Ecological Economics 160 (2019) 168–182

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Ecological Economics
journal homepage: www.elsevier.com/locate/ecolecon

Analysis

Georgescu-Roegen versus Solow/Stiglitz: Back to a controversy☆ T

Marc Germain
LEM-CNRS (UMR 9221), Université de Lille, France, and IRES, Université de Louvain, Belgium

ARTICLE INFO ABSTRACT

Keywords: Within the framework of an optimal growth model with a non renewable resource, this paper seeks to answer the
Optimal growth question of whether a production function that ignores the constraints of physics on the production process (such
Production function as the Cobb-Douglas) can generate a good medium-term approximation of the trajectory of the economy obtained
Exhaustible resource with a “true” production function, which takes these constraints into account. Two functions that respect these
JEL classification: constraints are considered: (i) the CES function and (ii) a function called ATF, designed specifically for the
C63 purposes of this paper and which has the property of being closer to the Cobb-Douglas than is the CES.
O44 The approximation generated by the Cobb-Douglas can be rough, at least for some variables. When the “true”
Q32
production function is the CES, this is explained by two effects: (i) the difference in technologies and (ii) the fact
Q57
that the Cobb-Douglas totally changes the long-term path of the economy compared to that induced by the CES.
In the case of the ATF, only the second effect acts. If accuracy is a concern, then whatever the “true” function the
obtained results do not argue in favour of a positive answer to the above question. The Cobb-Douglas is only
acceptable when the constraints of physics act weakly, which unfortunately is not always empirically verified
(especially in the case of energy). If accuracy is not the first concern, then the answer seems positive, to the
extent that the medium term paths generated by the Cobb-Douglas and the “true” function have a similar shape
and the orders of magnitude are preserved.

1. Introduction shown, Daly's criticism extends to any production function with a

A little over twenty years ago, in a special issue devoted to the
scientific contribution of Nicolas Georgescu-Roegen, the journal
Ecological Economics published a controversy between Herman Daly
on the one hand and Robert Solow and Joseph Stiglitz on the other
hand (EE, 1997). The controversy focused on the production function
assumed to represent the production of goods and services in neo-
classical growth models, and more specifically on how to account for
natural resources. Using the arguments of Georgescu-Roegen, Daly
(1997) pointed out that either these are ignored or they are taken into
account in an unsatisfactory way. The first case refers to growth models
involving only man-made factors of production (labour and capital) in
the tradition of Solow (1956). The second case refers to growth models
involving a natural resource in a production function alongside man-
made factors, in the tradition of Solow (1974) and Stiglitz (1974).
In the latter case (which is of interest to us in this paper), Daly's
main criticism concerns the use of production functions with a natural
resource in contradiction with the laws of matter and energy con-
servation, as well as with the second principle of thermodynamics. Most
often it is the function Cobb-Douglas, but as Baumgärtner (2004) has
natural resource subject to the Inada conditions. Yet, these laws of
physics govern all processes of transformation of matter and energy,
especially those that are associated with the production of goods and
services. Ignorance of these laws leads to far too optimistic assumptions
about production possibilities, particularly in terms of technical pro-
gress and substitution between natural (energy, raw materials) and
human (capital, labour) factors of production.
Daly's criticism in the preceding paragraph is actually a criticism of
a certain world view. Even when the natural resource is taken into
account, a major consequence of a conception of production that ig-
nores physical constraints is that the economy can grow indefinitely.
Indeed, if certain conditions in terms of technical progress and/or
substitution between natural and human factors are met, the average
productivity of the resource tends to be infinite over time, which makes
it possible to counteract the increasing scarcity of the resource (if it is
non-renewable) or the fact that its stock necessarily remains limited (if
it is renewable). As a result, balanced growth paths at a constant po-
sitive rate are possible in the long term. In this context, the fundamental
conclusion is that there are no physical limits to economic growth
(Fagnart and Germain, 2012).

☆
The author thanks Alphonse Magnus, Stefan Baumgärtner and three reviewers of the journal for their helpful comments.
E-mail address: marc.germain@uclouvain.be.

https://doi.org/10.1016/j.ecolecon.2019.01.012
Received 26 June 2018; Received in revised form 9 January 2019; Accepted 10 January 2019
0921-8009/ © 2019 Elsevier B.V. All rights reserved.
M. Germain
However, if the laws of physics mentioned above are properly taken
into account, the conclusion is likely to be quite different. For example,
the material conservation law requires that the average productivity of
a (material) resource has necessarily an upper bound (Anderson, 1987;
Baumgärtner, 2004). Daly's criticism is therefore devastating to the
extent that balanced growth paths at a constant positive rate prove
impossible. In this context, there are indeed physical limits to economic
growth, at least in quantitative terms1.
In their replies, Solow (1997) and Stiglitz (1997) do not deny the
constraints imposed by the laws of physics on the economy, but they
minimize their practical scope. In particular, Stiglitz points out that
even though their models have an infinite horizon and theoretically
allow production (or even population) to tend towards infinity over
time, the useful horizon for analysis is about 50 years. Consequently, as
long as the limits imposed by physics are far enough away, it is hoped
that a model that neglects these limits will still be able to give a sa-
tisfactory description of growth in the medium term.
Stiglitz's argument is illustrated in Fig. 1, where curves A, B and C
indicate three trajectories of an economy's GDP over time. T is the
horizon mentioned by Stiglitz (about 50 years). A is an indefinite
growth path generated by a production function that ignores the con-
straints of physics (therefore impossible in the long term). B and C are
two feasible (and mutually exclusive) paths resulting from the same
constraints. If the “true” path of the economy is B, then Stiglitz's ar-
gument holds: A and B are indeed constantly close on the interval [0,T].
On the other hand, it is not the case if C is the “true” path because A and
C separate from the origin.
Solow and Stiglitz's responses did not really convince Daly and other
ecological economists, and it is clear that the controversy mentioned
above has turned into a dialogue of the deaf. It remains relevant,
however, as many of the contributions to growth theory involving a
natural resource published after the EE issue are subject to the same
criticisms as those made by Goergescu-Roegen and Daly to Solow and
Stiglitz2.
In the other sense, Stiglitz's argument has not received to our
knowledge the attention it deserved. Fagnart and Germain (2011) re-
fute this argument in their paper, but they do not go into the issue in
depth (this is not their main purpose) and their model differs in many
ways from that of Solow (1974) and Stiglitz (1974).
The purpose of this paper is to examine the validity of Stiglitz's
argument in the framework of a model similar to that developed by this
author in his above-mentioned paper, i.e. an optimal growth model à la
Ramsey, where the production function involves (i) a human-produced
factor (capital) and (ii) a non-renewable natural resource.
We compare paths of the economy generated either by a “true”
production function which escapes the criticism of Daly or by the Cobb-
Douglas, the function retained by Stiglitz and subject to the criticism of
Daly. Two classes of “true” production functions are considered: (i) the
well-known and widely used constant elasticity substitution (CES)
production function with a substitution elasticity below 1 and (ii) a
function designed for the purposes of this article, called Alternative
“True” Function (ATF). The latter presents the property of being closer
1
But not necessarily in qualitative terms, as Fagnart and Germain (2011)
have shown. These authors develop a endogenous growth model, the main
originality of which is to distinguish between quality and quantity of produced
goods, while respecting the assumptions of ecological economics (in particular
the principle of mass conservation and the fact that resource productivity is
limited). While growth is necessarily transitory in terms of quantity, it can
persist in qualitative terms. However, this last result raises concern if the in-
crease in quality is accompanied by an increase in the complexity of the pro-
duced goods. Purely qualitative growth is only sustainable if the energy cost of
complexity is sufficiently low (Fagnart and Germain, 2015).
2
For example, and to take only recent contributions published in reference
journals, we can cite Stamford da Silva (2008), Benchekroun and Withagen
(2011) , and Bretschger and Schaefer (2017).
169
Ecological Economics 160 (2019) 168–182
Fig. 1. Stiglitz's argument.
to the Cobb-Douglas than is the CES (in a sense specified below). ATF
belongs to the same category of production functions as those devel-
oped by Lindenberger and Kümmel (2011) or Maes and Van Passel
(2013). These functions are explicitly designed to comply with physical
limits (regarding energy or matter)3 but, unfortunately, the Cobb-
Douglas is not close enough to these functions. Hence the need to de-
velop a specific production function such as ATF close enough to the
Cobb-Douglas.
The analysis aims to assess whether the path of the economy gen-
erated by the Cobb-Douglas is a good approximation to those obtained
with the CES or ATF in the medium term. It is therefore important to
highlight two original aspects of the analysis: (i) it focuses on the
transitional phase and not on the feasibility of long-term balanced
growth paths and (ii) its purpose is not to compare two production
functions as such (the Cobb-Douglas and the “true” production func-
tion), but rather to compare the trajectories of the economy that these
functions are likely to generate within a dynamic system (of which they
are only one component among others).
The main results can be summarized as follows. When the “true”
function is a CES with a substitution elasticity between capital and
resource significantly less than 1, the approximation generated by the
Cobb-Douglas of the path obtained with the CES is generally rough even
for the first few periods. A main reason lies in the difference between
the technologies represented by the production functions Cobb-Douglas
and CES. When the “true” function is the ATF, the approximation
generated by the Cobb-Douglas of the path obtained with ATF is better
because the difference between the technologies is significantly re-
duced. But despite this improvement, simulations show that the error
between trajectories remains not negligible. Another effect related to
the “influence of the future” appears to be a source of error. This effect
is due to the fact that, the model being intertemporal, the future in-
fluences the present. Now the Cobb-Douglas and the ATF generate to-
tally different long-term trajectories following the fact that the last
takes into account the limits of physics and the other not.
The structure of the paper is as follows. Section 2 presents the model
with a general production function. This function is characterized by an
upper bound to the productivity of the natural resource. Section 3 as-
sesses whether the Cobb-Douglas can generate a good approximation of
the medium term path of the economy obtained with the CES.
3
The LINEX function developed by Kümmel has been used in several studies
designed to revise the share of energy in GDP, particularly in relation to very
low estimates based on the Cobb-Douglas. See Lindenberger and Kümmel
(2011), Ayres et al. (2013), and Kümmel et al. (2015) and the contributions
cited therein.
M. Germain Ecological Economics 160 (2019) 168–182

