Saturday, January 7, 2012

Can the economy keep growing? This paper says no

I just finished reading the rather short yet very interesting journal article Entropy, Substitution and Sustainable Economic Growth found in the open access journal Research in World Economy.

In the debate over sustainable economic growth, two critical issues are elasticity of substitution and technical change. Due to entropy increasing law in MEI system, the elasticity of substitution between any two resources must decline to zero and the efficiency improvement of resources from technical change is also limited. Therefore, substitution and technical change can not sustain economic growth forever.

This paper is only 5 pages long and is an example on how brevity can sometimes make things less clear.  Essentially it argues that economic growth can not continue forever due to entropy.  As we use more capital and labor we will see more entropy which will result in the use of more capital and labor for maintenance of capital and labor.  This results in decreasing efficiency of production which means that there is an upper limit on how much we can increase economic growth.
The paper goes on to argue that technological change faces the same issue.  Fundamentally technology change doesn't increase efficiency but rather moves from using one resource to another to create the same output.  This means it would be subject to the same forces of entropy and thus, in the long run, would not be capable of sustaining economic growth.
I'm honestly nor sure what to make of this argument.  Again it is just too short of a paper to really be able to tell if this is a valid critique of long term economic growth.  Statements like this one "As a double-edged sword, technical change can’t fundamentally improve the efficiency of resources." are just not well backed up and need a much longer explanation.   
My feeling is that it might be a valid issue, but the theoretical future end of economic growth due to increasing entropy is so far away as to not be a realistic concern for centuries.  Still it is an interesting and short paper that I hope others will properly evaluate.