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The Role of Energy in the Industrial Revolution and Modern Economic Growth

The expansion in the supply of energy services over the last couple of centuries has reduced the apparent importance of energy in economic growth despite energy being an essential production input. We demonstrate this by developing a simple extension of the Solow growth model, which we use to investigate 200 years of Swedish data. We find that the elasticity of substitution between a capital-labor aggregate and energy is less than unity, which implies that when energy services are scarce they strongly constrain output growth resulting in a low income steady-state. When energy services are abundant the economy exhibits the behavior of the "modern growth regime" with the Solow model as a limiting case. The expansion of energy services is found to be a major factor in explaining economic growth in Sweden, especially before the second half of the 20th century. After 1950, labor-augmenting technological change becomes the dominant factor driving growth though energy still plays a role. Keywords: Unified growth theory, Energy, Industrial Revolution, Economic growth

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Energy Specializations: Energy and the Economy – Energy as a Productive Input; Energy and the Economy –Economic Growth and Energy Demand; Energy and the Economy – Resource Endowments and Economic Performance; Energy and the Economy – Energy Shocks and Business Cycles; Energy and the Economy –Economic Growth and Energy Demand; Energy and the Economy – Resource Endowments and Economic Performance

JEL Codes:
O13 - Economic Development: Agriculture; Natural Resources; Energy; Environment; Other Primary Products
Q34 - Natural Resources and Domestic and International Conflicts
F44 - International Business Cycles

Keywords: Unified growth theory, energy, Industrial Revolution, economic growth

DOI: 10.5547/01956574.33.3.5

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Published in Volume 33, Number 3 of The Quarterly Journal of the IAEE's Energy Economics Education Foundation.