Particular attention is paid to the determination of a range of permis- without modifying the fundamental dynamics of the model.
sible values for each of the parameters. The comparison of the trajec- At the beginning of its trajectory, the economy is endowed with a
tories generated by the CES and the Cobb-Douglas is repeated by stock of resource R. Being non-renewable, the resource obeys the fol-
varying each of the parameters in turn over its respective interval. lowing dynamic equation:
Section 4 assesses whether the Cobb-Douglas can generate a good ap- Rt + 1 = Rt Xt (5)
proximation of the medium term path of the economy obtained with the
ATF. The Conclusion returns to the validity of Stiglitz's argument in the with R1 = R. Rt is the resource stock at beginning of period t and Xt the
light of the obtained results. amount of resource consumed during the same period.
At each period, production is either assigned to consumption or
2. The Model investment: Yt = Ct + It. Given Eq. (4) and the link between K and k
(cfr. Eq. (2) with B = 1), it follows that:
The model is that of a planned economy à la Ramsey, with two kt + 1 Xt + 1
factors of production. These factors are capital and a non-renewable Yt = Ct + Kt + 1 = Ct +
At + 1 (6)
natural resource. Capital is understood here in a broad sense, i.e. as the
set of human factors (workforce, human capital, physical capital) acting The planner solves the following problem:
on the resource to produce goods and services4. T
Ct1
The macroeconomic production function is written: max t
{Ct , Kt + 1, Yt , Xt }t 1
t=1
1
Y = F (AK , BX ) (1)
under the constraints (5), (6) and
where Y,X,K denote production of goods, resource consumption and the
capital stock respectively. A and B are indexes of capital and resource Yt = F (At Kt , Xt ) = Xt f (kt ) (7)
productivity respectively, increasing with technical progress (assumed with K1 and R1 = R given. β is the discount factor (0 < β < 1), linked to
to be exogenous). F is nil if K = 0 or X = 0, differentiable, increasing the annual preference rate r according to the formula
and concave in each of its arguments.
1
The production function has constant returns to scale. =
Consequently, Eq. (1) can be rewritten in a normalized form, i.e. per [1 + r ] (8)
resource unit: where θ is the duration (in years) of a period t. σ is a positive exogenous
Y AK parameter that measures the instantaneous substitution elasticity of
y= = Bf = Bf (k ) consumption. Technical progress increases capital productivity. For-
X BX (2)
mally: At+1 > At > 0,∀t and limt + At = + .
where (i) y is the production of goods per resource unit, (ii) k represents Proposition 1. The first order optimality conditions derived from the
efficient capital per efficient resource unit. f is nil at the origin, dif- planner's problem are written:
ferentiable, increasing and concave. t t+1
In order to escape the criticism of Daly mentioned in the = At + 1 f (kt + 1)
Introduction, two conditions must be met: Ct Ct + 1 (9)
t t+1
– the production function defined by Eq. (2) satisfies the following [f (kt ) kt f (kt )] = [f (kt + 1) kt + 1 f (kt + 1)]
inequality:
Ct Ct + 1 (10)

lim y = y¯ < +
k + (3)
Proof. See Appendix 7.1. ▪

– the productivity parameter of the resource has an upper bound, i.e.
B B̄ < + .
These two conditions imply that the productivity of the resource is
bounded: even with infinite efficient capital, it is impossible to produce
an infinite quantity of goods with a finite quantity of resource.
Since the applied production functions studied in the following
sections are only different at the level of the normalized function f
(where the productivity indexes A and B are expressed as a quotient), it
will henceforth be assumed without loss of generality that B = B̄ = 1.
The equation of capital accumulation is written:
Kt + 1 = It
Eq. (9) is Ramsey's familiar condition describing optimal consumption
and saving behaviour. Eq. (10) states that the discounted utility gain
from consuming an additional unit of resource must be equalized
between periods. The terminal conditions are written KT+1 = 0 (or
YT = CT) and RT+1 = 0, reflecting the fact that there is no interest in
investing during the last period or to keep unused resources at the end
of the horizon5.
Thereafter, and regardless of the production function that is chosen,
the path of the economy (i.e. the values of Yt, Kt, Xt, Ct, kt in function of
time) is obtained by solving the system of Eqs. (5), (6), (7), (9) and (10).
3. CES versus Cobb-Douglas
(4)

where t denotes time. In the manner of Laitner (2000) and Fagnart and
Germain (2011), a complete depreciation of capital is assumed from
one period to the next, which is the same as assuming that a period
coincides with the lifetime of capital. This assumption has the ad-
vantage of significantly reducing the computation cost of simulations
4
The model is similar to Stiglitz (1974) with some notable differences. The
most important is that, unlike this author, we don’t limit ourselves to the Cobb-
Douglas. On the other hand, Stiglitz distinguishes between labour and capital
(in the strict sense). He also assumes a zero capital depreciation rate, which
allows to generate growth paths without technical progress.
The purpose of this section is to compare two paths of the economy,
the first one being obtained with a CES function that meets criterion
(3), the second one being obtained with the Cobb-Douglas function (the
function retained by Stiglitz (1974)) that violates Eq. (3).
A particular interest in the CES is justified by the fact that this
function is well known and widely used in the empirical economic lit-
erature. As the recent literature review by Brockway et al. (2017)
5
In a theoretical context, T is most often chosen infinite and the final con-
dition must be adapted. However, since the model is subsequently resolved
numerically, the conditions KT+1 = 0 and RT+1 = 0 are required.

