The economics of energy in the 18th century offers lessons for the present.
I recently read Robert Allen’s The British Industrial Revolution in Global Perspective (1), a fascinating analysis of why the industrial revolution happened, why it happened in Britain, and why other countries industrialized only later. Had I been asked beforehand for answers to these questions, I might have listed the following features of 18th century Britain:
- Large and accessible coal deposits.
- Ingenuity of its inventors, exploiting the scientific knowledge of the enlightenment.
- Relatively good governance by the standards of the time.
- Rural land reform (enclosure) facilitating higher food production to support growing cities.
According to Allen, however, 1 and 2 were not unique to Britain, and 3 and 4 are dubious. His analysis focuses instead on relative prices. And his main conclusion is this: in 18th century Britain, a combination of relatively high wages and cheap energy from coal made it profitable to substitute steam power for labour, even though the steam engines of the time were very inefficient (2). Allen presents detailed evidence showing that the wages of labourers in 18th century Britain were much higher than those in most of Europe, India and China, and comparable only with those in the Netherlands and parts of North America (3). Only Britain had significantly exploited coal at that time, and the price of energy in British coalfield regions was the lowest in the world.
How had this situation come about? The reasons are complex and Allen’s explanation goes back several centuries (4). Prominent in his account are: Britain’s success in exporting woollen cloth, supported by improvements in sheep farming; its economic gains from mercantilism and empire; the growth of London beyond the point at which its energy needs could be met at reasonable transport cost by wood; the development (via what Allen terms ‘collective invention’ by London builders) of houses designed to be heated by coal; and the consequent stimulation of coal mining around Newcastle, from where London was supplied by ship.
The development of steam power was financed by businesses and entrepreneurs. Innovation was facilitated by business clusters such as tin mines in Cornwall (another case of collective invention). The power obtained from steam engines per ton of coal increased tenfold between 1730 and 1850 (5). Steam power became profitable at progressively lower wage / coal-price ratios, and around 1850 was rapidly adopted in other European countries and the US. These countries had not been without coal deposits, inventors or entrepreneurs, but profitability at their prices determined the timing of adoption. Since moreover they were able to adopt the latest and most efficient technology, they did not need to waste resources repeating Britain’s long experimentation with early steam engines.
Allen’s book is a work of economic history, and does not attempt to draw lessons for the present. It does however offer much material suggestive of present-day parallels.
In most developed countries today, labour and energy costs are both high (taking costs to include the social costs of pollution and climate change associated with fossil fuels). A resource that is cheap by historic standards is information and communication technology (ICT). Developments such as smart meters and smart electricity grids can be viewed as attempts to substitute that cheap resource for high-cost labour and energy. Whether the energy cost savings from these developments can be more than marginal is debatable. But the application of ICT directly to energy supply is only one way to use it to reduce energy costs. Take electronic books, for example. They do not just reduce the cost of books by saving on physical material costs. They also facilitate space-saving wherever buildings contain shelves of books, and that saving in space could permit smaller buildings requiring less energy to heat.
Blue-sky thinking suggests other ways in which ICT might be harnessed to save energy. Driverless freight vehicles could not only reduce labour costs but also, by avoiding the need to transport drivers as well as goods, reduce weight and therefore fuel costs. Automated kitchens could save energy by selecting the most energy-efficient method to cook any dish, heating the minimum quantity of water for boiling or steaming, and facilitating more enclosed cookware with less heat loss. Kitchen automation could be linked to just-in-time delivery systems from food suppliers, reducing the need for homes to keep large stocks of food in energy-hungry and space-occupying fridges and freezers. Just as in early modern times the home was re-designed, replacing a central wood-burning fire with fireplaces and chimneys designed for coal, so perhaps homes now need to be re-designed for energy efficiency. The home of the future could be smaller but much more functional, with sophisticated systems managing any processes that use energy.
Another parallel relates to the development of renewable energy. The example of steam power suggests that the most promising route is for countries to specialise in the development of those types of renewables that are or could soon be profitable in their particular circumstances. That probably means solar power in hot dry countries, biofuels in tropical countries with suitable soil and rainfall, and wind power in countries with fairly steady winds. Such specialisation reduces the need for investment to be subsidised by government, and increases opportunities for collective invention. Countries in which a particular energy source is only available at high cost (such as solar power in northern Europe) might do best to ignore that source until development elsewhere has improved efficiency and reduced costs, just as many countries in the 18th century ignored steam power because for them it was too expensive.
Notes and References
- Allen R C (2009) The British Industrial Revolution in Global Perspective Cambridge University Press 331pp
- Allen pp 138-40 & 156-7
- Allen Chapter 2
- Allen Chapters 4 & 5
- Allen p 165
Economic Droplets 