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Economic growth models and the role of physical resources

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Conventional economic growth theory assumes that technological progress is exogenous and that resource consumption is a consequence, not a cause, of growth. This assumption is built into most, if not all of the largescale models used for policy guidance by governments. The reality is more complex. A ‘growth engine’ is a positive feedback loop involving declining costs of inputs and increasing demand for out puts. The most important ‘growth engine’ of the first industrial revolution was based on coal and steam power, through its impact on rapidly declining fossil fuel and mechanical power costs, and their relationship with scale of production on the one hand and demand for end use products, on the other. The growth impetus due to fossil fuel discoveries and applications, and continued cost reductions, continued through the 19th century and into the 20th with petroleum, internal combustion engines, and — most potent of all — electrification. The advent of cheap electricity in unlimited quantities has triggered the development of a whole range of new products and industries, including electric light, radio and television, moving pictures, and new materials such as aluminum and superalloys without which the aircraft and aerospace sectors could not exist. In effect, energy consumption within the economy is as much a driver of economic growth as it is a consequence of growth. The argument that energy is an intermediate input, while valid, is not conclusive. Though energy and other natural resource-based commodities can be regarded as economic intermediates (insofar as they are produced by the application of capital and labor) this is no less true of capital. In fact, the skills and knowledge embodied in the labor force are also products of capital and labor. Of course, it can be argued that, while capital and labor stocks can be augmented in the future, current economic output is only dependent on the quantities of these factors that currently exist. But the same statement holds for energy and physical resource flows. They are limited by past investment, both in supply and capacity for utilization. Neither can be increased instantaneously beyond fixed limits. The point is that, to a naive observer, energy and material resources are factors of production no less than labor or capital.

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