How Do We Achieve a Sustainable Economy?
Integrating Macroeconomics and Ecology via Energy and the Laws of Thermodynamics
Principal Investigator: Professor Steve Keen
Steve Keen is an Australian-born, British-based 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. He is an Honorary Professor at UCL and a Distinguished Research Fellow with the Institute for Strategy Resilience & Security.
All existing mathematical macroeconomic models use “production functions” to relate output (GDP) to inputs. At present these assume that output is created by combining inputs of labour, machinery (Capital) and technology, while change in output is attributed to changes in technology and the amounts of labour and capital employed. The role of energy is ignored.
In the real world, nothing can be produced without energy, and neither labour nor machines can function without energy inputs. The insight that “Labour without energy is a corpse; machinery without energy is a sculpture” led the economist in this group (Keen) to propose that production functions should treat output as a function of the energy harnessed by labour and capital. This leads to production functions relating output to the amount of energy converted into useful work by labour and machines.
The atmospheric scientist in this team (Garrett) approached the same issue from a thermodynamic perspective by an analogy between the economy and a growing child. Most of the nutrients consumed by a child are used to maintain its existing size; the child will grow over time if the amount of energy consumes grows over time. The same applies to the economy: most energy is needed to maintain the current industrial structure, and growth in output requires growth in either the amount of energy consumed or the efficiency of energy conversion.
Both these approaches allow economics to be linked with ecological sustainability at a fundamental level, since work necessarily results in waste energy (primarily in the form of waste products), where by the Second Law of Thermodynamics, the waste must exceed the reduction in disorder achieved by production. They allow economics to address the issue of sustainability at a fundamental level, since the essence of the sustainability problem is the impact of waste products from production on the biosphere—most prominently, but by no means exclusively, CO2 from exploiting energy in the form of fossil fuels.
To fully realise the potential of these two approaches, they need to be integrated properly; aggregate production functions in which energy plays the crucial role it does in the real world need to be produced that are suitable for all schools of thought; and disaggregated versions are needed to acknowledge the multiple input: multiple output nature of production, and hence waste generation. We will also construct proof-of-concept integrated economic and ecological models.
Our research can also allow the development of a new, positive definition of real GDP as useful work, measured in units of energy. The current definition as the inflation-adjusted sum of all monetized economic activity leads to obvious anomalies, such as including both transportation and traffic accidents in GDP.
The project will proceed by enabling the three researchers (Keen, Garrett, applied mathematician Grasselli) to work intensively together for three one-week periods over the next year to produce the required mathematical functions and models.