Lecture 4

Nature and extent of pre-industrial economic growth

Low growth of income per head and productivity

• The Malthusian equilibrium characterized by subsistence income and constant population (zero population growth) cannot be verified historically.

• Slow technological progress and income above subsistence and increasing slowly in major regions seem to be typical for pre-industrial Europe

Malthus + Smith = slow growth

• ‘Smithian’ gains from economies of repetition and learning by doing can balance the forces of diminishing returns

• Let K represent a state of knowledge = technology

• As population grows diminishing returns will lower average output per worker, A to B

• But a shift to a more advanced technology K’ will increase output, B to C

A to B is the Malthusian move and B to C is generated by ‘Smithian’ forces

A

B

C

K’

K

Average output per worker

Labour

Who wins?

• What matters is the relative strength of

• on the one hand: the forces of diminishing returns

• and on the other: the magnitude of technological progress caused by learning by doing

Smithian and Malthusian forces

Population Growth +

Division of Labour enhances economies of practice

+

+

Learning by Doing based Technological Change

+

+

Income perhead

Diminishing Returns

-

High TFP growth in England before Black Death

• Using the ‘Dual approach’ Persson (that’s me) found TFP growth around 0.2 per cent per year during the 100 years before the Black Death c.1350.

• The period after the Black Death was a period of slow down in TFP growth

• Results indicate a ‘Boserupian’ mechanism

Ester Boserup – the internationally most acclaimed female cand polit so far

• Boserup argued that technological advance in agriculture often was stimulated by land shortage

• Around 1300 Europe had experienced 600 years of continuous population increase

• The most advanced areas from a technological point of view were densely populated

Ph. Hoffman’s TFP analysis of French agriculture

• Hoffman at CALTECH analyzed French agriculture in the Early Modern area using Results similar to Persson’s.

• Productivity growth of about 0.2 per cent per year.

• But there are additional insights: large regional differences

TFP in France 1520-1790

Internal peace is good for growth

• The West and Normandy were outperformed by the densely populated areas around Paris and the Rhone delta

• Higher incidence of internal conflicts – religious wars – is partly to blame for poor performance

• Note the speed up of TFP growth in the Paris area in the 18th century

Measures of output per labourer.

• Another method detecting labour productivity uses the occupational distribution of the population.

• Urbanization ratio is interpreted as the proportion of the non-food producing labour force of total labour force

• Principle: Increasing urbanization reveals increasing labour productivity in the agricultural sector

Intuition

• Imagine a closed economy with a labour force of 100 and a yearly per capita consumption of food at 1 unit

• 95 of the workers produce the 100 units of food, 5 work in urban professions

• Output per agricultural labourer is 1.053 = 100/95• Now there is a productivity increase in agriculture:

85 workers are sufficient to produce the 100 units of food

• Output per agricultural worker has increased to 1.18

Let’s make the argument more realistic

• The economy is not closed, that is, there might be exports or imports of food

• Income might increase and per capita consumption of food will therefore increase

Definitions

• Q is agrarian output of food• A is agrarian labour force• N is total labour force• c is per capita consumption of food and is

increasing with increasing income• z is the ratio of domestic production to

domestic consumption of food (if z is smaller (larger) than 1 then the economy imports (exports) food

More definitions

• It follows that c times N = total consumption and c times z times N = total production

• Labour productivity is • Q/A = czN/A• The intuitive result just presented is obvious: if

all elements in Q = czN are constant and A falls, that is the urbanization ratio ( 1- A/N) increases, labour productivity increases

Further insights

• Q/A = czN/A

• If c increases (falls) labour productivity increases (falls)

• If z falls (increases) labour productivity falls (increases)

Stylized facts

• In a baseline estimate we assume that the agrarian labour force falls from 95 to 80 percent of the total labour force between year 1000 and 1300

• The economy remains self sufficient in food, z = 1

• Marginal propensity to consume food is 0.6 and the urban/rural income gap increases from 1 to 1.25

Trends in urbanization

0 500 1000 1500 1850

Percent

10

20

30

40

ItalyLow Countries (Northern France, Belgium, Netherlands)

Continental Western EuropeBritain

China

Illustrations

99

109

119

129

139

149

159

1000 1350

1 (la0=0,95;la1=0,8;li0=0,05;li1=0,2;k0=1;k1=1;s0=1,s1=1,25;m=0,6)

2 (m=0,4)

3 (s1=1,5)

4 (la1=0,7)

5 (k1=1,2)

6 (la1=0,7; k1=1,2; s1=1,5;, m=0,4)

Historical results

• Persson investigated two advanced areas, Netherlands and Tuscany, two to three centuries before the Black Death and found annual growth of between 0.1-0.2 per cent

• Bob Allen at Nuffield College, Oxford, used a similar method indicating large regional variations in the Early Modern period

Bob Allen on Early Modern Europe

Success and failure

• Why did the Low Countries perform differently: Belgium failed and the Netherlands succeeded? Politics matter

• English agriculture borrowed ideas from the Netherlands: an early example of technological catch-up

• Question: Are Allen’s and Hoffman’s results regarding France compatible?

Back to Basics:$PPP

• In Holland $PPP per head increased from some 1200 to 2000 from the middle of the 16th century to the end of the 17th century.

• In England it was around 1700 in year 1688.

Conclusion

• The historical record suggests that many regions in pre-industrial Europe had slow productivity growth, say, in the order of 0.1.to 0.25 per cent per year permitting income to remain above subsistence

• The basis for this productivity growth was division of labour in cities and agricultural specialization as well as learning by doing

How did pre-industrial Europe do compared to India and China?

• We will return to a few slides I did not have time to discuss in the first lecture.