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  • Print publication year: 2015
  • Online publication date: May 2018

4 - The nature and extent of economic growth in the pre-industrial epoch

Summary

Understanding pre-industrial growth

We will now combine elements in Malthusian and Smithian explanations as developed in Chapters 2 and 3 to enhance our understanding of the nature of pre-industrial economic growth in those critical phases when the land constraint actually became binding at least locally, say, before the Black Death and in the seventeenth to nineteenth centuries. This new view acknowledges diminishing returns from labour in agriculture as the rural population grows and if the tilled land/labour ratio falls, but we also explicitly acknowledge technological change, that is, the useful application of new knowledge. Furthermore there are Smithian gains from specialization triggered off by division of labour stimulated by increasing ‘the extent of the market’, that is an increase in aggregate demand. If we have resource constraints and technological change the story will become fundamentally different. Technological growth is present if we can produce more goods today than were produced yesterday, with the resources used in production held constant. Technological progress and division of labour enable the economy to have both positive population growth and constant or increasing per capita income. The intuition here is that the effects of diminishing returns are offset by technological change. Figure 4.1 below explains in a simple way how the mechanism works.

Positive population growth has two effects with opposing signs, plus or minus, as to the impact on output or income per head. If the economy is using all available land there will be diminishing returns from labour, which will affect output and income per head negatively. However, as long as positive population growth is increasing aggregate demand (= income per head times the number of people) in the economy, division of labour will be stimulated and hence income per head. There are good reasons to believe that population growth actually increases aggregate demand because, as we noted in Chapter 3, there is strong persistence in wage levels.

Useful attempts to measure the level and growth of labour and total factor productivity include R. C., Allen, ‘Economic structure and agricultural productivity in Europe, 1300–1800’, European Review of Economic History 4(1) (2000), 1–26. This article combines Persson's method (see below) with independent estimates of per capita income.
An important study of France already referred to is P., Hoffman, Growth in a Traditional Society: The French Countryside 1450–1815 (Princeton University Press, 1996).
A way to infer productivity changes in agriculture from changes in the urbanization ratio is explored in K. G., Persson, ‘Labour productivity in medieval agriculture: Tuscany and the Low Countries’, in B. M. S., Campbell and M., Overton (eds.), Land, Labour and Livestock, Historical Studies in European Agricultural Productivity (Manchester University Press, 1991), pp. 124–43. This chapter develops a precise formula for deriving labour productivity in the agricultural sector. The data required include changes in urbanization ratio, the ratio of urban to rural per capita income, the net trade in food and the marginal propensity to consume food. The results reported in the text derive from an assumption that the urban to rural income ratio is 5/1 and that the marginal propensity to consume food is 0.5, that is half of an income increase is used for food, and the rest for urban goods.
On real wages and income distribution see P., Hoffman, D. S., Jacks, P. A., Levin and P., Lindert, ‘Real inequality in Europe since 1500’, Journal of Economic History 62(2) (2002), 322–55. This article suggests a U-shaped development of inequality in the period from 1500 to 2000: it increases up to about 1650, at which time it stabilized and there is then a drift towards more equality after 1800.
Two useful articles on the long-term evolution of real wages in a comparative perspective are: R. C., Allen, ‘The great divergence in European wages and prices from the Middle Ages to the First World War’, Explorations in Economic History, 38 (2001), 411–47, and S., Özmucur and S., Pamuk, ‘Real wages and standards of living in the Ottoman Empire, 1489–1914’, Journal of Economic History 62(2) (2002), 277–321. On the Great Divergence debate see K., Pomeranz, The Great Divergence, China, Europe and the Making of the Modern World Economy (Princeton University Press, 2000). S., Broadberry and B., Gupta, ‘The early modern great divergence: wages, prices and economic development in Europe and Asia, 1500–1800’, Economic History Review 59(1) (2006), 2–31.
A fair amount of the reasoning in Chapters 3 and 4 is developed more rigorously in K. G., Persson, Pre-Industrial Economic Growth (Oxford: Basil Blackwell, 1988). The Dutch economic historian Jan Luiten van, Zanden has written extensively on the spectacular accomplishments of the early modern Netherlands. See e.g. ‘Taking measure of the early modern economy: historical national accounts for Holland in 1510/14’, European Review of Economic History 6(2) (2002), 131–64.