Working Paper Economic Growth , Technological Progress and Energy Use in the US over the Last Century : Identifying Common Trends and Structural Change in Macroeconomic Time Series

In this paper we argue two theses. First, we suggest that economies evolve along a long-term trajectory that corresponds closely to increases in the production and consumption of useful work (in the thermodynamic sense) rather than energy (exergy) inputs per se. Second, we argue that when economies experience sudden shocks and structural changes, due (for instance) to wars or major depressions, they are accompanied by significant changes in the quantity and patterns of energy (exergy) consumption and useful work output. To support these assertions we have performed unit root and structural change tests to characterise the temporal behaviour of the factors of production. These results have implications for understanding the role of energy in the economy, for modelling co-variation between output and factor inputs and for identification of the most appropriate form of the production function. 1. Rationale Economies appear to evolve along a long term trajectory driven by technological progress, in which the factors of production maintain a fairly stable relationship to each other. This behaviour resembles a kind of “self-organisation”. However, economies also react to sudden shocks or discontinuities. Commonly cited examples identified from previous time series analysis include major wars (WW I and WWII), the Great Depression (1930-34), and more recently the oil-price shock of 1973-74 (Dickey and Fuller 1979; Dickey and Fuller 1981; Perron 1989; Perron 1994). Long term economic growth reflects the underlying dynamics of technological progress. Discontinuities may correspond to clusters of major innovations focused on overcoming a barrier or exploiting a new opportunity. Not surprisingly these discontinuities also relate to important and sudden changes in the quantity, patterns and efficiency with which energy is used. However, most time series analyses to date have not incorporated physical measures of energy (exergy) production, consumption or use. Instead they have used aggregate energy prices, or production/consumption in monetary terms, as proxies. Yet, it is evident that each transitory shock (such as a war) was accompanied by major changes in the quantity, patterns and efficiency of energy consumption. These changes, in turn, are likely to have influenced – to differing degrees – both the cyclical fluctuations and long-term trends in output growth. The reasons for this neglect by previous studies can be partly attributed to the lack of availability of reliable time series describing the quantitative flows or energy (exergy) and useful work inputs to the economy, by sector or function. Neoclassical theory, which sees energy inputs as a consequence of economic activity and growth, rather than as a co-driver, is also partly responsible for the lack of attention to the statistical attributes of these time series. We have previously estimated a detailed time series of the exergy inputs and useful work delivered to the US economy from 1900 through 1998 (Ayres, Ayres et al. 2003), making it possible to undertake just such an empirical investigation. The immediate purpose of this paper is to characterise and compare the historical trends in factor inputs and output growth from a statistical perspective. This should provide information concerning the underlying data generating processes, as necessary for subsequent cointegration and causality analysis. The ultimate aim, of course, is to facilitate the selection of an appropriate production function to explain output growth. 1 Strictly speaking energy is conserved, exergy is consumed. 2 We describe useful work in the following section. Benjamin Warr Page 3 23/06/2006 2. Background We have noted elsewhere (Ayres and Warr 2002; Ayres, Ayres et al. 2003; Ayres and Warr 2005) that technological progress in the past century, has led to consistent reductions in the cost of energy (exergy) and useful work (exergy services) delivered to a user. Moreover, we have argued that these innovations have been central to the economic growth process. A brief explanation of terminology is important at this point. Exergy, B is the technical term for useful (available) energy, i.e. the energy that can be used to do useful work, U. For example, high temperature steam is available to do work, whereas room temperature water is not. A precise definition of availability can be found in thermodynamic textbooks and need not trouble us here. Energy (exergy) inputs to the economic system include fossil fuels, of course, but also nuclear fission, solar heat, photovoltaic electricity (PV), wind, flowing water, and biomass. Useful work consists of four distinct types. They are as follows: (1) muscle work by animals and humans, (2) mechanical work performed by machines, including internal combustion engines, and steam turbines (for electric power generation), (3) electrical work (e.g. lighting, electrolysis, motor drive) and (4) thermal work, including cooking, water heating and space heating. These are all examples of energy (exergy) services. Moreover, these services are quantifiable and can be calculated with reasonable accuracy, based on published statistics on the inputs plus some engineering data. Hereafter we drop the familiar, but misleading term energy in favour of the correct term, exergy. Power, a more familiar term, is a measure of useful work performed per unit time. However, power requirements (and outputs) for vehicles, for instance, are quite variable. Maximum power is needed only for acceleration or takeoff (e.g. of an airplane) but most engines operate far below maximum power output most of the time. There are statistics on the total rated (maximum) horsepower of prime movers installed in the US, but these data are not easily converted to useful work performed. The ratio of exergy service output (for any category) to exergy inputs is a pure number between zero and unity. It can be interpreted as the efficiency of conversion of exergy inputs to service (work) outputs. Moreover, this thermodynamic efficiency is a quantitative measure of the state of technology, either by function (such as transport or space heating), or in the aggregate for the economy as a whole. N.B. thermodynamic efficiency as defined here must not be confused with economic efficiency, as that term is normally used by economists. In general, thermodynamic efficiency increases monotonically over time. Figure 1 shows our calculated estimate of the aggregate thermodynamic efficiency for the US for the period 19002000. 3 Our estimated time series of the energy inputs and the various components of useful work, from 1900 through 1998, have been published elsewhere (Ayres, Ayres et al. 2003) and for electricity use efficiency (Ayres, Ayres et al. 2005). Benjamin Warr Page 4 23/06/2006 Technical efficiency of conversion of exergy (B) into useful work (U, exergy services), US 1900-2000. 0% 2% 4% 6% 8% 10% 12% 190