170
M. Germain
shows, the CES has even become the most empirically used production
function in recent years.
The purpose is to assess whether the Cobb-Douglas can generate a
path of the economy that can be a good medium-term approximation of
the path obtained with the CES. The analysis focuses on the transitional
phase and not only on the feasibility of long-term balanced growth
paths, hence the approach is numerical.
3.1. The CES and Cobb-Douglas Production Functions
In the context of this model, the CES production function is written:
1 1
= +
Yces [AK ] X (11)
or in normalized form (per resource unit):
1 on the basis of reasonable and generally accepted values.
= +1
yces k (12)
α and ρ are two parameters verifying 0 < α < 1 and ρ ≥−1. ρ de-
termines the elasticity of substitution ν between capital and resource
1 that assume that the representative agent consumes a single non-dur-
according to the relationship = 1 + .
The higher ν, the easier it is to substitute capital to the resource for a
given production level, and therefore the higher the output for the same
quantities of inputs. In other words, the higher ν the more favourable
are the production conditions. The parameter α determines the relative
weight of factors of production: ceteris paribus, the higher α, the higher
the weight of capital and the less important is the resource for pro-
duction.
The Cobb-Douglas function corresponds to the particular case of the
CES where ρ = 0 ( = 1) , in which case Eqs. (11) and (12) lead re-
spectively to:
Ycd = [AK ] X1 (13)
or in normalized form:
ycd = k (14)
It is verified that the CES complies with criterion (3) if ρ > 0. In-
deed, Eq. (12)
1 linked to the growing importance of environmental problems (such as
lim yces = y¯ces =
k +
[1 ]
1
(15)
which is clearly bounded since 0 < α < 1. The upper bound to the
productivity of the resource ȳces is all the lower (and therefore more
constraining) (i) the lower is α and/or (ii) the lower is ν (or the higher is
ρ). On the contrary, it is clear from Eq. (14) that ycd is not bounded and
therefore that the Cobb-Douglas does not meet criterion (3).
Fig. 2a illustrates in a normalized form (i) the CES characterized by
a substitution elasticity equal to ν = .5, denoted CES(.5) (blue curve),
and (ii) the Cobb-Douglas (denoted CD) characterized by a unit elasti-
city (red curve)6. CES(.5) describes a context in which capital and re-
source are not easily substitutable. The distribution parameter α is
common to the two functions and equal to .8. The figure confirms that
CES(.5) respects Eq. (3). Given the values of α and ρ, Eq. (15) ȳces = 5.
The two trajectories of the economy to be compared are obtained by
solving the system Eqs. (5), (6), (7), (9) and (10) with the two functions
(12) and (14). ycd(k) and yces(k) are involved in Eqs. (7) and (10) while
ycd (k ) and yces (k ) are involved in the behavioural Eqs. (9) and (10). It is
obvious that the difference between the two trajectories will be de-
termined (at least in part) by (i) the gap between these functions on the
one hand and (ii) the gap between the derivatives of these functions on
the other.
Fig. 2a suggests that CD is close to CES(.5) up to k ≈ 3. Fig. 2b,c
6
In Figs. 2, 3 and 4, the green curve refers to the ATF that will be considered
in Section 4.
171
Ecological Economics 160 (2019) 168–182
(blue curves) nuances this observation by showing for k [0, 2.5] the
relative errors between respectively (i) the two functions (eCES(k)) and
(ii) the derivatives of these two functions (edCES(k)). These relative er-
rors are calculated as follows:
ycd (k ) ycd (k )
eCES (k ) = 1 and edCES (k ) = 1
yces (k ) yces (k ) (16)
The two functions and their derivatives coincide only for k = 1, and as
soon as we deviate from this value, the errors eCES(k) and edCES(k) in-
crease rapidly. These relative errors become huge when k 0.
3.2. Choice of the Parameters
For each of the model parameters α,r,ν,σ and θ, a range of permis-
sible values is determined from estimates provided by the literature or
Concerning the elasticity of intertemporal substitution in con-
sumption σ, a recent literature review by Thimme (2017) argues for
considerably lower and clearly below one values in the case of models
able consumption good, which is the case here. At the same time, his
article suggests values closer to 1 than 0. So we will take as the range of
admissible values for σ the interval Iσ = [.5,1].
As we are interested in the medium/long term, we will consider not
too high values of the annual discount rate in order to avoid reducing
the weight of the future too much. The range of allowable values chosen
for r is Ir = [.01,.03].
Since the rate of capital depreciation is unitary (see above), the
length of a period θ corresponds to the average lifetime of capital. For
the Euro Zone, the European Central Bank estimates this lifetime at
(about) 20 years (ECB, 2006). For Canada, Baldwin et al. (2005) esti-
mate this lifetime (i) at around 25 years for buildings and (ii) between
11 and 15 years for machinery and equipment. These estimates lead us
to choose for θ the range of allowable values Iθ = [15,20] (in years).
Regarding the elasticity of substitution between natural and human
factors of production, the most documented case by the literature is
probably the one where the natural resource is energy. Attention to
energy as a factor of production (along with capital and labour) is
climate change) and the growing evidence that energy is tightly linked
to economic growth (Brockway et al., 2017). Based on industrial data
for 12 OECD countries and on the basis of a nested CES function, van
der Werf (2008) estimates the elasticity of substitution between energy
and the capital-labour couple to be between .17 and .65 at the level of
industries and between .17 and .61 at the level of countries. He tests the
hypothesis of unit elasticity (the Cobb-Douglas case) and rejects it for
all the industries and countries considered. Based on the same pro-
duction function, (i) Stern and Kander (2012) estimate values of ν
around 2/3 for Sweden and (ii) Heun et al. (2017) obtain very low
values (close to 0) for the United Kingdom. The previous estimates
suggest a range of permissible values belonging to the interval
Iν = [0,2/3], thus excluding values close to 1.
Some of the references cited in the previous paragraph also provide
estimates of the distribution parameter α. Depending on the variants
studied, Stern and Kander (2012) obtain values of α around .8, while
Heun et al. (2017) obtain values between .7 and 1. Based on the cali-
bration of their global energy transition model, Fagnart et al. (2017)
obtain a value of α equal to .66. Given the previous estimates, we
choose a range of permissible values equal to Iα = [.6,1].
Table 1 shows the permitted value ranges of the parameters σ,r,θ,ν
and α, as well as their reference values within the baseline. The other
parameters of the model are the initial capital value K1, the stock of
resource R, the initial capital productivity level A1 and the technical
progress rate gA = ln ( ). K
At + 1
At 1 is normalized to 1. The following sub-
section explains how R,A1 and gA are chosen so that the trajectories
M. Germain Ecological Economics 160 (2019) 168–182

Fig. 2. Normalized CES, ATF and CD production functions. (For interpretation of the references to color in this figure, the reader is referred to the web version of this
article.)

generated by the model have certain desirable properties. Finally, recall
that the discount factor β is linked to the annual discount rate r and to
the length of a period θ according to formula (8).
3.3. Long Term Behaviour
Thereafter, the growth rate of the variable xt between the time
periods t and t + 1 is defined as gxt = ln ( ). We have the following
xt + 1
xt
results.
Proposition 2. In the case of the Cobb-Douglas function, (i) a balanced
growth path is characterized by a constant growth rate equal to:
Proof. See. Appendix 7.2. ▪
By feasible path, we mean a path satisfying the resource constraint
(5) such that 0 < Rt+1 < Rt < R1 = R,∀t. If condition (18) is met, the
economy will necessarily grow in the long run, but it is possible that the
balanced growth path will be preceded by a (transitional) degrowth
phase.
Proposition 3. In the case of the CES function, the economy tends towards
a balanced degrowth path characterized by a constant rate equal to
ln( )
gY = gC = gX =
(19)

ln( )
gY = gC = gK = gA +
[1 ] (17) Proof. (cfr. Appendix 7.3). ▪

(ii) For this path to be feasible and characterized by a positive growth Since β < 1, this rate is necessarily negative. In the long term,
rate, the technical progress rate must satisfy the following condition: production and consumption of goods decline at the same rate as the
exploitation of the resource. Now, if the economy necessarily decreases
1 1 1 1 in the long term, it is nevertheless possible that the balanced degrowth
gA IgA = ln , ln
[1 ] (18) path will be preceded by a (transitional) growth phase.
The average rate of technical progress over a period of time gA is
related to the annual rate of technical progress ga according to the

