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Energy abundance and economic progress
Ann. nucl. Energy. Vol. 10. Nos 3/4, pp. 111-117, 1983 Printed in Great Britain
0306-4549/'83/030111-07503.00/0 Pergamon Press Ltd
E N E R G Y A B U N D A N C E A N D ECONOMIC PROGRESS SAM H. SCHURR Energy Study Center, EPRI, 3412 HillviewAve., P.O. Box 10412, Palo Alto, California, U.S.A.
There was a time, not too long ago, when it wasn't necessary to make speeches about the benefits of abundance in energy availability and use; it was just one of those facts oflife that seemed to be self-evident. If one were to probe this belief a bit further it would be found to depend upon two other more-or-less 'selfevident' propositions : one that saw a strong connection between more intensive energy use and the growth in productive efficiency at work and in the home, and another which saw a strong linkage between the growth in the per capita production of goods and services and overall improvements in human welfare. With the passage of time this set of beliefs is no longer as widely accepted as it used to be. Ideas that emerged with great force in the recent past, especially during the decade of the 1970s, seem to have destroyed the implicit societal consensus that previously supported both of the main underlying propositions linking energy abundance to the growth in human welfare. The focus of attention shifted, instead, in the direction of concern about the societal costs of energy use. Under these changed circumstances, it is probably well to revisit the benefit side of the societal calculus, and I am pleased to have been invited to do so in a setting where all the other papers will deal with societal costs. I propose to examine the factual basis for the beliefs that were previously accepted almost on faith. My major emphasis will be on analyzing the presumed linkage between energy abundance and economic growth--the economic component of social progress, so to speak. But I would like also to make a few comments about the other of the two linkages--that between economic progress and the growth in human welfare.
On the one hand, one can point to relatively high levels of per capita income in advanced industrial countries and to a number of social indicators, such as longevity and health, access to higher education, upward social mobility etc., to support the belief that human welfare has increased as a result of economic growth. Such indicators are eloquent testimony to the benefits of economic growth in the eyes of many. However, in direct opposition are those whose values lead them to question the human-welfare significance of higher gross national product (GNP) per capita and who point to various other indicators such as pollution, crowding, crime, alienation etc., all of which are said to demonstrate a pervasive deterioration in the quality of life. Most of us probably are sympathetic in some degree to both points of view, but we would all strike different balances of pluses and minuses. The unfortunate part of it is that there is no objective way of comparing and weighing the contradictory sets of indices which would be acceptable to everyone, particularly to those holding sharply opposing, polarized views. In the absence of an acceptable common denominator, the debate is bound to continue without resolution. A more objective basis for judgment can probably be reached if one asks not about 'human welfare" or 'human satisfaction', which are difficult to define, but instead about the economic conditions which are most compatible with minimizing political and social conflict in today's world. In answering this question, I believe that it is a valid observation that there are a lot of unmet wants within American society and throughout the world. It hardly needs comment that it is far easier to provide more if this can be done by distributing shares of an ever-growing economic pie than it would be to reapportion the shares of an unchanging total. ECONOMIC GROWTH AND HUMAN Otherwise we face the quandary of what has been called WELFARE the "zero-sum society", a situation in which it is possible DO economic growth and the growth in human for one group to gain only at the expense of another. welfare go hand in hand, as most of us used to assume, Economic growth provides the means for coping or are they, in fact, antithetical, as many now believe7 with many social and economic conditions which.are The different answers given to this question are, at urgently in need of attention. How are full employment bottom, largely a matter of personal value judgments. and per capita income growth to be achieved, with 111
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SAM H. Sch'ugg
inflation kept under control at the same time, if not through higher rates of growth resulting from enhanced productivity? Progress in satisfying a large number of unmet national needs in the U.S. such as national defense, housing, urban rehabilitation, the 'welfare net' for the needy and the aged, would be expedited by higher rates of real economic growth. The need for faster worldwide growth is equally compelling if conflict is to be reduced within the less-developed countries and between those countries and the industrialized world. To restore a higher rate of economic growth is, indeed, the core objective of the 'supply side' approach of the Reagan Administration. The argument between the Administration and many of its critics concerns the appropriate means for achieving a revitalization of the nation's capacity for growth. On the question of the need for growth, it seems to me that the old societal consensus is in the process of reemerging. Whether, in the final analysis, economic growth serves to enhance human welfare is an unanswerable question because conflicting value judgments are involved. The controversy surrounding this issue serves as a reminder that, no matter what one's own value judgments may be, questions concerning the quality of life require serious attention in mapping growth strategies in order to guard against the undesirable consequences that social critics have forcefully brought to public attention in connection with past economic growth. The adverse effects of providing and using energy are among those undesirable consequences. In studying the comparative societal costs of alternative energy sources, and means for mitigating these costs, this program is a step in providing the kinds of information and analysis needed for making more enlightened decisions concerning energy supply and use. ENERGY SUPPLY AND ECONOMIC GROWTH
I turn now to my main topic, the connections between economic growth and the availability and use of energy. Relationships between energy and the economy reflect both supply and demand interactions. One can visualize the operations of the economy as generating income flows which exert a pull on energy demands, either directly or through the chain of production involved in producing all other goods. Many energy analyses deal mainly (or even exclusively) with impulses that flow in this direction--from the broad economy to energy--and they place a heavy emphasis on price and income elasticities as they affect energy demands generated in producing and consuming the total national output.
