Energy in the theory of production

The fundamental role of energy as a factor of production is investigated. In this paper, capital K, labour L and work of production equipment—productive energy S—are considered to be important production factors. However, in contrast to some theories, the author does not consider the variables K, L, S to be independent; energy and labour inputs act as substitutes for each other, while capital K and work (L and S) are complements. Equations of production dynamics as a set of equations for variables (output Y, value of production equipment K, labour L, energy S, and two technological variables image and image connected with labour requirement and energy requirement, respectively) are established. The time path of output is determined by the exogenous quantities: the potential labour supply and the availability of energy resources. This theory is an extension of the conventional two-factor theory of economic growth. In the previous theory, capital played two distinctive roles which are separated in the present theory: capital as value of production equipment and capital as a substitute for labour. In the latter case, capital is the means by which the labour resource is substituted by energy rather than a production factor itself. Empirical evidence from the US economy is used to estimate the validity of the proposed mechanism of economic growth.