172
M. Germain
Fig. 3. Long term paths generated by CES(.5) (blue), ATF (green) and CD (red); 1 ≤ t ≤ 25. (For interpretation of the references to color in this figure legend, the
reader is referred to the web version of this article.)
formula
gA = [1 + ga ] 1 (20)
As the controversy between Georgescu-Roegen and Solow/Stiglitz (cfr.
Introduction) is part of the debate on the feasibility of growth, we want
the trajectories generated by the model to be growth trajectories (at
least for the first periods in the case of the CES). Consequently, the
annual rate of technical progress ga is chosen so that gA verifies Eq. (18).
A1 and R are adjusted in order to obtain positive and “reasonable”
growth rate values for the first periods (particularly with the CES).
Table 1 shows the reference values of R,K1,A1,gA used in the baseline. It
also includes the value ranges of R and gA used in the variants relative
to these parameters (see Sections 3.5.3 and 3.5.5).
3.4. The Baseline Simulation
The baseline simulation (against which will be compared all var-
iants studied in Section 3.5) is characterized by the set of parameter
values given in Table 1. The reference values of r and ga are respectively
.02 and .01. Given Eqs. (8) and (20), we obtain that β = .7430 and
gA = .1610. Then, Eq. (18) Ig A = [.0743, .297], and therefore the
condition gA I g A which guarantees a balanced growth path with the
Cobb-Douglas is indeed satisfied.
173
Ecological Economics 160 (2019) 168–182
Before turning to the analysis, it should be recalled that the purpose
is not to see whether the Cobb-Douglas is a good approximation of the
CES, but rather to see whether the trajectory of the economy generated
by the Cobb-Douglas is a good approximation of the one generated by
the CES.
3.4.1. Long Term Paths
Fig. 3a–d shows the trajectories of the economy generated by the
model respectively with the production functions CES (blue curves) and
CD (red curves). The variables depicted are the consumption of goods
Ct, the production of goods Yt, the quantity extracted of resource Xt, the
productivity of the resource yt. Recall that the time periods are “long”
(about 15 years)7.
Fig. 3a,b illustrates the following results that confirm Propositions 1
and 2:
Result 1. Only the Cobb-Douglas allows an indefinite growth of the
economy, thanks to technical progress and although the consumption of
resource decreases towards zero. In the long run, the economy tends
towards a balanced growth path characterized by the constant growth
7
The simulation horizon T is chosen large enough so that the trajectories for
the first dozens of periods are almost insensitive to the chosen value of this
parameter.
M. Germain Ecological Economics 160 (2019) 168–182

Fig. 4. Medium term paths generated by CES(.5) (blue), ATF (green) and CD (red); 1 ≤ t ≤ 4. (For interpretation of the references to color in this figure legend, the
reader is referred to the web version of this article.)

Table 1 given that Yt + and Xt 0 , the productivity of the resource

Ranges and reference values of the parameters. yt + . Criterion (3) is therefore sooner or later violated. On the
Parameter Interval Reference value contrary, as shown by Fig. 3d, in the case of CES(.5) yt tends towards its
limit value determined by Eq. (15). Therefore, we have the confirma-
σ [.5, 1] .75 tion that:
r [.01, .03] .02
Result 3. The Cobb-Douglas cannot be considered a satisfying
θ [15, 20] 15
v [0, 2/3] .5
description of the technology in the long term.
α [.6, 1] .8
R [5, 150] 50
gA [.08, .29] .161( g a = .01) 3.4.2. Medium Term Paths
K1 1 If the Cobb-Douglas cannot be considered a satisfying description of
A1 1.5 the technology in the long term, what about in the medium term, i.e. for
the first periods of the trajectory? While the path of the economy is
totally different in the long term depending on whether the production
rate given by Eq. (17). In this case, technology allows the economy to function is a Cobb-Douglas or a CES, Fig. 3a–d shows that this is not the
free itself from its resource constraint. case in the medium term. As far as production and consumption are
Result 2. With a CES characterized by an elasticity of substitution less concerned (Fig. 3 a–b), the blue and red curves move in the same di-
than 1, only transient growth is possible and sooner or later the rection and orders of magnitude are similar.
economy will decline, driven by the declining exploitation of the In order to analyze the quality of the approximation offered by the
resource. In the long run, the economy tends towards a balanced Cobb-Douglas in the medium term, we introduce the following notions:
degrowth path characterized by the constant negative rate given by Eq.
(19). – The time interval corresponding to the periods 1 ≤ t ≤ tf is called
hereafter the medium-term horizon (MTH). In the following, we will
Since the resource is non-renewable, Xt necessarily tends towards 0 test the validity of the Cobb-Douglas at the level of MTH.
whatever the production function (Fig. 3c). With the Cobb-Douglas,

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M. Germain Ecological Economics 160 (2019) 168–182

Table 2
Errors generated by CD w.r.t. CES(.5) and ATF on MTH.
CES(.5) ATF CD

eY eC eX ΛCES eY eC eX ΛATF ΛCD

min 0.2246 −0.0390 −0.1019 0.3044 −0.1252 0.0869 −0.0572 0.1499 0.1717
max 0.3034 0.3118 0.7732 0.9241 0.0267 0.1488 0.1267 1.3612 1.4712
mean 0.2972 0.1136 0.4402 0.0912 0.1383 0.1020

– To measure the mean difference between the trajectories of the function takes into account the limitations imposed by the laws of
variable x generated respectively by CES and CD, the following in- physics (modeled here by Eq. (15)) or not has an influence on the path
dicator will be used: of the economy in the short and medium term, and not only in the long
1 term.
tf
[ t=1
[xCD, t x CES, t ]2 ] 2
ex = 1
tf
[ t=1
2
xCES ,t ]
2
(21) 3.5. Other Parametrizations