What I want to emphasize instead are the impulses flowing in the other direction--from the conditions of energy supply to the performance of the economy. I believe that there have been critically important connections over the long term between (1) the quality features of essentially new energy forms such as electricity and liquid fuels that emerged and came into abundant supply during the 20th century; (2) the adoption of new energy-using production technologies that took advantage of the quality and cost characteristics of these abundantly available new energy forms; and (3) the growth of productive efliciency in the economic sectors in which the new electrical- and liquid-fuel-based technologies were applied. Let me turn to some specifics to illustrate what I have in mind, beginning with long-term growth in total national output and productivity.
The importance of productivity growth Table I provides a quick overview of trends in national output and productivity for subperiods covering practically all of the 20th century to date. It shows average annual percentage rates of growth for total output, labor quantity (man-hours of labor employed) and labor productivity (output per labor hour) for time intervals which have been divided into two broad categories--"productivity growth" years and "productivity slowdown" years. The data in this table show the critical role of productivity increases as a factor in the growth of national output. In the high-growth period of 19481966, for example, total national output grew at an average rate of almost 4%/year, with labor productivity accounting for 3.5 percentage points within this total. In the poor growth years of 1978-1980, by contrast, total output grew by only l~o/year, and this was accounted for by a 1.4 annual average percentage increase in the quantity of labor and a 0.4 annual average percentage drop in labor productivity. My purpose in showing this table is to highlight the importance of productivity growth as a factor in the overall growth in national output during the periods of high growth, as well as its decisive role in the slowing down of output growth, particularly during the post1973 period of rising energy prices and uncertain energy-supply prospects. I will be focusing on the highgrowth years in order to illustrate the linkages between favorable energy-supply conditions and economic growth over time, but I want to make a slight detour to comment on the post-1973 productivity slowdown. What lies behind the really precipitous decline in productivity growth during the past decade? Is it tied to changes in the conditions of energy supply during this period that were precipitated by the oil embargo in
Energy abundance and economic progress
1l 3
Table L Trends in total output and productivity in the U.S. (by subperiods within the 20th century) Annual percent rate of growth
Total output
Labor quantity (man-hours)
Labor productivity (output per man-hour)
Productivity growth periods 1905-1929 1929-1948 1948-1966
3.4 2.5 3.9
1.3 0.2 0.4
2.1 2.3 3.5
Productivity slowdown periods 1966-1973 1973-1978 1978-1980
3.5 2.4 1.0
1.4 1.3 1.4
2.1 1.1 -0.4
Source: Proc. Wkshop on Energy, Productivity and Economic Growth, EPRI, 12-14
January, 1981.
1973? The timing is certainly right for concluding that there must have been a connection. What's more, the phenomenon has been worldwide among the industrial nations, although at different rates of slowdown, thus lending additional credence to the energy connection. Yet, the evidence yielded by quantitative economic research assessing the linkage between deteriorating energy-supply conditions and declines in the growth of productivity in recent years gives an ambiguous answer. Standard growth-accounting analyses by economists assign only a minor role to energy in the productivity slowdown ; some econometric results, on the other hand, make energy supply a crucial element in the explanation. The entire question is still under intensive study, but, as of now the answer is up in the air so far as the economics profession is concerned. Despite the lack of agreement among economists concerning the role of energy in the recent productivity slowdown, energy-supply factors appear to have been an integral component of long-term increases in productivity during the high-growth years. The critical connection, in my judgment, has been between the conditions of energy supply--such things as abundance, dependability, cost and quality--and the emergence and growth of new energy-using technologies. The ener#y-technolo#y connection
Let's go back in time to the latter part of the 19th century. As late as 1870 about three-quarters of all the energy used in the U.S. was still coming from fuel wood, but the transition to coal was under way and coal was soon to become the dominant source. What was
primarily significant in this transition was not merely that coal substituted for wood in existing energy uses, but rather that this was basically a change from a fuel resource which "was in severely limited supply to another which was available in apparently endless amounts. The abundant availability of coal thus opened the way to the large-scale, unimpeded growth of iron and steel production. Ample supplies of iron and steel, in turn, made it possible to build and operate a railroad network which blanketed the country, and to build the machines required for the expansion of manufacturing. Once the fuel constraint was broken, and abundance in fuel supply became a fact of life, one development led to another in a dynamic sequence that laid the foundation for industrial society. In the 20th century, as the composition of energy supply moved towards liquid fuels and electricity, other major technological developments rooted in the special characteristics of these new energy forms were critically important to the rate and pattern of economic growth. Within manufacturing, electric motors as a percent of total horsepower grew continuously during the first half of this century until electricity came to dominate mechanized industrial processes. When this happened, it wasn't just the energy input that changed--from coal, say, to electric power--with everything else remaining essentially the same. Instead, entire productive systems were rearranged as the rigid requirements imposed by prime movers connected to shafts and belting were replaced by electric motors flexibly mounted on individual machines that could be adapted to whatever layout was most consistent with the underlying logic of production operations. It was essentially because
