Useful Exergy Is Key in Obtaining Plausible Aggregate Production Functions and Recognizing the Role of Energy in Economic Growth: Portugal 1960–2009

• Published in: Ecological economics Vol. 148; pp. 103 - 120
• Main Authors: Santos, João, Domingos, Tiago, Sousa, Tânia, St. Aubyn, Miguel
• Format: Journal Article
• Language: English
• Published: Elsevier B.V 01.06.2018
• Subjects: Aggregate production function; capital; Cointegration; Cost shares; ecological economics; economic development; elasticities; exergy; Granger causality; labor; Portugal; primary energy; production economics; production functions; time series analysis; Useful exergy; Portugal; Useful exergy; Aggregate production function; Cost shares; Cointegration; Granger causality
• ISSN: 0921-8009; 1873-6106
• DOI: 10.1016/j.ecolecon.2018.01.008

The role of energy in economic growth is controversial. Models based on aggregate production functions (APF) range from the neoclassical, which downplay energy due to a cost-share theorem, but typically rely on exogenous total factor productivity (TFP), to the ecological economic, which acknowledge energy's importance. The validity of the APF concept itself is questioned. Here, we apply cointegration analysis to identify APFs between output, capital, labor, and possibly energy, measured as primary energy or useful exergy. We test for TFP growth by including a time trend. We require that plausible APFs verify cointegration, non-negative output elasticities, and Granger-causality linking inputs to output. Our method recognizes cases where: a) plausible APFs do not exist (thereby addressing the APF critique); b) energy impacts growth directly; c) energy impacts growth indirectly, through capital and labor. We apply the method to Portugal (1960–2009), considering standard and quality-adjusted capital/labor measures. With a time trend or disregarding energy, plausible APFs are never found. Without a trend, plausible APFs are found only when considering capital-energy-labor combinations. Within these, with quality-adjusted capital and labor and useful exergy, results are consistent with the cost-share theorem but energy plays a central role, through a constraint on all factors of production. •We apply a cointegration-based method to test for aggregate production functions.•Plausible production functions are subject to empirically-defined criteria.•We test for the inclusion of primary energy, and useful exergy inputs.•Cointegration reveals the constraint of useful exergy inputs, alongside capital and labor, on growth.•The cost share theorem is reconciled with the relevance of energy in production.