In his wide-ranging new book Energy, Complexity and Wealth Maximization, physicist and economist Robert Ayres considers how the science of thermodynamics can be applied to economic growth and wealth creation. Ayres’s thesis is that “wealth in human society is the result of conscious and deliberate reformulation and dissipation of energy and materials.” The difference between that notion and standard descriptions of wealth is that in Ayres’s analysis, economic wealth stems not from the mere existence of valuable resources but from the transformation of existing energy and raw materials into the goods and services on which we depend. We burn oil. We mine ores and smelt them into metals, which we fashion into goods. But we do so at the expense of the depletion of those irreplaceable natural resources.

Shanghai at night, as seen from the International Space Station.

Shanghai at night, as seen from the International Space Station.

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Ayres encapsulates decades of his own research and that by colleagues Benjamin Warr, Reiner Kümmel, and many others to ground mainstream economics in physical law. He concentrates especially on their efforts to incorporate thermodynamics into economic growth theory because, he writes, “the laws of thermodynamics are central to everything that happens.” Moreover, he continues, “the core ideas of economic theory (up to now) have never included, or even touched tangentially, on energy or the laws of thermodynamics.”

Integrating thermodynamics into economics means imposing its laws on real-world economic models. As Ayres explains, mainstream economics assumes that energy is unlimited and its consumption is determined by demand, which in turn is determined by the state of the general economy. Those economic models treat energy as an “intermediate good” created by capital and labor, the only two “factors of production” in such models, rather than as a separate limited economic factor that determines production and growth.

The first law of thermodynamics says that energy is conserved—it must come from somewhere. The second law tells us that the energy and materials used in the economy will necessarily be degraded in the process of creating economic value and result in the discharge of waste heat, depleted ores, carbon dioxide, and other low-grade emissions. In Ayres’s view, energy is not an intermediate good but a third factor of production, and the low-cost and plentiful energy that has resulted from the exploitation of fossil fuels has been a primary driver of economic growth for the past 250 years.

The difference between Ayres’s perspective and the usual picture has enormous implications for economic policymaking. In calculations based on the mainstream framework, energy’s “output elasticity”—the percentage change in economic output per percentage change in energy input—is only about 0.05 for the US and other highly industrialized countries. By contrast, Kümmel, Ayres, and others calculate a value closer to 0.3 to 0.4—almost an order of magnitude larger.

Ayres devotes two chapters, “Mainstream Economics and Energy” and “New Perspectives on Capital, Work, and Wealth,” to developing the economic implications of his thesis. An appendix titled “Energy in Growth Theory” summarizes the ideas and presents data in support of Ayres’s hypothesis.

The reconceptualization of energy and its impact as an economic driver will naturally lead the reader to wonder what will happen when fossil fuels become less available. Ayres addresses that question in the chapter “Energy, Technology, and the Future,” which discusses peaking oil production, the fracking boom, energy efficiency, and renewable energy. Several chapters illustrate the surprising universality of the entropy concept. In economics, local entropy reduction and increasing complexity—that is, economic value creation—come at the expense of a global entropy increase. But as physicists well know, that local–global dichotomy is ubiquitous, as Ayres demonstrates in the chapters “The Cosmos, the Sun, and the Earth”; “The Origin of Life”; and “Energy, Water, Climate, and Cycles.” Much of that material is fun to read, but it is not central to Ayres’s main thesis about wealth maximization in contemporary human society.

Anyone who has puzzled over the disconnect between mainstream economics and the physical sciences or who is concerned about the economic implications of the finite limits of our biosphere should read Energy, Complexity and Wealth Maximization. As Ayres evocatively puts it, “Nothing happens without a flow of energy. Not in the natural world and not in the human world. Thus, it is perfectly true that energy—not money—makes the world go round.”

Phil Metz is an independent sustainability researcher focused on developing scientifically grounded practical tools for mitigating climate change at urban and regional levels. He holds a PhD in high-energy theoretical physics and an MBA in marketing.