is the wage share of GDP. This rests on
the assumption that the salary corresponds to
the marginal contribution of labor.

8. Cobb-Douglas cont.
• The factor income shares for labor (α) respectively capitalists ((1- α)
are used as weights to model the contribution of labor and capital
to GDP under the assumption of constant returns to scale.
• In growth accounting is what grows fast and gets paid much that
gets the largest explanatory power.
• If capital grows at the same pace as GDP (which is normal for
developed countries) it will only explain roughly a third of GDP
growth in the growth accounting framework, because the weight of
capital, judged by its cost share, is often only about as much (0.3-
0.4).
• As a consequence all conventional growth accounting ends up with
a large role for total factor productivity (TFP); what is not explained
by more capital per worker (capital deepening) is explained by
higher efficiency in the combined use of capital and labor.

9. If energy is included
• Normally energy has no importance, since its
cost share is so low in modern economies
(10%)

10. How to make energy matter
• For energy to play a more fundamental role in a growth accounting
framework it is necessary to modify the basic model assumptions.
• One possibility is to edge away completely from the neoclassical
idea of compensation to the factors of production according to their
marginal productivity, and allow any kind of weights as long as the
sum of weights are 1 (constant returns to scale), but this can lead to
severe theoretical difficulties. (Ayres, R., and B. Warr (2009), p190-
195. Some results of their modeling seem counterintuitive and
unrealistic: the marginal productivity of labor approaches zero
when workers are equipped with more capital.)
• Another possible adjustment, which we follow here, is to allow
restrictions for the degree of substitution between energy, labor
and capital.

21. Why is energy less important after
1950?
• Because it is abundant and cheap (low cost
share, just an illusion?)
• Or because the economy basically grows on
basis of something else? Information
Technology (IT)?

22. Support for the IT idea
useful work / GDP [GJ/1000$]
3,5
3,0
2,5
2,0
1,5
1,0
0,5
USA Japan UK Austria
0,0
1900 1915 1930 1945 1960 1975 1990 2005

23. Global Challenge
• Most of the world is not just growing on basis
of IT, the developing world take the second
and third industrial revolution simultaneously
• Demand pull – rising prices of energy
• Climate change: What will a brake on coal use
imply for economic growth and welfare?