The Turning Tide: How Energy Has Driven the Transformation of the British Economy Since the Industrial Revolution

Abstract

Since the Industrial Revolution, the economy of the UK has transformed from that of an industrial manufacturing giant to a service economy and a central hub for the financial sector. Energy and energy services derived from fossil fuels have played a key role as drivers behind this structural change. Using data from 1855 — 2015 on capital, labor, and energy in a CES production function, we show that during this period input factors were mostly gross complements. However, between 1960 and 1980, the elasticity of substitution of energy increased substantially, from around 0.7 to more than 2.4. These high elasticity estimates were not permanent, and this wave of change that characterized the transition has since dissipated. Elasticities have since returned to even lower values around 0.3, indicating that energy services which depend primarily on fossil fuel inputs, such as transportation, pose a serious limit to the efficacy of efforts aimed at reducing fossil fuel consumption.

Keywords: Elasticity of Substitution, Energy Inputs, Aggregate Production, Industrialization, Structural Change

JEL Classification: C55, E13, E23, N10, Q43