ex is the average error between the two paths of xt on MTH. These two In order to test the robustness of the previous result, the trajectories
paths are the sets of values {xCD,t,t = 1,…,tf} and {xCES,t,t = 1,…,tf}. obtained with the CES and Cobb-Douglas functions for other model
xCD,t and xCES,t are respectively the values taken at period t by variable parametrizations were compared. Each of the main parameters of the
x (for example output) along the paths generated by the Cobb- model (σ,r,α,ν,R,θ) has been varied successively on its range of varia-
Douglas and CES functions. tion shown in Table 1. In the case of σ,r,α, parameter variations are
– In the particular case where the time interval is limited to a single made within the limits permitted by condition (18) (where the discount
period t, Eq. (21) reduces to the instantaneous error observed at time factor β varies in function of r according to Eq. (8)).
t and defined by:
x CD, t x CES, t 3.5.1. Variation of σ,r
ext =
xCES , t (22) Fig. 5a,b shows how the average errors eY (blue curve), eC (green
curve) and eX (red curve) change respectively with σ and r.
ext is equal to the relative difference between the two values xCD,t
These errors are respectively relative to variables Yt,Ct,Xt and are
and xCES,t generated at time t.
defined by Eq. (21). For each parameter variation, Table 3 gives the
minima of eY,eC,eX and the corresponding values of the parameter
Stiglitz's argument claims that the useful horizon of growth models
where these minima are observed. For example, as part of the σ var-
is about fifty years (cf. Introduction). Thereafter, the medium-term
iation exercise, (i) the 3rd line indicates that the minima of eY,eC and eX
horizon MTH is set at 60 years. The reason for this choice is that 60 is a
are respectively equal to 3.34, 11.36 and 24.12%, and (ii) the 2nd line
multiple of 15 and 20, the two bounds of the range of allowable values
indicates that these minimas are respectively reached for σ = .61,.75
of θ determined in Section 3.2. So, whether we take one or the other of
and .64.
these two durations, we obtain that MTH is divided into an integer
The following comments can be made.
number of periods. Under the baseline, the length of a period θ is
15 years, so that the number of periods is tf = 4. The value θ = 20 will
1. Whatever the parameter (σ or r) and the variable (Y,C or X) con-
be considered in Section 3.5.4.
sidered, the average error on MTH varies considerably (often by
Fig. 4a–c shows the trajectories of the economy on the time interval
several dozens of percents). When the parameter under considera-
MTH generated by the model respectively with the functions CES(.5)
tion approaches either end of its variation range, we observe that
(blue curves) and CD (red curves). The variables depicted are the
errors can become very high (50% and more).
consumption of goods Ct, the production of goods Yt, the quantity ex-
2. Fig. 5a,b also shows that the behaviour of the errors is not mono-
tracted of resource Xt. Columns 2 to 4 of Table 2 give for variables Yt,Ct
tonous.
and Xt (i) the minimum and maximum instantaneous errors and (ii) the
3. Whatever the parameter considered, we observe from Fig. 5a,b that
average error obtained on the interval 1 ≤ t ≤ 4 (i.e. MTH). The 5th
eY,eC and eX reach their respective minimum values for different
and last columns show for CES(.5) and CD the corresponding interval
values of the parameter (see also Table 3)8.
= [ k , k¯ ], where k and k̄ are the minimum and maximum values taken
4. Table 3 shows that the average errors eY and eC are around 1 and
by kt on MTH.
10% respectively. This means that for some parameter configura-
The following observations can be made.
tions, the CD is likely to provide a good approximation of the “true”
trajectory of production or consumption. Unfortunately, the same is
1. For each variable, the quantities relative to the two trajectories are
not true for the operation of the resource. Whatever the value of para-
comparable. However, Fig. 4b shows a systematic overestimation of
meter considered, the minimum of eX remains permanently above 20
production, i.e. YCD,t > YCES,t,∀t (the red curve is still above the blue
percent.
curve).
5. The other parameters being set at their reference values, there is no
2. With a few exceptions, the instantaneous errors are high (in absolute
value of σ for which CD leads to a good approximation of the “true”
value). They are constantly over 20% for production (Table 2).
trajectory for all variables Yt,Ct,Xt. Indeed, as shown in Fig. 5a,b,
3. The quality of the approximation on MTH varies from one variable
max{eY ( ), eC ( ), eX ( )} is higher than 20% whatever σ. The same
to another. If we refer to the average errors (last row of Table 2), it is
conclusion applies for r.
best for Ct and the worst for Xt. These average errors being between
11 and 44%, the approximation generated by CD of the “true” path
of the economy is clearly rough.

In summary: 8
Note that the values in Table 3 are approximations of the true minima, since
Result 4. As far as the baseline is concerned, whether the production the set of tested values of the considered parameter is discrete.

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M. Germain Ecological Economics 160 (2019) 168–182

Fig. 5. Mean errors generated by CD w.r.t CES(.5) on MTH (eY: blue; eC: green; eX: red).

3.5.2. Variation of α,ν
Fig. 5c,d shows how average errors eY,eC,eX change with α or ν. The
following comments can be made.
1. In the case of a variation of α, the comments 1, 2, 3 and 5 expressed
in Section 3.5.1 remain valid. In particular, there is no value of α for
which CD leads to a good approximation of the “true” trajectory for
all variables Yt,Ct,Xt. Indeed, as shown in Fig. 5c,
max{eY ( ), eC ( ), eX ( )} always remains higher than 25% whatever α.

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M. Germain Ecological Economics 160 (2019) 168–182

Table 3 approximation of the “true” trajectory for all variables Yt,Ct,Xt.

Minima of mean errors generated by CD w.r.t. CES(.5) on MTH.
Yt Ct Xt 3.5.4. Variations of θ
The next exercise consists in varying the duration of a period θ,
σ 0.6100 0.7500 0.6400 assumed to be the same as the average life of capital. The limits of the Iθ
0.0334 0.1136 0.2412
min{ex } interval determined in Section 3.2 are 15 and 20 years. In order not to
r 0.0135 0.0180 0.0150
0.0115 0.1105 0.2042
be limited to two “observations”, the durations 10 and 12 years are also
min{ex }
α 0.8700 0.8100 0.8500 considered. The medium-term horizon MTH being 60 years, considering
min{ex } 0.1015 0.1010 0.2545 durations of 10, 12, 15 and 20 years amounts to subdivide MTH in 6, 5,
ν 0.9000 0.9000 0.9000 4 and 3 periods respectively.
min{ex } 0.0412 0.0478 0.0354 Fig. 5f shows how average errors eY,eC,eX change with θ. The fol-
R 20 30 10
lowing comments can be made.
min{ex } 0.2124 0.0966 0.0927
θ 12 15 10
min{ex } 0.2949 0.1136 0.2689 1. The results are similar to those obtained previously for the other
gA 0.2600 0.1700 0.2300 parameters (except ν). The evolutions of eY and eC are non-mono-
min{ex } 0.0213 0.1065 0.2549 tonous. The error on production eY appears not very sensitive to the
αCD 0.8750 0.8100 0.8500 length of the period. The only regularity concerns eX, which is po-
min{ex } 0.0498 0.0972 0.2192
sitively correlated with θ.
2. The figure suggests that considering values of θ beyond 20 years
2. Fig. 5d shows that the average errors eY,eC and eX decrease mono- would lead to higher errors eY,eC,eX.
tonically when ν increases. The closer ν is to 1, the closer the CES is 3. Again, there is no value of θ for which CD leads to a good approx-
to CD, and the easier it is to substitute capital for the resource. On imation of the “true” trajectory for all variables Yt,Ct,Xt. Indeed, as
the contrary, for the lowest values in the interval, we observe that shown in Fig. 5f, max{eY ( ), eC ( ), eX ( )} is higher than 30%
errors eY and eX can become very high (50% and more). whatever θ.
3. For ν = .8, eY,eY,eX are around or less than 10%. For ν = .9, these
errors are all less than 5%. The other parameters being fixed to their 3.5.5. Other Exercises of Variation
reference values, CD thus generates a good approximation of the Other exercises investigate the difference between the paths of the
“true” trajectory of the economy if the latter is generated by a CES economy generated by CES and CD as a function of variations of (i) the
with an elasticity greater than .8. Unfortunately, such values of ν are rate of technical progress gA and (ii) the capital share parameter αCD of
well above the range of permissible values Iν = [0,2/3]. the Cobb-Douglas (while maintaining the share parameter αCES of the
CES to its reference value). Previous exercises have all assumed that
Why these contrasting results depending on whether the parameter αCES = αCD = α, which is assuming that the Cobb-Douglas matches the
that varies is α or ν? These parameters being technological, the ex- CES borderline case when 0 . Now, if αCD and αCES were to be es-
planation is to be found in the CES and CD production functions defined timated from the same econometric data, there is no reason for these
by Eqs. (12) and (14): estimates to coincide9.
Whether it is αCD or gA that varies, Table 3 does not show better
1 results than previously: the minima of eY,eC,eC,eX are not observed for
– On the one hand, the difference between fces (k ) = k + 1 the same value of the parameter considered. In addition, eX always
and fcd(k) = kα (k given) is not a monotonic function of α. The same remains above 20%.
is true for the difference between derivatives. For 0 < k < 1, the Finally, it should be noted that when the variation exercises pre-
differences fces(k) − fcd(k) and fces (k ) fcd (k ) decrease if α in- sented above are made around other baselines, they lead to similar
creases, but for sufficiently high k, these differences increase with α. conclusions. In summary, from all the variation exercises presented
It follows that increasing α does not (necessarily) imply a better above, the following emerges:
approximation of the true trajectory by the one generated by CD. Result 5. The different simulations show that if the substitution
– On the other hand, the difference fces(k) − fces(k) (k given) is a elasticity between capital and resource is significantly less than 1, the
monotonous decreasing function of ν, and the same applies (almost observation made in the context of the baseline extends to other sets of
everywhere) to the differences between derivatives. A higher ν in- parameters: the approximation generated by the Cobb-Douglas of the
volves (ceteris paribus) a technology closer to CD (characterized by path obtained with the CES on MTH is generally rough.
ν = 1). We can therefore expect that the approximation generated
by the Cobb-Douglas of the “true” path is the better the higher is ν,
which is confirmed in Fig. 5d. 4. ATF Versus Cobb-Douglas

