There is a strain of thought, common among those who are both technically literate and policy- or economically minded, that energy production and consumption underlies the economy in a fundamental way. Energy, in this view, is afforded status as a special quantity, of greater importance than any other—possibly including capital. This attitude is exemplified in Vaclav Smil’s How the World Really Works, which begins in Chapter 1 with a focus on energy, energy conservation, and a quote from Robert Ayres:

Simply put, energy is the only truly universal currency […]. [I]t is hard to understand why modern economics […] has largely ignored energy. [Economics assumes] “that energy doesn’t matter (much) because the cost share of energy in the economy is so small that it can be ignored … as if output could be produced by labor and capital alone—or as if energy is merely a form of man-made capital that can be produced (as opposed to extracted) by labor and capital.”

One might take issue with the claim that the share of energy in the economy is indeed small (spending on energy in the U.S. is something like 7% of GDP). More importantly, on the margin, a (hypothetical) low price of energy means precisely that energy should be ignored in economic analysis. Adding or removing a small amount of energy does not much affect any of the economic activities that people are willing to pay for. This is what prices are for: to quantify and communicate the relative importance of goods. As long as the market is behaving close to efficiently and we confine ourselves to “marginal” statements (those concerning small changes from the status quo), the price is the most trustworthy guide.

What about “off the margin”? It’s tempting to conclude that, because energy conservation is a physical law, we can short-circuit difficult economic reasoning by appealing to the flow of energy. But I can’t think of any way in which this makes energy meaningfully unique. Our universe has (assuming the Standard Model) a few other conserved quantities—baryon and lepton numbers in particular—and several more approximately conserved quantities, including isospin and most “element numbers”. Energy is not alone.

Baryon number gives concrete meaning to the intuition that mass is conserved. Mass itself isn’t conserved, being exchangeable with other forms of energy, but in everyday matter:

• Estimating mass by multiplying baryon number by the neutron mass gives a figure correct to within 1%, and
• Even within that 1%, nuclear masses can’t be modified without extreme expense.

So as far as economics is concerned, mass is conserved. Why do clever, physics-literate economists not tend to talk about the importance of mass in the economy? Certainly most things tend to have mass, and therefore the use of mass is necessary to build anything. It seems to me that this allows stronger statements than energy conservation, since most things we buy don’t store great amounts of energy.

Going further: as far as economically relevant processes are concerned, “element number” is also a conserved quantity, for almost any element. So, for example, iron is conserved almost as precisely as energy is, and any violation of the conservation of “iron number” is not likely to be economically important. Even more, the number of iron atoms on Earth is approximately conserved in a way that the amount of energy on Earth is not.

When people think about natural constraints on the economy in less abstract (or “sophisticated”) terms, the availability of certain elements often plays a central role. See, for instance, modern concerns over the mining and trading of rare-earth elements. This seems reasonable to me. Certainly the fact that energy conservation is afforded a higher status in the Standard Model than “iron conservation”, isn’t a good reason to place more emphasis on energy in analysis of the economy.

The best argument I know of for discussing energy is that in many contexts it is expensive. I agree: and we’re back to the margin!

It helps to make things concrete, and throughout his book (most of which is not, ostensibly, about energy) Smil provides the energy cost of various tasks, so as to convince the reader of the fundamental importance of energy. The quality of these claims varies. A particularly instructive such claim is found at the start of chapter 3:

Producing large, high-purity silicon crystals […] that are cut into wafers is a complex, multi-step, and highly energy-intensive process […].

This process isn’t energy-intensive as a result of any immutable thermodynamic laws yet known. It is simply the process that is known and convenient, and it happens to be an energy-intensive one. No physical law prevents the use (perhaps with tradeoffs, including R&D cost) of a process that consumes less energy. As the price of energy rises, more pressure is put on manufacturers to reduce energy use, and the energy cost of high-purity silicon falls. Absent a good estimation of this elasticity across a range of prices, we learn nothing by thinking about energy that we didn’t already know from looking at current prices.