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Robert U Ayres (1998)

Eco-thermodynamics: economics and the second law

Ecological Economics, 26(2):189 - 209.

The laws of physics, especially the first and second laws of thermodynamics, have significant implications for economic theory. The major implications of the First Law (conservation of mass/energy) are straightforward and have been discussed at length elsewhere. In brief, raw material inputs to economic processes are not `consumed'. Having been extracted from the environment in the first place, they eventually return to the environment as wastes. The economic implications of the Second Law (entropy law) are far more subtle. There is considerable literature, initiated by the work of Georgescu-Roegen, on the supposed constraints on economic growth imposed by the fact that economic processes utilize `low-entropy' raw materials (fossil fuels and high grade metal ores) and discard `high entropy' wastes. However, as a practical matter the flux of available low-entropy energy (exergy) from the sun is extremely large and certainly adequate to sustain economic activity in the solar system indefinitely, even though fossil fuel and metal ore stocks may eventually be exhausted. It is argued in this paper that the real economic significance of the Second Law lies in the fact that exergy is: (i) not conserved; and (ii) is a useful common measure of resource quality, as well as quantity, applicable to both materials and energy. Thus, exergy can be used to measure and compare resource inputs and outputs, including wastes and losses. This is potentially important in itself. Moreover, since exergy is not conserved it is truly consumed (i.e. used up) in economic processes. Hence, exergy is no less a `factor of production' than labor or capital. This fact has strong implications for economic growth theory, especially with regard to assessing the role of technical progress.

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