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SAM H. SCh'U~
electrification removed the organizational limitations imposed by prior energy-distribution systems within factories that its use was of such enormous importance to the growth of manufacturing efficiency. In agriculture the most important improvements have resulted from the use of liquid-fuel-based internal combustion engines in field operation, with electricity in a strong supporting role in such operations as pumping, irrigation, dairying and feed and food processing. The remarkable jump in farm productivity that resulted from the mechanization of agriculture, and the concurrent release of large numbers of workers to the industrial labor force, constituted a structural change of critical importance to the economic evolution of the U.S. Farm workers, as a percentage of the total labor force declined from about 25% at the end of World War I to roughly 3~o today, while farm production per man-hour increased more than 10-fold between 1920 and the late 1970s. This phenomenal growth in productivity was supported by a transition from more than 20 million horses and mules in 1920 to about 250 million horsepower of mechanized equipment at the present time. Comparable changes, whose effects are far more difficult to measure, took place within the home, where electrification, in particular, has made it possible to escape the more oppressive forms of household labor. Such changes in household technology have also made it easier for women to join the ranks of the paid labor force in increasing numbers, thereby adding to the nation's capacity to produce, in a manner analogous to the earlier massive flow of labor from farms to factories. Whereas labor-force participation by adult women stood at only 20~ in 1900, and less than 25~o in 1920, it had risen to more than 50% by 1979. The effects of technological changes tied to the emergence of these new energy forms were, of course, not confined to developments within farms, factories and households. Major impacts on the geographic distribution of economic activity also resulted from developments in energy supply and in associated energy-use technologies. During the 19th century the strict limits imposed upon industrial sites by the fixed location of waterways required for transportation and the waterwheels required for mechanical power, were overcome by the growth of railroads and the use of transportable fuels such as coal. In the 20th century, automotive transportation greatly broadened the availability of transportation routes, while liquid and gaseous fuels further enhanced the mobility of fuels, thereby removing the limitations on industrial locations previously imposed by coal and railroads. More recently, air conditioning and air transportation, tied to electricity and liquid fuels, have
removed other constraints which severely restricted economic growth in many regions of the U.S. and the world. The developments just summarized--and many others that could be added to the list--have translated into national, regional and local development and growth; enhanced productivity in industry, agriculture, transportation and the home; greater production per capita of goods and services for human consumption; and great improvements in the living comforts and amenities of the ordinary person. But, even ifa strong case can be made for the energytechnology linkages that characterized the past, what is its relevance for the future? One might legitimately ask whether the special relationship between energy and technology was of significance only for an earlier era in which technical advance consisted mainly in replacing human muscle and animal power. To examine this question let's look a bit more closely at the past impacts of electricity, in particular, and try to evaluate its prospects for interacting with energy-using technologies in the future. In its ability to alter entire systems of production, as in the reorganization of manufacturing operations, electricity did far more than replace human muscle. In fact, it became an important management tool which permitted major improvements to be made to existing machine processes, and in so doing revolutionized production technologies. Because of such characteristics as its susceptibility to precise control, highlyfocused application, fractional use and its unique linkage to such future technological systems as computers and robotics, electric energy carries comparable potentials for radically affecting productive operations in the future, whether in manufacturing activities now using heat and chemical processes, or in the highly-diversified, labor-intensive (brain, not muscle), and increasingly important activities of the commercial, service and knowledge sectors of the economy. Although its specific manifestations will change, there is every reason to expect that the electricity-technology-productivity nexus which has been so important in the past could exercise a similar-and perhaps even a greater--leverage on productive efficiency and economic growth in the future.
The growth of energy efficiency Does emphasis on the benefits of energy abundance overlook the urgency of another objective that must be kept clearly in view: the need to be concerned with energy efficiency itselt?. Will we be able to afford a continuation, into the future of the type of unconstrained energy past we have experienced? These questions reflect concerns which leaped to the top of the
Energy abundance and economic progress
115
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energy-policy agenda during the 1970s in a reaction to newly-perceived threats of growing energy scarcity and of declining environmental quality resulting from the harmful impacts associated with the growth in energy use.
