Economic growth and the transition from traditional to modern energy in Sweden

Abstract

We examine the role of substitution from traditional to modern energy carriers and of differential rates of innovation in the use of each of these in economic growth in Sweden from 1850 to 1950. We use a simple growth model with a nested CES production function and exogenous factor-augmenting technological change and carry out a counterfactual simulation based on the econometric results. Even though the rate of technical change was higher for modern energy, innovation in the use of traditional energy carriers contributed more to growth between 1850 and 1890, since the cost share of traditional energy was so much larger than that of modern energy in that period. However, after 1890 we we find that modern energy contributed much more to economic growth than traditional energy, but, increasingly, labor-augmenting technological change became the most important single driver of growth.