David Stern | The University of Queensland

We build a directed technical change model of the British Industrial Revolution where one sector uses a fixed renewable energy ("wood") quantity, and another uses coal at a fixed price. As population grows, the wood price rises and shifts innovation to the coal-using sector. Theoretical analysis shows the effects of technology levels, energy prices, and the elasticity of substitution on technical change. Empirical calibration produces historically plausible results. Counterfactual simulations show that more wood, dearer coal, a higher substitution elasticity or lower population growth would have greatly delayed the Industrial Revolution. The transition to modern economic growth is thus accelerated by wood scarcity.

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