The place to begin in answering these questions is with an examination of the behavior of energy efficiency during the period of unconstrained energy use and rapid improvements in productivity growth that has just been reviewed. Figure 1 traces the ratio of total energy consumption to G N P for a full 100 years between 1880 and 1980. What I want to emphasize is the persistent decline in energy intensity (alternatively stated, the persistent growth in energy efficiency) for much of the period roughly extending from World War I until mid-century, at the same time that energy-supply conditions of the kind that have just been discussed were helping to support a fast growth in overall productive efficiency. Table 2 shows these comparative developments by
specific time periods for the total economy and for the industrial sector, which includes both manufacturing and mining. Note the close association between the high rates of increase in total factor productivity (capital and labor inputs combined) and the decline in the intensity of energy consumption relative to output, particularly in the industrial sector; for example, during the period between 1920 and 1929, when total factor productivity in industry increased at close to a 6% average annual rate, energy consumed per unit of industrial output declined by about 4%/year, on average. These relationships are surprising, and they appear also to be counterintuitive. Didn't the rise in productivity require the substitution of energy and machines for labor? And didn't the intensity of energy use rise as a result? Yes, it did ; during this period energy use was growing about three times as fast as man-hours of labor employed. Energy intensity rose relative to labor. But, as a result of the leverage on overall
Table 2. Energy intensity, productivity growth and energy costs (annual average rates of change, by subperiods, 1910-1953) Total economy
Period
Energy intensity* (E/GNP ratio)
1910-1920 1920-1929 1929-1940 1940-1948 1948-1953
-0.3 - 1.9 -0.9 - 1.0 - 2.1
Industrial sector
Total factor productivity
Energy intensity* (E/industrialoutput ratio)
Total factor productivityt
Fuel and power costs
+ 1.3 + 2.3 + 1.7 + 1.7 + 3.4
-0.4 -4.0 - 1.6 - 1.3 - 3.0
+0.4 + 5.7 + 1.1 +2.9 + 3.1
+4.3 - 1.8 - 1.1 -0.7 + 0.8
* Measured in terms of primary energy inputs. + Total output relative to labor and capital inputs combined. Source: Proc. Wkshop on Eneroy, Productivity and Economic Growth, EPRI, 12-14 January, 1981.
116
SAM H . SCmIRR
(4) In
a roundabout way that was completely unintended (and indeed unnoticed), the positive effects on overall economic output resulting from the aforementioned'factors served also to enhance the efficiency of energy use, as measured by the relationship between inputs of energy and the growth of national output.
productive efficiency exercised by the new technologies (especially electrically-based technologies in the case of industry), final output grew faster than energy consumption with the net result that energy consumption relative to total national output of goods and services declined persistently (i.e. energy efficiency #rew persistently). The energy-technology--productivity nexus yielded an auamentation in total output large enough to more than offset the increased use of energy relative to labor. This combination of declining energy intensity and growing total factor productivity during the period of most rapid productivity growth leads me to the following speculations as to what was taking place:
The key mechanism involved in all of this appears to have been technical change which occurred in response to comparative costs and, in particular, in response to the unusual flexibility of those energy forms that came to dominate the fuel mix. If this line of theorizing is correct, one of the keys to reconciling the future growth of energy productivity and labor and total factor productivity would be (a) through the vigorous pursuit of those energy-supply technologies which assure the renewed future abundant availability, on favorable terms, of t h o ~ energy forms which possess the highlydesirable flexibility features that have characterized liquid fuels and electricity, and (b) through the search for counterpart energy-consumption technologies that can put these characteristics to efficient use in industrial, commercial and household applications.
(i) Energy was not only cheap and abundantly available (note the falling fuel and power costs during much of this period), but increasingly in forms that were unusually flexible (i.e. electricity and liquids) compared to the solid fuels that had previously dominated major sectors of use. (2) These conditions of energy supply--low cost, abundance and inherent flexibility in use--led to the utilization of energy in a variety of new processes and new places that served to quicken the pace of technical advance. (3) The direct effects of these imaginative new applications showed up in the enhanced efficiency of productive operations, as reflected in the behavior of such statistical indicators as labor and total factor productivity.
R E S T O R I N G ENERGY A B U N D A N C E
The data and reasoning summarized in this paper point toward the importance of making the restoration of energy abundance, based upon dependable sources of supply, a major national objective. Although this
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Energy abundance and economic progress objective can not be realized quickly, the richness of America's resource base offers hope for believing that it can be attained, if diligently pursued. I would like to conclude with a few remarks on this subject. The U.S. has a reasonably-assured domestic natural resource base of all mineral fuels used in today's commercial technologies ranging from about 40,000 to 110,000 quads (depending on whether the energy content of uranium is measured with or without breeding). A comparison of this total with estimated future energy consumption, shows clearly that, even excluding nonconventional sources, there are enough fuel resources to carry the nation for a long time. We are not in danger of running out of conventional fuel resources--the pessimists to the contrary notwithstanding. This resource base, as can be seen in Fig. 2, consists essentially of coal and uranium resources. Clearly, therefore, even on a conservative reckoning, we have in the welt-established technology of electricity a ready key to the effective use of fuel resources that can guarantee long-term suppl'y abundance. Equally important is the fact that because of the potential abundance of coal and nuclear fuels, the long-term cost
I 17
behavior of electricity based on these fuels should depart markedly from the common expectation of sharply rising long-run energy costs resulting from resource depletion. The latter expectation, now so widespread, is based essentially upon experience with dwindling oil resources. Electricity, in sharp contrast, carries the prospect of strongly moderating the rise in real energy costs over time because it will be using fuels not threatened by resource exhaustion. Other potential technologies moving in this same direction include the practical applications of solar energy (electrical and nonelectrical) and the use of manufactured sources of oil and gas based upon plentiful resources of coal and shale. Whether we will capitalize on these potentials remains to be seen; the outlook to date is not reassuring. Environmental concerns, and other societal costs of the sort to be addressed in the remainder of this program, are among the major problems that need to be dealt with in a manner that is broadly acceptable to the mainstream of American society. All the more reason for believing that the program of this meeting is of the highest importance to achieving progress in solving a fundamental national problem.