In summary, the more ν increases, the more the technological rea- 4.1. The “Technology Difference ” Effect
lities described by CES and CD are getting closer. It is not the same
when α increases. Hence the contrasting results depending on whether To explain the previous result, reconsider the baseline analyzed in
it is ν or α that varies. Section 3.4. On the one hand, the values of kt obtained with CES(.5)
during the MTH belong to the interval ΛCES = [.30,.92] (see Column 5
of Table 2). On the other hand, Fig. 2b,c shows that on this interval the
3.5.3. Variations of R
The exercise of varying R is equivalent to that of varying the initial
stock of capital K1. Given that the economy is characterized by constant 9
To illustrate this, consider a world characterized by the technology de-
returns to scale, it is indeed the ratio K1/R which determines the scribed by the “true” production function (12). In t = 1, we therefore observe y1
magnitude of average errors. Here, we have varied this ratio by varying and k1 such that CES . If αCD is calibrated on the observations
1
= CES + 1
y1 k1
R, K1 remaining fixed at its reference value (equal to 1). in t = 1, Eq. (14) implies y1 = k1 CD
ln(y )
CD = ln(k ) . Barring exceptions, αCD will
1

Fig. 5e shows how average errors eY,eC,eX change with R. It appears 1

not coincide with αCES. As an example, if we consider the baseline where ρ = .5
that comments 1, 2, 3 and 5 expressed in Section 3.5.1 remain valid. and αCES = .8, and if we use the values of k1 and y1 generated by the CES to
Again, there is no value of R for which CD leads to a good estimate αCD, we obtain αCD = 0.8641, which is indeed different from αCES.

