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?

19 Pages Posted: 15 Jun 2022

See all articles by Reiner Kümmel

Reiner Kümmel

Institute for Theoretical Physics und Astrophysics, University of Würzburg

Jürgen Grahl

Department of Mathematics, University of Würzburg

Dietmar Lindenberger

Faculty of Management, Economics and Social Sciences, University of Cologne

Date Written: June 4, 2022

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

Suggested Citation

Kümmel, Reiner and Grahl, Jürgen and Lindenberger, Dietmar, 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? (June 4, 2022). Available at SSRN: https://ssrn.com/abstract=4127764 or http://dx.doi.org/10.2139/ssrn.4127764

Reiner Kümmel (Contact Author)

Institute for Theoretical Physics und Astrophysics, University of Würzburg ( email )

Würzburg, D-97074
Germany

Jürgen Grahl

Department of Mathematics, University of Würzburg ( email )

Würzburg, D-97074
Germany

Dietmar Lindenberger

Faculty of Management, Economics and Social Sciences, University of Cologne ( email )

Alte Wagenfabrik - Vogelsanger Str. 321
Cologne, D-50923
Germany

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