Energy, knowledge and economic growth

Abstract

It is argued that the explosive growth experienced in much of the World since the middle of the 19th Century is due to the exploitation and use of fossil fuels which, in turn, was made possible by capital good innovations that enabled this source of energy to be used effectively. Economic growth is viewed as the outcome autocatalytic co-evolution of energy use and the application of new knowledge associated with energy use. It is argued that models of economic growth should be built from innovation diffusion processes, unfolding in history, rather than from a timeless aggregate production function. A simple ‘evolutionary macroeconomic’ model of economic growth is developed and tested using almost two centuries of British data. The empirical findings strongly support the hypothesis that growth has been due to the presence of a ‘super-radical innovation diffusion process’ following the industrial deployment of fossil fuels on a large scale in the 19th Century. Also, the evidence suggests that large and sustained movements in energy prices have had a very significant long term role to play.