Growth in History: In Search of a Unified Theory
Before considering the ‘ideal conditions’ for economic growth we will briefly
survey the new and exciting literature that attempts to provide a unified
account of the ‘Great Escape’ of leading world economies from ‘Malthusian
stagnation’ to a regime of ‘modern economic growth’. Prominent here has
been the research of scholars such as Daron Acemoglu, Gregory Clark, Richard
Easterlin, Oded Galor, Martin Goodfriend, Gary Hansen, Simon Johnson,
Charles Jones, Eric Jones, Michael Kremer, David Landes, Robert Lucas,
Angus Maddison, John McDermott, Omer Moav, Joel Mokyr, Douglass North,
Stephen Parente, Kenneth Pomeranz, Edward Prescott, James Robinson and
David Weil. The main puzzles to explain are these:
1. Why did no country or region of the world, before the eighteenth century
(the Malthusian era), experience lasting intensive growth, that is, sustained
increases in per capita GDP?
2. What led to the ‘Industrial Revolution’, and was this ‘Revolution’ inevitable?
3. What caused the ‘Great Divergence’ in living standards across the world
that has taken place during the last 250 years?
It is difficult to imagine that there are any bigger or more difficult questions
for economists to answer! At the moment, scholars working on providing
answers to these questions are at the frontiers of growth theory and empirics.
Increasingly, in order to provide plausible answers to such questions, growth
theorists have begun to appreciate the value of economic history and the
previous research carried out by economic historians. Indeed, there has recently
emerged a growing synergy between growth theory, economic history
and development economics that has been long overdue. While the Solow
and Romer models may provide convincing explanations of the modern experience
of economic growth in developed economies, they do not account for
the major growth transition that occurred with the onset of the Industrial
Revolution. What is needed is a unified theory that can account for the major
features of the Malthusian era as well as the modern growth regime as
documented in Table 11.1. Currently there are several plausible accounts or
‘stories’ of the evolution of world living standards.
The natural selection, evolution story
Galor and Moav (2001, 2002) highlight the interplay between Darwinian and
Malthusian forces. The struggle for survival during the epoch of Malthusian
stagnation gradually leads to an evolutionary improvement in the quality of
human capital, which in turn stimulates an increase in the rate of technological
progress. This eventually creates the conditions conducive to a ‘take-off’
of sustained economic growth. Galor and Weil (1999, 2000) carry this story
forward and explain how an endogenous transition takes place with an economy
moving from a ‘Malthusian Regime’ to a ‘Post-Mathusian Regime’ before
finally entering the ‘Modern Growth Regime’. The first two regimes are
separated by an acceleration of technological progress while the latter two
are separated by the demographic transition which is driven by utility-maximizing
fertility behaviour (see Lee, 2003).
656 Modern macroeconomics
The population, ideas and property rights story
Michael Kremer (1993), building on the work of Paul Romer, constructs a
model where technological progress is driven by ideas. In turn the number of
ideas depends on the size of the population. Therefore, during the Malthusian
era, while improvements in living standards are negligible, technological
progress causes the size of the population to increase, which further stimulates
technological progress through the creation of more ideas. Kremer’s
model predicts that, historically, the growth rate of population will be proportional
to its level, at least before the worldwide spread of the demographic
transition in the latter part of the twentieth century (see Lee, 2003). Charles
Jones (2001b) adds to this story a key requirement that in order for technological
progress to win the race against Malthusian diminishing returns, not
only do there need to be increasing returns to accumulable factors; there also
need to develop ‘innovation-promoting institutions’ as emphasized by North
(1990).
The Mathus to Solow story
Hansen and Prescott (2002) and Parente and Prescott (2005) build models
where an economy is initially dominated by a land-intensive, low-productivity
‘Malthus technology’ with low knowledge input. Eventually, as knowledge
grows, driven by the profit motive, the economy gradually switches to one
that is dominated by a much more productive ‘Solow technology’. An earlier
model of Goodfriend and McDermott (1995) emphasizes the transition from
household to market production driven by the increasing returns to specialization
made possible by a growing population.
The institutions and property rights story
North and Weingast (1989) highlight the positive impact that the establishment
of more secure property rights had on innovation and entrepreneurship
in Britain before the Industrial Revolution. Acemoglu et al. (2002b), building
on this idea, trace the rise of the colonial ‘Atlantic trader’ economies after
1500 and link their subsequent growth success to the influence of the commercial
bourgeoisie who demanded and obtained changes in institutions that
led to greater protection of property rights. This is turn provided a foundation
for the Industrial Revolution to take place in Britain.
The ‘Gifts of Athena’ story
Mokyr (1990, 2002, 2005) surveys the history of technological change and
traces the intellectual roots of the Industrial Revolution to important changes
in the method and culture involved with the creation and dissemination of
new knowledge. ‘The Scientific method that evolved in seventeenth century
Western Europe meant that observation and experience were placed in the
public domain’ (Mokyr, 2005) and scientific knowledge became a public
good. ‘Open science’ and verification, rewarded by fame and recognition,
became part of what Mokyr calls the ‘Industrial Enlightenment’. The notion
that economic progress was possible dominated this new enlightenment. The
wave of ‘macroinventions’ and ‘microinventions’ (the ‘wave of gadgets’) that
characterized the Industrial Revolution would not have been possible without
these intellectual roots. As Mokyr notes, ‘knowledge creates opportunities,
but it does not guarantee action’ (2005). Moreover, the ‘emphasis on the
Enlightenment illustrates how economists should think about culture and
cultural beliefs’.
These are just some of the recent stories that attempt to provide a unified
account of the evolution of world income over the very long run. The interested
reader should also consult Jones (1988), Easterlin (1996), Landes (1998),
Lucas (2002), Maddison (2001) and Clark (2003).
