Why are prices proportional to embodied energies?

Other interpretations are unavailable with neoclassical micro theory and all leading macro theories because energy is not part of their core constructs (Jehle & Reny, 2011;Mas-Colell et al., 1995;Samuelson & Nordhaus, 2004;Silberberg & Suen, 2001). Such omission is surprising considering the accepted truths that (1) goods are material rearrangements (Ryan & Pearce, 1985;von Mises, 1949), and (2) humans can only rearrange matter with energy transfers.

Together, these ideas suggest that means are energy transfers, as supply depends on the factors that influence energy transfers: primarily the energy goods that provide energy (e.g. rice, oil) and prime movers that transfer it (e.g. workers, engines), and secondarily whatever other factors that influence energy transfers processes (e.g. water, information, social norms, the environment).

The only available alternative to economic theory that could interpret the proportionality between nominal prices and average embodied energies is an energy theory of value (Costanza, 1980;Hannon, 1973;Odum, 1971). Yet, such theory creates more problems than it solves.

Imposing that economic value is defined by the energy spent producing goods severely reduces or ignores the role of intra and inter-temporal preferences, other inputs, and technological progress (Alessio, 1981;Hertzmark, 1981;Huettner, 1982;Huettner, 1976;Webb & Pearce, 1975). Furthermore, energy’s relevance cannot be understood independently from the prime movers that transfer it to rearrange matter, e.g. a barrel of oil is useless without an engine that can transfer its energy content to produce a good.

Hence, why are nominal prices proportional to average embodied energies? This paper attempts to theoretically explain such proportionality following conventional economic rationale. The starting point is an autarkic agent that maximizes utility subject to an energy transfer constraint.

Such constraint, justified with the idea that means are energy transfers, is the point of departure 1 Average embodied energy is the total energy required on average to produce a unit of a good. from conventional theory. Given this constraint, the paper shows how maximizing consumer and producer behavior reveals marginal energy transfers, what influences their magnitudes, and that nominal prices arise as their social representation under exchange and perfect competition. The proportionality under study follows given the relation between marginal energy transfers and average embodied energies.

The remainder of the paper is as follows: Section 2 lays out a model in which an autarkic agent maximizes utility subject to an energy transfer constraint, and given such constraint, solves an array of optimization problems that must be solved for Pareto-efficiency. Section 3 extends the autarkic setting to analyze how exchange leads to nominal prices as representations of marginal energy transfers, and relates such magnitudes to average embodied energies. Section 4 provides a discussion on these results and section 5 concludes.

My point of departure from traditional theory is the consideration of means as energy transfers.

Given this proposition, utility maximization for an autarkic agent is subject to an energy transfer constraint, and given such constraint, an array of secondary optimization problems must be solved for Pareto-efficiency. This section discusses why means are energy transfers, and solves both primary and secondary optimization problems.

Means are energy transfers because humans can only act by rearranging matter, and they can only rearrange matter with energy transfers. Even if ends are immaterial such as reputation, power, or love, they can only be obtained with material rearrangements such as the writing of a seminal paper, the conquest of a territory, and the shipment of flowers. As Adams (1982) puts it “Every event in history can occur only insofar as there is available whatever amount of energy (i.e., work) is necessary to carry it out. We can think thoughts wildly, but if we do not have the wherewithal to convert them into action, they will remain thoughts”.

The proposition that means are energy transfers requires two clarifications. One is that it is teleological, as energy transfers are means only insofar as they do material rearrangements in accordance to human ends. Such rearrangements are economic goods (goods hereafter), which excludes free goods untouched by human action such as freely available clean air, and material rearrangements that do not serve human purpose such as an AC unit in the a

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