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.