What if calculations of the economic effects for Germany of a stop of energy imports from Russia are misled by the neoclassical cost-share theorem?

Abstract

The cost-share theorem and the related equilibrium structure of neoclassical economics are not consistent with thermodynamics and the process nature of energy conversion in wealth creation and technological evolution. In industrial economies energy's output elasticity is typically much larger than its share in total factor cost, whereas for labor the opposite holds. This drives the ongoing substitution process of replacing relatively expensive labor by relatively cheap energy in combination with increasingly automated capital. A model calculation of output losses in German industry due to constraints on energy availability, e.g. as consequence of an embargo on Russian gas imports, shows: If one forgoes the cost-share theorem one obtains losses that are an order of magnitude larger than the losses that result from neoclassical equilibrium analyses. The mathematical proof that the cost-share theorem is invalid for present industrial economies is complemented by a verbal reasoning based on energy's fundamental economic role of activating the capital stock.

Keywords: cost-share theorem, thermodynamics, energy conversion, technological evolution, substitution, output elasticities, embargo of Russian gas

JEL Classification: A12, E23, Q43