Energy Transitions, Directed Technical Change and the British Industrial Revolution

This paper provides an alternative view on the transition from stagnation to growth by building a two-sector model of the British Industrial Revolution. The sectors differ only in the use of input factors, wood and coal. The model characterises the transition from stagnation to high growth as a direct consequence of the transition from biomass to coal use in Britain. Formalising the accounts of economic historians, technological progress is modelled as an endogenous process driven by the cost differentials between wood and coal. As wood price rises and coal price remains stable it becomes profitable to innovate in coal-using technologies and hence, innovation shifts to the coal-using sector. The model is calibrated to match the main features of the British economy in the transition period between 1550 and 1849. The model reproduces one of the important characteristics of the First Industrial Revolution – transition from low growth to high growth. Counterfactual analyses indicate that, absent coal reserves and low cost coal supplies, growth would have been slower and income per capita would have been 53% of that observed in 1849. Also, the model does a good job in explaining the timing of structural transformations in the British economy.