1 Two Paradigms of Production and Growth

This article contrasts two incompatible paradigms of economics and their implication for economic growth. The first paradigm is consistent with the micro-foundations of neoclassical theory, which assume that all goods and services are produced from other goods plus value added by some combination of capital and labor. The theory does not explain growth, but simply assumes that technological progress (or multi-factor productivity gains) will continue indefinitely along the supposedly `optimal’ path. Related endogenous growth theory, attempts to explain the so-called Solow residual in terms of spillovers and/or increasing knowledge embodied in `human capital’, but this theory is unquantifiable – lacking satisfactory metrics for knowledge or human capital – and it still neglects the role of energy and materials The second paradigm focuses on the economy as a material resource processor-convertor. It interprets economic growth as an evolutionary process driven mostly by technological innovations (not by capital accumulation), with a strong focus on materials processing and energy (exergy) conversion. We measure resource inputs and resource conversion efficiency in thermodynamic terms. Using a new a This work was initiated when the first author was a part-time visiting professor at the UN University, Institute for Advanced Study in Tokyo, during 2000 and 2001. It has also been supported by the European Commission under project TERRA (FP5-IST) and by the Center for Management of Environmental Resources at .