Correcting the economic blindspot on energy

Once you acknowledge the reality that “labour without energy is a corpse, capital without energy is a sculpture” (Keen et al 2019), and the empirical fact that, to fit cross-country data, the capital coefficient in the Cobb Douglas Production Function is 0.8 rather than the customary 0.3 (Mankiw 1995), then by Occam’s Razor, the Leontief constant coefficients model is the most appropriate and parsimonious production function. This consequently portrays GDP as the transformation of energy into useful work. This realisation indicated that an energy-based production economy could be modelled. The result was an energy-based version of the Goodwin model (Goodwin 1967).

The next stage—of acknowledging that raw materials as well as energy were essential non-produced inputs to production—meant modelling an economy with a one commodity production function with two primary inputs, energy and raw materials, and two primary outputs, a consumption good and an investment good.

This raised a key realist problem with such an abstract model: how can you imagine a consumption good which is not one like corn (a corn economy model isn’t a model of manufacturing, because corn can be a consumption—eat it—savings—store it—or investment—plant it—in its raw state) but which somehow feels realistic?

John Hicks was faced with this dilemma when he tried (and failed) to build a model of a sequential production economy (Hicks 1935). He imagined a “bread economy” in which the only output was bread—but where the inputs necessarily involved both wheat and bread ovens. How does one make an oven out of bread? The impossibility of imagining how led Hicks to abandon this gallant quest, and dump on us instead the IS/LM model.

Despite this tragic outcome, we genuinely felt Hicks’s key imaginative dilemma ourselves, when we tried to imagine a consumption good that can also be manufactured—transformed by labour, capital, energy, and previous generations of itself—into a realistic investment good?

The solution came from imagination, in the form of the animated movie The Iron Giant ( Rather than trying to imagine a realistic consumption good that can also be turned into an investment good and hence capital on Earth, we imagined another world, The Planet of the Iron Giants. There, the workers are Iron Giants, the consumption good is iron, and the investment good is iron. Iron Ore and Coal are the raw material/energy pair. They are converted in and into blast furnaces, iron mills, coal mining equipment, iron ore mining equipment, and food for the Iron Giants. We had our causal chain, and the derivation of a single commodity model, where the essential inputs are non-produced energy and minerals, followed naturally. Technically, it recreated the Goodwin model (Goodwin 1967) again, with the added capability of modelling waste creation and its negative environmental feedback on production.

Steve Keen is an Australian economist and author. He considers himself a post-Keynesian, criticising neoclassical economics as inconsistent, unscientific and empirically unsupported. The major influences on Keen’s thinking about economics include John Maynard Keynes, Karl Marx, Hyman Minsky, Piero Sraffa, Augusto Graziani, Joseph Alois Schumpeter, Thorstein Veblen, and François Quesnay. Hyman Minsky’s financial instability hypothesis forms the main basis of his major contribution to economics which mainly concentrates on mathematical modelling and simulation of financial instability. He is a notable critic of the Australian property bubble, as he sees it.

Keen was formerly an associate professor of economics at University of Western Sydney, until he applied for voluntary redundancy in 2013, due to the closure of the economics program at the university. In autumn 2014, he became a professor and Head of the School of Economics, History and Politics at Kingston University in London. He is also a fellow at the Centre for Policy Development. He has since taken retirement and is crowd source funded to undertake independent research as well as being a Distinguished Research Fellow at the Institute for Strategy Resilience & Security, University College of London