0306-4549/'83/030111-07503.00/0 Pergamon Press Ltd
E N E R G Y A B U N D A N C E A N D ECONOMIC PROGRESS SAM H. SCHURR Energy Study Center, EPRI, 3412 HillviewAve., P.O. Box 10412, Palo Alto, California, U.S.A.
There was a time, not too long ago, when it wasn't necessary to make speeches about the benefits of abundance in energy availability and use; it was just one of those facts oflife that seemed to be self-evident. If one were to probe this belief a bit further it would be found to depend upon two other more-or-less 'selfevident' propositions : one that saw a strong connection between more intensive energy use and the growth in productive efficiency at work and in the home, and another which saw a strong linkage between the growth in the per capita production of goods and services and overall improvements in human welfare. With the passage of time this set of beliefs is no longer as widely accepted as it used to be. Ideas that emerged with great force in the recent past, especially during the decade of the 1970s, seem to have destroyed the implicit societal consensus that previously supported both of the main underlying propositions linking energy abundance to the growth in human welfare. The focus of attention shifted, instead, in the direction of concern about the societal costs of energy use. Under these changed circumstances, it is probably well to revisit the benefit side of the societal calculus, and I am pleased to have been invited to do so in a setting where all the other papers will deal with societal costs. I propose to examine the factual basis for the beliefs that were previously accepted almost on faith. My major emphasis will be on analyzing the presumed linkage between energy abundance and economic growth--the economic component of social progress, so to speak. But I would like also to make a few comments about the other of the two linkages--that between economic progress and the growth in human welfare.
On the one hand, one can point to relatively high levels of per capita income in advanced industrial countries and to a number of social indicators, such as longevity and health, access to higher education, upward social mobility etc., to support the belief that human welfare has increased as a result of economic growth. Such indicators are eloquent testimony to the benefits of economic growth in the eyes of many. However, in direct opposition are those whose values lead them to question the human-welfare significance of higher gross national product (GNP) per capita and who point to various other indicators such as pollution, crowding, crime, alienation etc., all of which are said to demonstrate a pervasive deterioration in the quality of life. Most of us probably are sympathetic in some degree to both points of view, but we would all strike different balances of pluses and minuses. The unfortunate part of it is that there is no objective way of comparing and weighing the contradictory sets of indices which would be acceptable to everyone, particularly to those holding sharply opposing, polarized views. In the absence of an acceptable common denominator, the debate is bound to continue without resolution. A more objective basis for judgment can probably be reached if one asks not about 'human welfare" or 'human satisfaction', which are difficult to define, but instead about the economic conditions which are most compatible with minimizing political and social conflict in today's world. In answering this question, I believe that it is a valid observation that there are a lot of unmet wants within American society and throughout the world. It hardly needs comment that it is far easier to provide more if this can be done by distributing shares of an ever-growing economic pie than it would be to reapportion the shares of an unchanging total. ECONOMIC GROWTH AND HUMAN Otherwise we face the quandary of what has been called WELFARE the "zero-sum society", a situation in which it is possible DO economic growth and the growth in human for one group to gain only at the expense of another. welfare go hand in hand, as most of us used to assume, Economic growth provides the means for coping or are they, in fact, antithetical, as many now believe7 with many social and economic conditions which.are The different answers given to this question are, at urgently in need of attention. How are full employment bottom, largely a matter of personal value judgments. and per capita income growth to be achieved, with 111
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SAM H. Sch'ugg
inflation kept under control at the same time, if not through higher rates of growth resulting from enhanced productivity? Progress in satisfying a large number of unmet national needs in the U.S. such as national defense, housing, urban rehabilitation, the 'welfare net' for the needy and the aged, would be expedited by higher rates of real economic growth. The need for faster worldwide growth is equally compelling if conflict is to be reduced within the less-developed countries and between those countries and the industrialized world. To restore a higher rate of economic growth is, indeed, the core objective of the 'supply side' approach of the Reagan Administration. The argument between the Administration and many of its critics concerns the appropriate means for achieving a revitalization of the nation's capacity for growth. On the question of the need for growth, it seems to me that the old societal consensus is in the process of reemerging. Whether, in the final analysis, economic growth serves to enhance human welfare is an unanswerable question because conflicting value judgments are involved. The controversy surrounding this issue serves as a reminder that, no matter what one's own value judgments may be, questions concerning the quality of life require serious attention in mapping growth strategies in order to guard against the undesirable consequences that social critics have forcefully brought to public attention in connection with past economic growth. The adverse effects of providing and using energy are among those undesirable consequences. In studying the comparative societal costs of alternative energy sources, and means for mitigating these costs, this program is a step in providing the kinds of information and analysis needed for making more enlightened decisions concerning energy supply and use. ENERGY SUPPLY AND ECONOMIC GROWTH
I turn now to my main topic, the connections between economic growth and the availability and use of energy. Relationships between energy and the economy reflect both supply and demand interactions. One can visualize the operations of the economy as generating income flows which exert a pull on energy demands, either directly or through the chain of production involved in producing all other goods. Many energy analyses deal mainly (or even exclusively) with impulses that flow in this direction--from the broad economy to energy--and they place a heavy emphasis on price and income elasticities as they affect energy demands generated in producing and consuming the total national output.