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M. Germain
differences between CES(5) and CD can be important. Indeed, eCES
decreases from 9.41 to 0.05%, while edCES decreases from −5.90 to
−7.07 % before increasing to −1.55 %. It is therefore not surprising
that the path generated by CD is only a poor approximation to that
obtained with CES(.5). CES(.5) and CD are mathematically too different
to expect anything else.
In the case of a CES function, given α, the maximum elasticity is
determined by the upper bound on the productivity of the resource ȳ ,
itself imposed by the laws of physics. This maximum elasticity of sub-
stitution is obtained by inversion of Eq. (15): max = 1 +
1
, where
min
. Thus, if ȳ = 5 for example, a CES function is acceptable
ln(1 )
min = ln y¯ .
only if ν ≤ .5. Now the baseline was precisely characterized by the
values = .8, = .5, y¯ = 5. Thus, the results obtained in Section 3.4
can be reinterpreted as follows:
Result 6. In the context of the baseline, the upper bound imposed by
the laws of physics on the productivity of the resource creates a
“technology difference” effect that makes the Cobb-Douglas too
different from the “true” production function CES(.5). As a result, CD
cannot generate an acceptable approximation of the “true” economic
trajectory.
On the contrary, the Cobb-Douglas provides a good approximation
of the “true” trajectory obtained with a CES when the latter is char-
acterized by a sufficiently high substitution elasticity ν (in other words
when the substitution between factors of production is sufficiently
easy). All other parameters fixed at their reference values, this was
verified for ν ≥ .8 (see Section 3.5.2). Unfortunately, a value ν ≥ .8 and
its accompanying physical limit do not appear empirically justified
(ν = .8 is clearly outside the range of permitted values Iν determined in
Section 3.2) 10.
However, production functions other than the CES are likely to sa-
tisfy a given limit ȳ . This leads to the following two questions:
– is it possible to design a production function with the double
property of (i) satisfying a “severe” limit (such as the limit ȳ = 5
characterizing the baseline) and (ii) being mathematically close to
the Cobb-Douglas on a sufficiently wide value interval of k in order
to avoid the problem encountered with CES(.5) mentioned above?
– If so, could the Cobb-Douglas provide a good approximation of the
trajectory obtained with the “true” function resulting from the an-
swer to the previous question?
The purpose of the following subsection is precisely to answer to
these two questions.
4.2. An Alternative “True ” Production Function
The function (hereafter called ATF for Alternative “True” Function)
that we intend to study is as follows:
Y = Xfatf (k )
where:
b CD (red curves) on MTH. Columns 6 to 8 of Table 2 give for the vari-
k 1 exp ,0 k k¯
y = fatf (k ) = k ables Yt,Ct and Xt (i) the minimum and maximum instantaneous errors
y¯, k > k¯
fatf(k) is zero at the origin, everywhere continuous, differentiable and
concave. ȳ is the upper bound to the productivity of the resource im-
posed by the laws of physics. α and ȳ being given, the parameters k̄ and
b are defined implicitly by the conditions
10
Given Eq. (15) with α = .8, ν ≥ .8 corresponds to a limit ȳ 625, to be
compared to the value ȳ 5 characterizing the baseline.
Ecological Economics 160 (2019) 168–182
b
y¯ = k¯ 1 exp
k¯ (25)
f atf (k¯ ) = 0 (26)
The function k 1 exp ( )
b
k
increases monotonously from the
origin, reaches its maximum at k = k̄ < + then decreases mono-
tonously for k > k̄ . As shown by Eq. (24), fatf(k) coincides with
k 1 exp
b
( )
on [0, k¯ ], then remains fixed at its maximum value ȳ
k
for k > k̄ . Obviously ATF satisfies Eq. (3) but, unlike the CES, it reaches
its maximum value for a finite value of k. Finally, note that CD is a
particular case of ATF obtained when b + .
The function fatf(k) (i.e. ATF in normalized form) is illustrated in
Fig. 2a (green curve). In Fig. 2a, the parameter b is adjusted so that ATF
has the same maximum value as CES(.5) ( ȳ = 5). Fig. 2b shows that
ATF practically merges with CD over the interval [0,1.5]. The relative
error between these functions (green curve) increases with k, but re-
mains limited to less than 1% for k = 2.5. Fig. 2c shows that the deri-
vatives of these functions are also very close over the interval [0,1.5].
However, the error (green curve) increases quite rapidly beyond
k = 1.5 and reaches 6% for k = 2.5.
While estimates for the CES are available for the substitution elasti-
city ν, the same cannot be said for the ATF parameters. However, we can
construct an interval of admissible values for b from the one relative to ν
1
using the equations = 1 + , (15), (25) and (26). Given Iν = [0,2/3] (see
Section 3.2) and α = .8 (its baseline value), we obtain for b the range of
admissible values Ib = [1.60,89.45].
4.3. Numerical Results
4.3.1. Long Term Behaviour
As in Section 3, it should be recalled that the purpose of the analysis
is not to assess whether the Cobb-Douglas is a good approximation of
ATF, but to see whether the trajectory of the economy generated by the
Cobb-Douglas is a good approximation of that generated by ATF.
Fig. 3a–d illustrates the long-term trajectories obtained with the func-
tions CES(.5), ATF and CD (blue, green and red curves respectively).
Again b is such that ATF has the same maximum value as CES(.5).
ATF leads the economy to a zero stationary state, as does the CES
and unlike the Cobb-Douglas (Fig. 3a,b). At the level of production and
resource extraction and as long as the economy is growing, the red
curves are closer to the green curves than to the blue curves (Fig. 3b,c).
Fig. 3d confirms that the productivity of the resource yt tends towards
the same maximum limit ȳ = 5 with CES(.5) and ATF.
4.3.2. Medium Term Behaviour
In the long term, CD and ATF create paths that diverge completely.
Does this prevent CD from generating a good approximation of the path
obtained with ATF in the medium term? For 1 ≤ t ≤ 4 (i.e. MTH),
Fig. 3a–d gives the impression that this is indeed the case. Not only the
(23) green and red curves move in the same direction, but they remain re-
latively close to each other for the four variables considered.
Fig. 4a–c depicts the paths of consumption, production and resource
extraction obtained with CES(.5) (blue curves), ATF (green curves) and
(24) and (ii) the mean error between the paths generated by ATF and CD on
MTH. Finally, the last two columns show for ATF and CD the corre-
sponding interval = [ k , k¯ ], where k and k̄ are the minimum and
maximum values taken by kt on MTH.
The following observations can be made.
1. Compared to the “true” trajectory (generated by ATF), CD leads to a
systematic underestimation of consumption (the red curve is always
under the green curve).
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M. Germain
2. The instantaneous errors (in absolute value) are less than 15%.
3. The quality of the approximation on MTH varies from one variable
to another. Referring to the average errors (Table 2, last row, col-
umns 6 to 8), it is best for Yt and the worst for Ct. These average
errors being between 9 and 14%, the approximation generated by
CD of the “‘true”’ path can be considered not too bad, whatever the
variable considered.
4. For Yt and Xt, the approximation generated by CD of the “true” path is
much better when the latter is generated by ATF rather than CES(.5)
(Fig. 4b,c). This is confirmed by the fact that the average errors eY and
eX are less for ATF than for CES(.5). Unfortunately, the same is not
true for variable Ct: on MTH, the mean error eC is higher for ATF than
for CES(.5).
Table 2 explains why CD performs globally better when the “true”
production function is ATF rather than CES(.5). One observes that the
values taken by kt on MHT belong to the interval [.15,1.36], on which
CD and ATF are very close (Fig. 2b). Over this interval, eATF increases
from 0 to 0.015%. In terms of derivatives, the approximation is a little
less successful: edATF increases from 0 to 0.18%.
4.4. The “Influence of the Future ” Effect
If CD performs better when the “true” function is ATF, the quality of
the approximation remains however uneven in the sense that the error
remains non-negligible on MTH for the different variables (around 10%
or more). This observation remains true for other configurations of
parameters. How then to explain that the difference between trajec-
tories remains not negligible on MTH, while ATF and CD are very close
as checked in the previous paragraph?
The explanation lies in the “influence of the future” effect which can
be described on the basis of the following arguments:
1. The trajectories of the economy generated by ATF and CD result
from the resolution of the system of Eqs. ((5), (6), (7), (9) and (10)
not on MTH but up to the horizon T, assumed very large.
2. Since the model is intertemporal, the future influences the present.
In other words, the state of the system describing the planner's be-
haviour at time t depends not only on periods before t but also on
periods after t. Therefore, the values taken by the system on MTH
depend on the values taken after MTH, including in the long term.
3. We saw that because of the limits imposed by physics (schematized
here by constraint (3)), the trajectories of the economy generated by
ATF (which takes this limit into account) and CD (which does not
take it into account) diverged completely in the long term.
4. Since (i) the trajectories generated by ATF and CD diverge com-
pletely in the long term (argument 3) and (ii) the long term influ-
ences the medium term (argument 2), it follows that these same
trajectories will not be close on MTH.
Due to the “influence of the future” effect, the ATF and CD functions
are not calculated at the same values of kt on MTH. Therefore, even if
these two functions are very close for a given value of their argument,
the fact that they are not calculated for the same values is sufficient for
the error between trajectories to be significant.
The above explanation is corroborated by running the model with
CD and ATF over a time horizon limited to MTH. The average errors
eY,eC and eX are then all significantly less than 1%, proof that the error
source related to the influence of the future is neutralized. On the other
hand, it is not the same if the “true” function is CES(.5). The eY,eC and eX
mean errors all remain around 20% or more. The explanation given at
the beginning of this section remains valid: the “technology difference”
effect is still present because CES(.5) and CD are mathematically too far
apart even if we restrict ourselves to the range of values taken by kt on
MTH.
The following results emerge from the above:
179
Ecological Economics 160 (2019) 168–182
Result 7. The interest of the ATF is to highlight, alongside a
“technology difference” effect (linked to the difference in production
functions), another source of discrepancy between the trajectories
generated by the “true” function and the Cobb-Douglas, namely an
“influence of the future” effect linked to the intertemporal character of
the model.
Result 8. The Cobb-Douglas produces a poor approximation of the true
trajectory if this one is generated by CES(.5) because the “technology
difference” and “influence of the future” effects play together. The
approximation generated by the Cobb-Douglas is better if the “true”
trajectory is generated by ATF because the “technology difference”
effect is neutralized. However, the “influence of the future” effect
remains present and this second effect is sufficient to prevent CD to
generate a close trajectory to the one generated by ATF.
5. Conclusion
Within the framework of an optimal growth model with a non-re-
newable resource, the purpose of this paper is to assess the validity of
what we have called Stiglitz's argument, i.e. the extent to which a
production function that ignores the constraints of physics on the pro-
duction process can nevertheless generate a good medium-term ap-
proximation of the trajectory obtained with the “true” production
function, which takes these constraints into account. In the model, the
latter result in an upper bound to the productivity of the resource.
Three classes of functions are studied: the CES and ATF which respect
this bound and the Cobb-Douglas which does not respect it.
The comparison of the trajectories generated by the Cobb-Douglas
and the “true” function is first made in the case where the latter is the
CES. This comparison is repeated by varying each parameter of the
model in turn over its respective range of permissible values. The dif-
ferent simulations show that if the substitution elasticity between ca-
pital and resource is significantly less than 1, the approximation gen-
erated by the Cobb-Douglas of the path obtained with the CES is
generally rough (at least for one or the other variable of the economy)
and this, even for the first few periods. A main reason lies in the
“technology difference” effect: if the elasticity of substitution of the CES
is constrained to belong to its interval of permissible values (interval
itself determined by the upper limit on the productivity of the re-
source), the production functions CES and CD describe too different
technological realities.
The comparison of the trajectories generated by the Cobb-Douglas
and the “true” function is then made in the case where the latter is the
ATF. Expressed per unit of resource, ATF has the advantage of being
mathematically close to the Cobb-Douglas for a much wider range of
values of the independent variable than in the case of the CES. This
quality is reflected in the fact that for most variables, the path gener-
ated by the Cobb-Douglas is closer to the one generated by ATF than to
the one generated by CES. But even if ATF neutralizes the “technology
difference” effect mentioned above, simulations show that the differ-
ence between trajectories is not negligible. Another effect related to the
“influence of the future” appears to be a source of error. This effect is
due to the conjunction of two factors: (i) the model being intertemporal,
the future influences the present and (ii) CD and ATF generate totally
different long-term trajectories following the fact that one takes into
account the limits of physics and the other not.
In the end, what about the validity of Stiglitz's argument, i.e. the
idea that the Cobb-Douglas function could generate a good medium-
term approximation of the trajectory of an economy obtained with a
production function taking into account the constraints of physics on
the production process ? Everything depends on the desired quality of
the approximation. If accuracy is not the first concern, then Stiglitz's
argument seems valid: in the medium term, the paths generated by CD
and the “true” function have a similar shape and the orders of magni-
tude are preserved. On the other hand, if some precision is required (for
M. Germain Ecological Economics 160 (2019) 168–182

example, errors must be less than 10% for all variables), then the results As these models are intertemporal, it is not clear that they escape the
obtained in this paper do not argue in favour of the argument. The “influence of the future” effect highlighted above. On the other hand,
Cobb-Douglas is acceptable only when the constraints of physics act Stiglitz's argument could be more successful in a causal model, whose
sufficiently weakly. Unfortunately, various empirical studies suggest state depends only on the past and where therefore the “influence of the
that it is not the case, especially in the case of energy. future” effect does not play. This argument could also be more suc-
However, this paper does not claim to end the debate. cessful in the case of another natural resource than energy, where the
Stiglitz’argument could be tested in the context of other models, par- possibilities of substitution with capital would be more favourable.
ticularly endogenous growth and/or overlapping generations models.