Before considering the ‘ideal conditions’ for economic growth we will briefly
survey the new and exciting literature that attempts to provide a unified
account of the ‘Great Escape’ of leading world economies from ‘Malthusian
stagnation’ to a regime of ‘modern economic growth’. Prominent here has
been the research of scholars such as Daron Acemoglu, Gregory Clark, Richard
Easterlin, Oded Galor, Martin Goodfriend, Gary Hansen, Simon Johnson,
Charles Jones, Eric Jones, Michael Kremer, David Landes, Robert Lucas,
Angus Maddison, John McDermott, Omer Moav, Joel Mokyr, Douglass North,
Stephen Parente, Kenneth Pomeranz, Edward Prescott, James Robinson and
David Weil. The main puzzles to explain are these:
1. Why did no country or region of the world, before the eighteenth century
(the Malthusian era), experience lasting intensive growth, that is, sustained
increases in per capita GDP?
2. What led to the ‘Industrial Revolution’, and was this ‘Revolution’ inevitable?
3. What caused the ‘Great Divergence’ in living standards across the world
that has taken place during the last 250 years?
It is difficult to imagine that there are any bigger or more difficult questions
for economists to answer! At the moment, scholars working on providing
answers to these questions are at the frontiers of growth theory and empirics.
Increasingly, in order to provide plausible answers to such questions, growth
theorists have begun to appreciate the value of economic history and the
previous research carried out by economic historians. Indeed, there has recently
emerged a growing synergy between growth theory, economic history
and development economics that has been long overdue. While the Solow
and Romer models may provide convincing explanations of the modern experience
of economic growth in developed economies, they do not account for
the major growth transition that occurred with the onset of the Industrial
Revolution. What is needed is a unified theory that can account for the major
features of the Malthusian era as well as the modern growth regime as
documented in Table 11.1. Currently there are several plausible accounts or
‘stories’ of the evolution of world living standards.
The natural selection, evolution story
Galor and Moav (2001, 2002) highlight the interplay between Darwinian and
Malthusian forces. The struggle for survival during the epoch of Malthusian
stagnation gradually leads to an evolutionary improvement in the quality of
human capital, which in turn stimulates an increase in the rate of technological
progress. This eventually creates the conditions conducive to a ‘take-off’
of sustained economic growth. Galor and Weil (1999, 2000) carry this story
forward and explain how an endogenous transition takes place with an economy
moving from a ‘Malthusian Regime’ to a ‘Post-Mathusian Regime’ before
finally entering the ‘Modern Growth Regime’. The first two regimes are
separated by an acceleration of technological progress while the latter two
are separated by the demographic transition which is driven by utility-maximizing
fertility behaviour (see Lee, 2003).
656 Modern macroeconomics
The population, ideas and property rights story
Michael Kremer (1993), building on the work of Paul Romer, constructs a
model where technological progress is driven by ideas. In turn the number of
ideas depends on the size of the population. Therefore, during the Malthusian
era, while improvements in living standards are negligible, technological
progress causes the size of the population to increase, which further stimulates
technological progress through the creation of more ideas. Kremer’s
model predicts that, historically, the growth rate of population will be proportional
to its level, at least before the worldwide spread of the demographic
transition in the latter part of the twentieth century (see Lee, 2003). Charles
Jones (2001b) adds to this story a key requirement that in order for technological
progress to win the race against Malthusian diminishing returns, not
only do there need to be increasing returns to accumulable factors; there also
need to develop ‘innovation-promoting institutions’ as emphasized by North
(1990).
The Mathus to Solow story
Hansen and Prescott (2002) and Parente and Prescott (2005) build models
where an economy is initially dominated by a land-intensive, low-productivity
‘Malthus technology’ with low knowledge input. Eventually, as knowledge
grows, driven by the profit motive, the economy gradually switches to one
that is dominated by a much more productive ‘Solow technology’. An earlier
model of Goodfriend and McDermott (1995) emphasizes the transition from
household to market production driven by the increasing returns to specialization
made possible by a growing population.
The institutions and property rights story
North and Weingast (1989) highlight the positive impact that the establishment
of more secure property rights had on innovation and entrepreneurship
in Britain before the Industrial Revolution. Acemoglu et al. (2002b), building
on this idea, trace the rise of the colonial ‘Atlantic trader’ economies after
1500 and link their subsequent growth success to the influence of the commercial
bourgeoisie who demanded and obtained changes in institutions that
led to greater protection of property rights. This is turn provided a foundation
for the Industrial Revolution to take place in Britain.
The ‘Gifts of Athena’ story
Mokyr (1990, 2002, 2005) surveys the history of technological change and
traces the intellectual roots of the Industrial Revolution to important changes
in the method and culture involved with the creation and dissemination of
new knowledge. ‘The Scientific method that evolved in seventeenth century
Western Europe meant that observation and experience were placed in the
public domain’ (Mokyr, 2005) and scientific knowledge became a public
good. ‘Open science’ and verification, rewarded by fame and recognition,
became part of what Mokyr calls the ‘Industrial Enlightenment’. The notion
that economic progress was possible dominated this new enlightenment. The
wave of ‘macroinventions’ and ‘microinventions’ (the ‘wave of gadgets’) that
characterized the Industrial Revolution would not have been possible without
these intellectual roots. As Mokyr notes, ‘knowledge creates opportunities,
but it does not guarantee action’ (2005). Moreover, the ‘emphasis on the
Enlightenment illustrates how economists should think about culture and
cultural beliefs’.
These are just some of the recent stories that attempt to provide a unified
account of the evolution of world income over the very long run. The interested
reader should also consult Jones (1988), Easterlin (1996), Landes (1998),
Lucas (2002), Maddison (2001) and Clark (2003).
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