Useful Exergy and Economic Growth: A Better Way to Model the Economy

What is it about?

This paper investigates the role of energy in economic growth by testing whether aggregate production functions (linking output to capital, labour, and energy) are statistically valid and economically meaningful. It develops a rigorous econometric approach based on cointegration and causality tests and applies it to Portugal from 1960 to 2009. A key contribution is comparing different ways of measuring energy, showing that using useful exergy—energy actually delivered to perform work—leads to plausible and consistent results, while standard approaches that ignore energy or rely on primary energy fail to do so.

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Photo by Dominik Lückmann on Unsplash

Photo by Dominik Lückmann on Unsplash

Why is it important?

The role of energy in economic growth is still debated, with many models treating it as a minor factor. This paper is important because it shows that plausible economic relationships between inputs and output only emerge when energy—measured properly as useful exergy—is included. It demonstrates that energy is not just another input, but a key constraint that influences the productivity of capital and labour, helping to explain economic growth without relying on unexplained residuals. In doing so, the paper provides strong evidence that economic growth is fundamentally linked to physical energy use, and that ignoring this can lead to misleading conclusions in economic modelling and policy.