What I want to emphasize instead are the impulses flowing in the other direction--from the conditions of energy supply to the performance of the economy. I believe that there have been critically important connections over the long term between (1) the quality features of essentially new energy forms such as electricity and liquid fuels that emerged and came into abundant supply during the 20th century; (2) the adoption of new energy-using production technologies that took advantage of the quality and cost characteristics of these abundantly available new energy forms; and (3) the growth of productive efliciency in the economic sectors in which the new electrical- and liquid-fuel-based technologies were applied. Let me turn to some specifics to illustrate what I have in mind, beginning with long-term growth in total national output and productivity.
The importance of productivity growth Table I provides a quick overview of trends in national output and productivity for subperiods covering practically all of the 20th century to date. It shows average annual percentage rates of growth for total output, labor quantity (man-hours of labor employed) and labor productivity (output per labor hour) for time intervals which have been divided into two broad categories--"productivity growth" years and "productivity slowdown" years. The data in this table show the critical role of productivity increases as a factor in the growth of national output. In the high-growth period of 19481966, for example, total national output grew at an average rate of almost 4%/year, with labor productivity accounting for 3.5 percentage points within this total. In the poor growth years of 1978-1980, by contrast, total output grew by only l~o/year, and this was accounted for by a 1.4 annual average percentage increase in the quantity of labor and a 0.4 annual average percentage drop in labor productivity. My purpose in showing this table is to highlight the importance of productivity growth as a factor in the overall growth in national output during the periods of high growth, as well as its decisive role in the slowing down of output growth, particularly during the post1973 period of rising energy prices and uncertain energy-supply prospects. I will be focusing on the highgrowth years in order to illustrate the linkages between favorable energy-supply conditions and economic growth over time, but I want to make a slight detour to comment on the post-1973 productivity slowdown. What lies behind the really precipitous decline in productivity growth during the past decade? Is it tied to changes in the conditions of energy supply during this period that were precipitated by the oil embargo in
Energy abundance and economic progress
1l 3
Table L Trends in total output and productivity in the U.S. (by subperiods within the 20th century) Annual percent rate of growth
Total output
Labor quantity (man-hours)
Labor productivity (output per man-hour)
Productivity growth periods 1905-1929 1929-1948 1948-1966
3.4 2.5 3.9
1.3 0.2 0.4
2.1 2.3 3.5
Productivity slowdown periods 1966-1973 1973-1978 1978-1980
3.5 2.4 1.0
1.4 1.3 1.4
2.1 1.1 -0.4
Source: Proc. Wkshop on Energy, Productivity and Economic Growth, EPRI, 12-14
January, 1981.
1973? The timing is certainly right for concluding that there must have been a connection. What's more, the phenomenon has been worldwide among the industrial nations, although at different rates of slowdown, thus lending additional credence to the energy connection. Yet, the evidence yielded by quantitative economic research assessing the linkage between deteriorating energy-supply conditions and declines in the growth of productivity in recent years gives an ambiguous answer. Standard growth-accounting analyses by economists assign only a minor role to energy in the productivity slowdown ; some econometric results, on the other hand, make energy supply a crucial element in the explanation. The entire question is still under intensive study, but, as of now the answer is up in the air so far as the economics profession is concerned. Despite the lack of agreement among economists concerning the role of energy in the recent productivity slowdown, energy-supply factors appear to have been an integral component of long-term increases in productivity during the high-growth years. The critical connection, in my judgment, has been between the conditions of energy supply--such things as abundance, dependability, cost and quality--and the emergence and growth of new energy-using technologies. The ener#y-technolo#y connection
Let's go back in time to the latter part of the 19th century. As late as 1870 about three-quarters of all the energy used in the U.S. was still coming from fuel wood, but the transition to coal was under way and coal was soon to become the dominant source. What was
primarily significant in this transition was not merely that coal substituted for wood in existing energy uses, but rather that this was basically a change from a fuel resource which "was in severely limited supply to another which was available in apparently endless amounts. The abundant availability of coal thus opened the way to the large-scale, unimpeded growth of iron and steel production. Ample supplies of iron and steel, in turn, made it possible to build and operate a railroad network which blanketed the country, and to build the machines required for the expansion of manufacturing. Once the fuel constraint was broken, and abundance in fuel supply became a fact of life, one development led to another in a dynamic sequence that laid the foundation for industrial society. In the 20th century, as the composition of energy supply moved towards liquid fuels and electricity, other major technological developments rooted in the special characteristics of these new energy forms were critically important to the rate and pattern of economic growth. Within manufacturing, electric motors as a percent of total horsepower grew continuously during the first half of this century until electricity came to dominate mechanized industrial processes. When this happened, it wasn't just the energy input that changed--from coal, say, to electric power--with everything else remaining essentially the same. Instead, entire productive systems were rearranged as the rigid requirements imposed by prime movers connected to shafts and belting were replaced by electric motors flexibly mounted on individual machines that could be adapted to whatever layout was most consistent with the underlying logic of production operations. It was essentially because
