The Economy Is an Energy System

What physics tells us that mainstream economics forgot

Published as part of iQ-LOOP's Insights series.

Is it feasible for an economy to indefinitely expand on finite resources on our planet? It appears to be the type of inquiry a freshman might have, which a professor could dismiss. A recent dialogue between Nivi Jaswal-Wirtjes [1], and economist Professor Steve Keen [2] places that inquiry at the forefront, with ramifications for individuals engaged in energy, industry, or infrastructure.

The economy is not a financial system. It is an energy system

Financial resources, labour, and capital are commonly recognised as the foundations of economic activity. Keen believes that there is a more important factor beneath these three: energy. In its absence, labour is rendered inefficient, and machinery cannot function. However, the Cobb-Douglas production function [3], which is often used in conventional economics, makes no mention of energy. It combines labour and capital, raises each to a power level, and multiplies by a residual known as total factor productivity. The model's initial creators acknowledged in 1928 that energy should be incorporated into future revisions. This was never the case.

The empirical correlation provides an alternate narrative. According to Keen, the link between energy consumption and GDP is approximately one-to-one: a 5% rise in energy usage corresponds to a 5% increase in GDP, whereas a 6% decrease in energy consumption correlates to a comparable drop in output. Economic systems are not based on theoretical principles. They run on energy, and models that ignore it show an impossible world.

Entropy is the ledger that no one reads

The planet's energy budget originates with the sun, which emits high-frequency, low-entropy [4] radiation known as photons. Biological systems, and the economies that rely on them, capture high-quality energy, convert it into productive effort, and then release it back into the environment as lower-quality, higher-entropy byproducts. That unidirectional movement from order to chaos is not metaphorical. The second law of thermodynamics applies to both the factory floor and the leaf.

In this sense, quality is just as important as quantity. A calorie cannot be equated with another calorie, a barrel of oil is not the same as a barrel of diesel, and treating energy as a uniform input, as classical economic theory recommends, obscures the physical constraints that genuinely govern production. An economy that ignores entropy is fundamentally out of sync with the natural world.

Work, economy, and energy are one continuous chain.

Keen offers a valuable viewpoint on the historical trend of economic progress: track the amount of energy a unit of work can generate. A human operating at maximum capacity may produce roughly 100 watts, which is comparable to the output of a standard incandescent light bulb. A draft animal provides approximately a thousand. The shift to fossil fuels transformed solar energy, previously gathered by plants and wildlife, into a labour force. Keen describes them as "fossil fuel slaves." Since the 1700s, each improvement in living conditions has corresponded to an increase in energy output per worker. Keen puts it bluntly: work without energy is like a lifeless corpse, whereas capital without energy is like a statue. No action occurs until energy enters the system.

Energy cannot be created. It can only be transformed.

This fundamental physical law underpins everything else. Economic activity did not generate the energy reserves that underpin the modern economy, such as coal, oil, and gas. They were discovered, removed, and transformed from one form into another. That single truth reframes what growth means on a finite planet: an economy cannot create new energy out of thin air; it can only improve its ability to convert existing energy, use it more efficiently, store it more effectively, and move it into cleaner forms.

That is precisely the problem iQ-LOOP was designed to address. If energy cannot be created and every economy is based on its transformation, the technologies that determine how efficiently we store and redeploy that energy, sustainably, safely, and at scale, should not be overlooked in the climate discourse. They are the discourse. Aluminium-based energy storage is one solution to a long-standing physical constraint: how do we store high-quality energy in a stable form and release it as work when and where it is required, without incurring the losses and pollutants associated with the fossil fuel chain Keen describes?

A closing thought on where this is heading.

The conversation between Jaswal-Wirtjes and Keen also brings up an interesting paradox: artificial intelligence is being marketed as a solution to labour and productivity restrictions, while paradoxically becoming one of the most energy-intensive technologies ever implemented. Keen points out that AI's energy consumption is already "off the scale," owing primarily to fossil fuels, and that the true limit to how far AI may develop may be physical rather than computational. ChatGPT alone is anticipated to consume almost the daily energy consumption of 22,000 US households, the majority of which is not yet provided by renewables.

That is the same lesson in a new form: any system we create, no matter how computerised, begins as an energy system. Taking that truth seriously, rather than modelling around it, is the first step in developing a viable growth, climate, or technology strategy. That's also why this work matters to those of us who work in energy storage.

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[1] Nivi Jaswal-Wirtjes is a filmmaker and researcher, the founder of the Virsa Foundation, and producer of the documentary Third Degree Burnout: A Survivor's Guide

[2] Prof. Steve Keen (born 28 March 1953) is an Australian economist and author.

[3] The Cobb-Douglas production function is a well-known economic formula that describes how businesses use inputs such as labour and capital to produce goods and services (output). Mathematician Charles Cobb and economist Paul Douglas developed it to assess productivity, efficiency, and economic progress.

[4] A scientific measure of disorder, randomness, and energy not available to do work in a closed system. It tells you how energy and matter diffuse over time.