Why energy's economic weight is much larger than its cost share

• Energy is a powerful factor of production and the dominant component of “technological progress”.
• Energy, in conjunction with appropriate constraints, is an essential part of any theory of economic growth.
• We owe a substantial part of our material wealth to energy conversion in the machines of the capital stock.

Energy conversion and entropy production determine the growth of wealth in industrialized economies. Novel econometric analyses have revealed energy to be a production factor whose output elasticity, which measures its economic weight, is much higher than its share in total factor cost, while for labor just the opposite is true. Although this result is at variance with neoclassical economic theory, it is compatible with the standard maximization of profit or time-integrated utility if appropriate technological constraints on capital, labor, and energy are taken into account. Shifting the burden of taxes and levies from labor to energy is an adequate policy consequence.