The Role of Energy in Productivity Growth

Abstract

The objective of this paper is to analyze the role of energy in the growth of productivity. The special significance of energy in economic growth was first established in the classic study Energy and the American Economy 1850-1975, by Schurr and his associates (1960) at Resources for the Future. From 1920 to 1955, Schurr noted, energy intensity of production had fallen while both labor and total factor productivity were rising.' The simultaneous decline of energy intensity and labor intensity of production could not be explained solely on the basis of substitution of less expensive energy for more expensive labor. Since the quantity of both energy and labor inputs required for a given level of output had been reduced, technical change would also be a critical explanatory factor. From 1920 to 1955 the utilization of electricity had expanded by a factor of more than ten, while consumption of all other forms of energy only doubled. The two key features of technical change during this period were that (1) the thermal efficiency of conversion of fuels into electricity increased by a factor of three, and (2) "the unusual characteristics of electricity had made it possible to perform tasks in altogether different ways than if the fuels had to be used directly."2 For example, as Schurr noted, the electrification of industrial processes had led to much greater flexibility in the application of energy to industrial production.