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

FCN Working Paper No. 07/2017

40 Pages Posted: 16 Nov 2017 Last revised: 5 Jan 2018

See all articles by Julius Frieling

Julius Frieling

RWTH Aachen University - Institute for Future Energy Consumer Needs and Behavior (FCN)

Reinhard Madlener

RWTH Aachen University

Date Written: June 1, 2017

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

Suggested Citation

Frieling, Julius and Madlener, Reinhard, The Turning Tide: How Energy Has Driven the Transformation of the British Economy Since the Industrial Revolution (June 1, 2017). FCN Working Paper No. 07/2017. Available at SSRN: https://ssrn.com/abstract=3070878 or http://dx.doi.org/10.2139/ssrn.3070878

Julius Frieling (Contact Author)

RWTH Aachen University - Institute for Future Energy Consumer Needs and Behavior (FCN) ( email )

Mathieustrasse 6
Aachen, 52074
Germany

Reinhard Madlener

RWTH Aachen University ( email )

School of Business and Economics / E.ON ERC
Mathieustraße 10
Aachen, 52074
Germany
+49 241 80 49 820 (Phone)
+49 241 80 49 829 (Fax)

HOME PAGE: http://www.eonerc.rwth-aachen.de/fcn

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