THE CAPITAL-ENERGY SUBSTITUTABILITY DEBATE - A NEW LOOK

Over the last twenty years, many studies have been made of the elasticity of substitution between capital and labor. The reported estimates are highly variable, and reveal an apparent dichotomy between cross-sectional and time-series studies. The former suggest that capital and energy are substitutes while the latter suggest the converse. All these studies reported Allen partial elasticities of substitution. We suggest that the Morishima elasticity may be a more useful measure for the issues of concern to capital-energy substitution. We calculate the Morishima elasticities from parameters estimated in a selection of earlier studies and find no excessive variability, nor any evidence of the time-series/cross-section dichotomy. Capital and energy are Morishima substitutes.