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SAM H. SCh'U~
electrification removed the organizational limitations imposed by prior energy-distribution systems within factories that its use was of such enormous importance to the growth of manufacturing efficiency. In agriculture the most important improvements have resulted from the use of liquid-fuel-based internal combustion engines in field operation, with electricity in a strong supporting role in such operations as pumping, irrigation, dairying and feed and food processing. The remarkable jump in farm productivity that resulted from the mechanization of agriculture, and the concurrent release of large numbers of workers to the industrial labor force, constituted a structural change of critical importance to the economic evolution of the U.S. Farm workers, as a percentage of the total labor force declined from about 25% at the end of World War I to roughly 3~o today, while farm production per man-hour increased more than 10-fold between 1920 and the late 1970s. This phenomenal growth in productivity was supported by a transition from more than 20 million horses and mules in 1920 to about 250 million horsepower of mechanized equipment at the present time. Comparable changes, whose effects are far more difficult to measure, took place within the home, where electrification, in particular, has made it possible to escape the more oppressive forms of household labor. Such changes in household technology have also made it easier for women to join the ranks of the paid labor force in increasing numbers, thereby adding to the nation's capacity to produce, in a manner analogous to the earlier massive flow of labor from farms to factories. Whereas labor-force participation by adult women stood at only 20~ in 1900, and less than 25~o in 1920, it had risen to more than 50% by 1979. The effects of technological changes tied to the emergence of these new energy forms were, of course, not confined to developments within farms, factories and households. Major impacts on the geographic distribution of economic activity also resulted from developments in energy supply and in associated energy-use technologies. During the 19th century the strict limits imposed upon industrial sites by the fixed location of waterways required for transportation and the waterwheels required for mechanical power, were overcome by the growth of railroads and the use of transportable fuels such as coal. In the 20th century, automotive transportation greatly broadened the availability of transportation routes, while liquid and gaseous fuels further enhanced the mobility of fuels, thereby removing the limitations on industrial locations previously imposed by coal and railroads. More recently, air conditioning and air transportation, tied to electricity and liquid fuels, have
removed other constraints which severely restricted economic growth in many regions of the U.S. and the world. The developments just summarized--and many others that could be added to the list--have translated into national, regional and local development and growth; enhanced productivity in industry, agriculture, transportation and the home; greater production per capita of goods and services for human consumption; and great improvements in the living comforts and amenities of the ordinary person. But, even ifa strong case can be made for the energytechnology linkages that characterized the past, what is its relevance for the future? One might legitimately ask whether the special relationship between energy and technology was of significance only for an earlier era in which technical advance consisted mainly in replacing human muscle and animal power. To examine this question let's look a bit more closely at the past impacts of electricity, in particular, and try to evaluate its prospects for interacting with energy-using technologies in the future. In its ability to alter entire systems of production, as in the reorganization of manufacturing operations, electricity did far more than replace human muscle. In fact, it became an important management tool which permitted major improvements to be made to existing machine processes, and in so doing revolutionized production technologies. Because of such characteristics as its susceptibility to precise control, highlyfocused application, fractional use and its unique linkage to such future technological systems as computers and robotics, electric energy carries comparable potentials for radically affecting productive operations in the future, whether in manufacturing activities now using heat and chemical processes, or in the highly-diversified, labor-intensive (brain, not muscle), and increasingly important activities of the commercial, service and knowledge sectors of the economy. Although its specific manifestations will change, there is every reason to expect that the electricity-technology-productivity nexus which has been so important in the past could exercise a similar-and perhaps even a greater--leverage on productive efficiency and economic growth in the future.
The growth of energy efficiency Does emphasis on the benefits of energy abundance overlook the urgency of another objective that must be kept clearly in view: the need to be concerned with energy efficiency itselt?. Will we be able to afford a continuation, into the future of the type of unconstrained energy past we have experienced? These questions reflect concerns which leaped to the top of the
Energy abundance and economic progress
115
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energy-policy agenda during the 1970s in a reaction to newly-perceived threats of growing energy scarcity and of declining environmental quality resulting from the harmful impacts associated with the growth in energy use.