Appendix

Proof of Proposition 1. We follow the approach of Chow (1997, chapter 2).

The planner solves the following problem:
T
t Ct1
max
{It , Kt + 1, Xt , Rt + 1 }t 1
t=1
1 (27)
under the constraints
Ct = F (At Kt , Xt ) It = Xt f (kt ) It (28)
and Eqs. (4) and (5), with K1 and R1 given.
Given the definition of kt, Eq. (4) becomes
kt + 1 Xt + 1
= It
At + 1 (29)
Then the Lagrangian is written:
T
t Ct1 kt + 1 Xt + 1
L= t+1 It µt + 1 [Rt + 1 Rt + Xt ]
t=1
1 At + 1

where λt+1 and μt+1 are the multipliers associated to constraints (29) and (5).
The FOC are written:
t
L
= + t+1 t+1 = 0
It Ct
t
L t kt t + 1µ
= t + f (k t ) t+1 =0
Xt At Ct
t+1
L t+1 Xt + 1
= t+1 + Xt + 1 f (kt + 1) = 0
kt+ 1 At + 1 Ct + 1
L t + 1µ t + 2µ
= t+1 + t+2 =0
Rt + 1

which gives:
t
= t+1
t+1
Ct (30)
t
t kt t + 1µ
t + f (k t ) = t+1
At Ct (31)
t+1
t+1 = At + 1 f (kt + 1)
t+1
Ct + 1 (32)
t + 1µ
t+1 = t + 2µ
t+2 (33)
Eqs. (30) and (32) on the one hand, and Eqs. (31) and (33) on the other, lead to:
t t+1
= At + 1 f (kt + 1)
Ct Ct + 1
t t+1
t kt t+1 kt + 1
t + f (k t ) = t+1 + f (kt + 1)
At Ct At + 1 Ct + 1

The first equality is Eq. (9). The second equality and Eq. (32) lead to Eq. (10).
To make sense, a solution {It , Xt , kt + 1, Rt + 1; t 1} to the previous equations must be such that these variables are positive. If such a
kt t t k t
solution exists, then it is a maximum. Indeed, (i) Eq. (32) t+1 > 0 ; (ii) Eqs. (31) and (32) t
tA + Ct
f (kt ) = Ct
At f (kt ) At + Ct
f (kt )
t t
t
= C [f (kt )t f (kt ) kt ] = µt + 1 > 0 (because f is concave). So a sufficient condition to have a maximum is that the functions Xtf(kt) − It,It
t + 1µ
t+1
t
and Rt − Xt are concave with respect to their arguments. These functions being differentiable and their second partial derivatives being nil or
negative, that's the case.

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M. Germain Ecological Economics 160 (2019) 168–182

Proof of Proposition 2. Thereafter, the rate of change (growth or degrowth) in the variable x is defined as gx = ln ( ).xt
xt 1
In the case of the Cobb-Douglas, the dynamic system presented in Section 2 becomes:
Yt = [At Kt ] Xt1 = Xt kt (34)
t 1 t
1
= At kt
Ct 1 Ct (35)
t 1 t
kt 1 = kt
Ct 1 Ct (36)
Yt 1 = Ct 1 + Kt (37)

Eq. (34) gY = ln ( ) = ln (
Yt
Yt 1
[At Kt ] Xt1
[At 1 Kt 1 ] Xt1 1 ) = ln ( ) + ln ( ) + [1
At
At 1
Kt
Kt 1
] ln ( )
Xt
Xt 1
gY = gA + gK + [1 ] gX (38)
Ct
Eq. (35)
1
Ct 1
= At kt 1
gC = ln ( At kt 1
) At kt 1
= exp ( gC ) . If gC > 0, Yt and Kt tend towards a constant ratio, which implies
gA + [ 1] gk = 0
gA
gk =
1 (39)
Eq. (37) implies
gC = gY = gK = g (40)
Ct kt
Eq. (36) Ct 1
= kt 1
gC = ln( ) + gk , which with the two previous equations imply:
ln( )
g= gA +
[1 ] (41)
For there to be growth, the rate of technical progress must be sufficiently high:

1 1
gA > ln
(42)
ln( ) gA [1 ] + ln( )
By definition, kt = gk . Then Eqs. (39), (40) and (41)
At Kt
Xt
gX = gA + gK gX = gA + [1 ]
gA + 1
= [1 ]
gA +
ln( ) [1 ]
gX = + gA
[1 ] (43)
+
In infinite horizon, the balanced growth path must to be feasible satisfy t=1
Xt R and therefore be characterized by gX < 0. The previous
relationship then involves
[1
1
]
gA < ln ()
1

1 1
gA < ln
[1 ] (44)
Eqs. (42) and (44) lead well to the condition (18).
kt Ct
The stationary savings rate can be characterized. Given that , Eq. (35)
1 Yt / Xt Yt
At kt = At kt
= At At Kt / Xt Ct 1
= Kt
=
Yt 1 Yt
Kt Yt 1
g = ln ( )+gs
s
ln( ) = [1 ]g
s= exp([1 ]g) (45)
To make sense, the balanced growth path must be characterized by 0 < s < 1. Eqs. (41) and (45) exp([1 ] g ) < 1 ln( ) + [1 ]g < 0
ln( ) ln( ) [1 ]
ln( ) + [1 ] [1 ]
gA + <0 ln( ) + + [1 ] A
g <0 ln( ) + gX < 0
1
gX < ln
(46)
Given that 0 < α < 1, this condition is necessarily satisfied if gX < 0, which is guaranteed if Eq. (44) is satisfied.
1
Proof of Proposition 3. In the case of the CES, y = f (k ) = k
+1
1 1 y 1+
(i) f (k ) = k
+1 k 1 = k
y y
(ii) 1 = k
+ [1 ]y 1 k
= [1 ]y
y 1+ y
Then f (k ) kf (k ) = y k k
=y 1 k
= y [1 ]y .
It follows that the dynamic system presented in Section 2 becomes:
Xt
Yt = 1
= yt Xt
+1
kt (47)

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M. Germain Ecological Economics 160 (2019) 168–182

t 1 t 1+
yt
= At
Ct 1 Ct kt (48)
t 1 t
yt1 +1 = yt1 +
Ct 1 Ct (49)

Yt 1 = Ct 1 + Kt (50)
1
Because of technical progress, yt ȳ = [1 ] < + . Given Eq. (47), Yt/Xt tend towards the constant ratio ȳ and therefore:
gX = gY

So asymptotically, Eq. (49)

Ct
Ct 1
= ln ( ) = ln( )
Ct
Ct 1

ln( )
gC =
(51)
which is indeed Eq. (19).
y Ct Yt 1+ Yt Yt 1 1 + Yt 1 1+ Ct Yt 1 1 + 1 1+
One has , so that Eq. (48)
Y/X Y
k
= AK / X
= AK Ct 1
= At At Kt
= Yt 1 Kt
= Yt 1 st 1 Ct 1 Yt
= st 1
At At At
Ct 1 Yt 1 + At + 1 st1 +
At st1+1 = = exp( gC + [1 + ] gY ) . Therefore, = gA + [1 + ] gs = 1
Ct Yt 1 At st1 +1

gs = gA
1+ (52)
gs being negative, st 0 so that 1 st 1. Thus, Eq. (50) Ct = [1 st ] Yt tends asymptotically towards Yt. Therefore,
gC = gY (53)
Since Kt + 1 = st Yt , and so in view of Eqs. (51), (52) and (53):
Kt + 1 st Yt
Kt
= st 1 Yt 1
ln( )
gK = gs + gY = gA
1+

Finally, the CES generates asymptotically a balanced degrowth path, where (i) Yt,Ct,Xt decrease at the same rate, (ii) the savings rate decreases to
0 and (iii) Kt decreases even faster than Yt.

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