In conventional neoclassical theory the production factor energy is either neglected altogether, which is inconsistent with thermodynamics, or attributed only marginal importance. The argument is that energy's share in total factor cost is small compared to the cost shares of labor and capital. However, the recessions after the oil price crises in 1973/74 and 1979/81 have posed the question how a production factor of monetarily minor importance can have such grave economic consequences.

The conventional view of the low economic importance of energy dates back to the first stages in the development of neoclassical economic theory. Initially, the focus was not so much on the generation of wealth, but on its distribution and the efficiency of markets. Consequently, the early thinkers in economics started with a model of pure exchange of goods, without considering their production. With a set of assumptions on rational consumer behavior it was shown that through the exchange of goods in markets an equilibrium results in which all consumers maximize their utility in the sense that it is not possible to improve the situation of a single consumer without worsening the situation of at least one other consumer (Pareto optimum). This benefit of (perfect) markets is generally considered as the foundation of free-market economics. It shows why markets, where "greedy" individuals meet, work at all. But later, when the model was extended to include production, the problem of the physical generation of wealth was coupled inseparably to the problem of the distribution of wealth, as a consequence of the model structure: Since the neoclassical equilibrium is characterized by a (profit-maximizing) optimum in the interior -and not on the boundary- of the region in factor space accessible to the production system according to its state of technology, factor productivities had to equal factor prices. In the resulting production model the weights with which the production factors contribute to the physical generation of wealth, i.e. the elasticities of production, have to equal the factor cost shares. These cost shares, in the industrialized countries, are typically 0.7 (labor), 0.25 (capital) and 0.05 (energy).

Consequently, according to the neoclassical model, the elasticities of production of the factors, which -roughly speaking- measure the percentage of output growth if a factor input increases by one percent, would have to have these values: labor 0.7, capital 0.25, and energy 0.05. With these input weights a decrease of energy utilisation of up to 7%, as observed during the first oil crisis between 1973 and 1975, could explain a decrease of value added of only 0.05(7% = 0.35%. The actually observed decreases of economic output,
however, were roughly ten times larger.

Furthermore, a substantial part of observed long-term economic growth cannot be explained by the growth of the factor inputs, if these are weighted by their cost shares. Large residuals remain. In most cases the residuals play a more important role than the explanatory factors, which, according to Gahlen, makes the neoclassical theory of production tautological [2]. Solow, after noting "...it is true that the notion of time-shifts in the [production] function is a confession of ignorance rather than a claim of knowledge'' [3], comments: "This ... has led to a criticism of the neoclassical model: it is a theory of growth that leaves the main factor in economic growth unexplained'' [4].

As it has been shown recently, the residuals of neoclassical growth theory can mostly be removed by taking into account the production factor energy appropriately [5-11]. It turns out that the crucial point is to drop the neoclassical equilibrium assumption, and to determine the elasticities of production of the factors by purely technological and empirical considerations instead. Thereby, the previously unexplained technological progress reveals its two principal elements: The first one is the activation of the increasingly automated capital stock by energy; and, of course, the people who handle capital have to be qualified appropriately. The second one consists of improvements of organizational and energetic efficiencies of the capital stock. The short-term impact of the first element is much bigger than that of the second element, but the reverse may be true for the long-term impact, if efficiency improvements fundamentally change the course of economic evolution [11]. The efficiency improvements are identified by shifts of the corresponding technology parameters in the production functions, whereas energy's high productive power in increasingly automated production processes is revealed by its high elasticity of production: Energy's elasticity, in industrial sectors of the economy, is typically of the order 0.5, i.e. as large as those of capital and labor together. In service sectors it still exceeds energy's low cost share significantly [7]. Both in industrial and service sectors, labor's elasticity is far below its cost share. Only in the case of capital, do elasticities of production and cost shares turn out to be roughly in equilibrium, as neoclassical theory presupposes.²

What are the consequences of these findings? Let us frame one selected point as follows. If wealth had been distributed according to the "marginal productivity theory", labor would have received only a share of national income much smaller than the observed 70%. But apparently, in the past most of the value added by energy was attributed to labor. The underlying mechanism of distribution was that of wage-negotiations in which free labor unions, powerful during times of high employment, regularly succeeded in winning wage increases according to the growth of productivity, i.e. increased production due to increased and more efficient energy utilization. This way most of the population in the industrialized countries benefited from the wealth generated by the production factors capital, labor, and energy.

With increasing automation in production, however, human routine labor becomes more and more dispensable. A possible consequence is the increasing inequality in the distribution of income, as can be observed in the US, where, due to flexible labor markets, the hours worked per year have increased, but the problem of the "working poor" remains unsolved. Consequently, if society wishes to organize labor markets more competitively, while socially unacceptable distributional effects are to be avoided, the question arises how the institutional settings within market-economies have to be adapted to the changing technological conditions.