Mostly, today's macroeconomic theory defines economic output as the result of a deliberately chosen combination of human labor and capital input (buying materials, infrastructure, services, etc). Over time output from a given quantity of inputs improves due to efficiency and/or productivity gains. These gains are typically included as an additional factor in production functions. Over the past two centuries, both labor and capital productivity have been growing more or less continuously, indicating an ever-improving economy.
Alternative research approaches show that this theory might be misleading, as energy inputs into production are not factored into output functions separately. Of all input factors bought with capital, energy is the only one that is absolutely required. A simple example might illustrate this: One can manufacture a drinking cup by using anything from wood to clay to metal or plastics. Yet no matter which material is chosen, energy, measured in Joules, Watt-hours, BTU, etc, is required to turn it into a cup one can drink from. To begin with, a human may carve a drinking bowl from a piece of wood found in the forest, at task requiring a few hours of focused manual work. To deliver this work, the person needs food, which essentially is an energy input. On the other end of the spectrum, a machine may produce hundreds of plastic cups per minute. For this approach, a significant amount of energy is required, ranging from the oil providing the chemicals to the energy used to run the machines, and to the energy used to build the machines and the factory the cups are produced in. When compared to carving, the human effort to produce one cup becomes much smaller, which increases total labor productivity, but total energy consumption going into one cup is likely to be the same or even higher. Or to put it differently: In any economic process, energy cannot be replaced with anything else but other sources of energy.
The laws of physics state that each transformation process, no matter whether it is physical, chemical or biological, requires energy, and its application is always associated with a loss in the form of heat. It is thus not surprising that on a global scale, primary energy consumption, mostly in the form of fossil fuels such as coal, natural gas and oil, has grown almost in line with total economic output (measured as global GDP) over the course of the past century. On the level of the developed world, this connection is less pronounced, but can be attributed mostly to the recent de-industrialization of most OECD countries, where many energy- and labor-intensive activities have been shifted to emerging economies like China.
If this is correct, human societies expecting to grow their output in the future will likely require more energy compared to today, despite all attempts at using that energy more efficiently. Higher extraction cost or limits in energy availability might therefore reduce the ability to accomplish further growth. Unfortunately, this connection is not generally accepted by economists, which still leads to future growth projections we consider unrealistic.
In order to strengthen global research on this subject, we are working on establishing knowledge related to the actual contribution of energy to economic output. Key areas of interest are:
- Contribution of energy use to economic development and growth
- Identifying the influence of energy availability and energy prices
- Energy contributions to productivity gains
- Analysis and comparison of future energy sources (particularly renewables)
- Viability analysis of energy source replacements (e.g. electric vs. combustion engine passenger cars)
- Study of energy efficiency options