The place to begin in answering these questions is with an examination of the behavior of energy efficiency during the period of unconstrained energy use and rapid improvements in productivity growth that has just been reviewed. Figure 1 traces the ratio of total energy consumption to G N P for a full 100 years between 1880 and 1980. What I want to emphasize is the persistent decline in energy intensity (alternatively stated, the persistent growth in energy efficiency) for much of the period roughly extending from World War I until mid-century, at the same time that energy-supply conditions of the kind that have just been discussed were helping to support a fast growth in overall productive efficiency. Table 2 shows these comparative developments by
specific time periods for the total economy and for the industrial sector, which includes both manufacturing and mining. Note the close association between the high rates of increase in total factor productivity (capital and labor inputs combined) and the decline in the intensity of energy consumption relative to output, particularly in the industrial sector; for example, during the period between 1920 and 1929, when total factor productivity in industry increased at close to a 6% average annual rate, energy consumed per unit of industrial output declined by about 4%/year, on average. These relationships are surprising, and they appear also to be counterintuitive. Didn't the rise in productivity require the substitution of energy and machines for labor? And didn't the intensity of energy use rise as a result? Yes, it did ; during this period energy use was growing about three times as fast as man-hours of labor employed. Energy intensity rose relative to labor. But, as a result of the leverage on overall
Table 2. Energy intensity, productivity growth and energy costs (annual average rates of change, by subperiods, 1910-1953) Total economy
Period
Energy intensity* (E/GNP ratio)
1910-1920 1920-1929 1929-1940 1940-1948 1948-1953
-0.3 - 1.9 -0.9 - 1.0 - 2.1
Industrial sector
Total factor productivity
Energy intensity* (E/industrialoutput ratio)
Total factor productivityt
Fuel and power costs
+ 1.3 + 2.3 + 1.7 + 1.7 + 3.4
-0.4 -4.0 - 1.6 - 1.3 - 3.0
+0.4 + 5.7 + 1.1 +2.9 + 3.1
+4.3 - 1.8 - 1.1 -0.7 + 0.8
* Measured in terms of primary energy inputs. + Total output relative to labor and capital inputs combined. Source: Proc. Wkshop on Eneroy, Productivity and Economic Growth, EPRI, 12-14 January, 1981.
116
SAM H . SCmIRR
(4) In
a roundabout way that was completely unintended (and indeed unnoticed), the positive effects on overall economic output resulting from the aforementioned'factors served also to enhance the efficiency of energy use, as measured by the relationship between inputs of energy and the growth of national output.
productive efficiency exercised by the new technologies (especially electrically-based technologies in the case of industry), final output grew faster than energy consumption with the net result that energy consumption relative to total national output of goods and services declined persistently (i.e. energy efficiency #rew persistently). The energy-technology--productivity nexus yielded an auamentation in total output large enough to more than offset the increased use of energy relative to labor. This combination of declining energy intensity and growing total factor productivity during the period of most rapid productivity growth leads me to the following speculations as to what was taking place:
The key mechanism involved in all of this appears to have been technical change which occurred in response to comparative costs and, in particular, in response to the unusual flexibility of those energy forms that came to dominate the fuel mix. If this line of theorizing is correct, one of the keys to reconciling the future growth of energy productivity and labor and total factor productivity would be (a) through the vigorous pursuit of those energy-supply technologies which assure the renewed future abundant availability, on favorable terms, of t h o ~ energy forms which possess the highlydesirable flexibility features that have characterized liquid fuels and electricity, and (b) through the search for counterpart energy-consumption technologies that can put these characteristics to efficient use in industrial, commercial and household applications.
(i) Energy was not only cheap and abundantly available (note the falling fuel and power costs during much of this period), but increasingly in forms that were unusually flexible (i.e. electricity and liquids) compared to the solid fuels that had previously dominated major sectors of use. (2) These conditions of energy supply--low cost, abundance and inherent flexibility in use--led to the utilization of energy in a variety of new processes and new places that served to quicken the pace of technical advance. (3) The direct effects of these imaginative new applications showed up in the enhanced efficiency of productive operations, as reflected in the behavior of such statistical indicators as labor and total factor productivity.
R E S T O R I N G ENERGY A B U N D A N C E
The data and reasoning summarized in this paper point toward the importance of making the restoration of energy abundance, based upon dependable sources of supply, a major national objective. Although this
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Energy abundance and economic progress objective can not be realized quickly, the richness of America's resource base offers hope for believing that it can be attained, if diligently pursued. I would like to conclude with a few remarks on this subject. The U.S. has a reasonably-assured domestic natural resource base of all mineral fuels used in today's commercial technologies ranging from about 40,000 to 110,000 quads (depending on whether the energy content of uranium is measured with or without breeding). A comparison of this total with estimated future energy consumption, shows clearly that, even excluding nonconventional sources, there are enough fuel resources to carry the nation for a long time. We are not in danger of running out of conventional fuel resources--the pessimists to the contrary notwithstanding. This resource base, as can be seen in Fig. 2, consists essentially of coal and uranium resources. Clearly, therefore, even on a conservative reckoning, we have in the welt-established technology of electricity a ready key to the effective use of fuel resources that can guarantee long-term suppl'y abundance. Equally important is the fact that because of the potential abundance of coal and nuclear fuels, the long-term cost
I 17
behavior of electricity based on these fuels should depart markedly from the common expectation of sharply rising long-run energy costs resulting from resource depletion. The latter expectation, now so widespread, is based essentially upon experience with dwindling oil resources. Electricity, in sharp contrast, carries the prospect of strongly moderating the rise in real energy costs over time because it will be using fuels not threatened by resource exhaustion. Other potential technologies moving in this same direction include the practical applications of solar energy (electrical and nonelectrical) and the use of manufactured sources of oil and gas based upon plentiful resources of coal and shale. Whether we will capitalize on these potentials remains to be seen; the outlook to date is not reassuring. Environmental concerns, and other societal costs of the sort to be addressed in the remainder of this program, are among the major problems that need to be dealt with in a manner that is broadly acceptable to the mainstream of American society. All the more reason for believing that the program of this meeting is of the highest importance to achieving progress in solving a fundamental national problem.