1. Emergent properties and Energy in Economics

2. Stymied by stylized facts
Four unsolved anomalies for mainstream economics
Rise in inequality
Financial crisis
Preceded by “Great Moderation”
Slow growth after it
Easily solved by system dynamics/complex systems approach
Describe fundamental structure of the system
Postulate simplest possible relationships between entities in system
See what happens…
Define Employment Rate, Wages Share, Debt Ratio, Productivity, Profit, Profit Share

3. Explained by simplest possible dynamic monetary model
Differentiate system states with respect to time:
“Employment will rise if economic growth exceeds the sum of population & labor productivity growth”
“Wages share of output will rise if wage rise exceeds growth in labor productivity”
“Debt ratio will rise if debt grows faster than GDP”
Add simplest possible relationships between system states

4. Explained by simplest possible dynamic monetary model
Results in simple 3-dimensional model
Moderation then crisis
Simulated as ODEs in Minsky:
And a second outcome with stylized characteristics just like those mainstream “anomalies”
Inequality
Crrisis

5. Explained by simplest possible dynamic monetary model
Same model in system dynamics form:

6. Where did economics go astray?: History
Energy absent—or effectively non-essential—in all current models of production
Marxists: Labor theory of value
Surplus derived from & proportional to labour input
Neoclassicals: Output by substitutable “factors of production”
No Energy input
No Energy input
No Energy input
Post-Keynesians: Output by fixed proportions
Kummel-Ayres LINEX: Substitutable “factors of production” including energy
Energy input, but…
Could hypothetically set Energy input to zero & still get output
Independent Labour & Capital inputs imply they can function without energy…

7. Where must economics start?: Energy & Thermodynamics
Concept of labour and capital without energy is absurd
Labour without energy is a corpse
Capital without energy is a sculpture
Think of them instead as means to harness “free” energy
And think of GDP as “useful work”. Then we start with
All measured in energy terms: megajoules
Actual work by capital & labour depends on
Number of units of L (unskilled workers) and “K” (machines)
Flow of energy/time (E) harnessed by L and K
Ratio (x<1) of energy available for useful work(Exergy, Ex) to energy (E)
Efficiency (e<1) of use of exergy

8. Where must economics start?: Energy & Thermodynamics
In multiplicative constant returns to scale form:
Rearranging:
Components:
Units of capital & labour as in standard CDPF
Energy parameters for Labour:
EL say 4000 calories/day
xL say 0.5
eL say 0.5
Effectively a constant  1000
Raised to a power
Energy parameters for Capital:
EK (Energy consumption per machine per day) has risen exponentially over time
xK & eK time-varying but maxima below 1
Raised to a power

9. Where must economics start?: Energy & Thermodynamics
Final formula is
Compared to Cobb-Douglas Production Function
“Solow Residual” is energy converted to useful work by machinery
Compared to Kummel-Ayres in CDE form
Can be put in output per worker form, unlike Kummel-Ayres function:
Can also relate output per head to “useful work by machines” per head
a a scaling factor, rather than statement of “marginal productivity”
Can remove “K” & use measured energy consumption by industry
Total energy consumed by industry is an empirically known quantity
Substitute
to yield

10. Where must economics start?: Energy & Thermodynamics
Energy-substituted equation is
Putting this in per capita real income form yields:
Energy per head; trend
Employ-ment rate; cyclical
GDP per head; cyclical trend
Data exists for GDP per head, employment rate (l) & energy per head
But not (time-varying) exergy-energy ratio or efficiency…

11. Introducing energy into a dynamic model
Cobb-Douglas form still implies unrealistic substitutability of Labour & Capital
Can instead modify Post Keynesian relations…
From To

12. Introducing energy into a dynamic model
Machinery as way of harnessing free energy to do work
Labour hired proportional to energy
Could also model investment as accessing proportion (<100%) of current capability to exploit energy