Other Evidence Of The Elasticity Of Exergy As Useful Work

As noted several times in this book, standard neoclassical theory says that the elasticity of output with respect to energy (exergy) E should be equal to the dollar share of energy to total output. Recently, thanks to price rises, this share - just for oil - is about 4 percent of US GDP. Based on this presumed equality, a cut in petroleum output of 10 percent would result in a GDP reduction of 0.4 percent, from the 'normal' GDP increase of 3.4 percent per year. But the actual oil shock-related declines, relative to trend, were nearer 4.0 percent, on average, or ten times that predicted by the conventional factor share argument (Hamilton 2005).

The original debate about cost shares was prompted by efforts to explain the impact of oil price spikes in the 1970s on US consumer prices and economic growth (Perry 1977; Solow 1978; Denison 1979, 1985). There was a heated debate beginning in the 1980s about the relationship between oil consumption, prices and GDP, with a number of econometric studies on each side of the issue. One group of economists reported econometric results suggesting oil price rises have little or no effect on GDP (for example, Darby 1982; Bohi 1991; Darrat and Gilley 1996), while another group came to the opposite conclusion (for example, Tatom 1981; Hamilton 1983; and Burbridge and Harrison 1984, among others). The differences between these studies are difficult to summarize, except to say that they appear to be largely due to different testing hypotheses, choices of econometric techniques and different sample periods (mostly focusing on the 1970s).

Recent studies based on a longer history seem to be converging toward some agreement. One study that seems to have anticipated elements of ours deserves particular mention (Moroney 1992). Moroney investigated the effects of changes in capital and energy per unit of labor on labor productivity for 1950-84, leading to estimated output elasticities of similar magnitude (as compared to ours) for the two variables. Moroney estimated that increased energy consumption per unit of labor contributed 1.17 percentage points to growth during the period 1950-73, while declines in energy consumption cut 0.5 percentage points from growth during 1974-84.

Many econometric studies focused on price effects. The correlation between oil price rises and economic recessions is such that accidental coincidence can be ruled out (Hamilton 2005). In nine out of ten cases, a price increase was followed by a recession. Moreover, oil price rises, as compared to declines, tend to have non-linear (disproportionally negative) effects on GDP growth. To be sure, the fact that these price increases were mostly linked to military conflicts leaves open the possibility that other events associated with the conflicts, rather than the oil price increases per se, may have caused the recessions (Hamilton 2003). The negative effect of price volatility in oil markets on GDP has been confirmed by others, and provides support for Hamilton's non-linear measure (Guo and Kliesen 2005). Still, despite the enormous literature on the topic, the problem of explaining these non-linear effects remains open. In any case, no single explanation of recessions is necessary or sufficient (Barsky and Kilian 2004). But the non-linear negative impact of energy price increases, as opposed to decreases, on growth seems to be reasonably well established today.

Evidence of a completely different nature may eventually be provided by input-output models that take into account the non-substitutability of exergy and useful work.

Taking all the evidence into account, we argue that there is a strong case for asserting that either exergy or useful work can be regarded as factors of production. The virtue of useful work is that it also incorporates a large component of what we mean by technological progress. On the other hand, we would not seriously expect a simple production function model of four variables to explain all the vagaries of past economic behavior. While exergy and useful work are important, and should never have been neglected, there are many other macroeconomic phenomena (and policy interventions) that have had, and continue to have, an important role.

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