Malthus to Solow Gary D. Hansen and Edward C. Prescott American Economic Review, September 2002 Presented by BAO Yan

Objective and Issues  Some empirical facts concerning preindustrial and postindustrial English economy.  Two kinds of technologies: –Malthus land-intensive technology; –Solow technology.  The development (or growth) path from Malthusian economy to Solow economy.

Major Conclusions  Land ’s share in production should fall endogenously over time, as observed historically.  Escape from Malthusian stagnation and transition to Solow growth.

English Economy ( )  Period  Period

Analytical Framework  One-good, two-sector version of Overlapping- Generations model. [Diamond (1965)]  Malthus sector:  Solow sector:

Model Economy  Firm allocation: profit maximization  Household allocation: utility maximization  Markets clear.  Demographic structure: [Kremer (1993)]

Competitive Equilibrium  It is always profitable to operate the Malthus sector.  Maximized profit per unit of output in the Solow sector is positive if and only if  Both sectors will be operated if and only if the inequality above is satisfied at the factor prices obtained under the Malthus economy.

Competitive Equilibrium  Resource allocation across the two sectors:  Given initial conditions, the model determines the equilibrium sequences:  cannot be solved for analytically.

Development Path  Per capita income is constant in the Malthus- only growth path.  Solow technology will be adopted at some point of time.  Transition to Solow economy depends upon the parameters of the model.

Quantitative Exercise ParameterDefinitionValue Growth factor in Malthus technology1.032 Growth factor in Solow technology1.518 Capital share in Malthus technology0.1 Labor share in Malthus technology0.6 Capital share in Solow technology0.4 Discount factor1.0

Population Growth Function  Data resource for calibration: Lucas (1998) on population growth rates and per capita GNP from 1750~

Economy Simulation  Over 99% of resources are allocated to the Solow sector after three generations  Value of land relative to output decreases after the Solow technology is adopted.

Simulated Transition  The decrease of land value relative to output is roughly consistent with the pattern seen in the historical data.

Simulated Growth Path  Population grows at the same rate as output and wage stays constant in the Malthusian period.  Population growth and real wage increases after industrial revolution.

Critical Considerations  Sources for technological innovation  Population growth pattern  Why didn’t industrial revolution happen in the rest of the world?  Why did some countries that did take off result in stagnation trap?  “Growth miracle”

Possible Extensions  Different forms of production function  Institutional effect [Jones (1999)]  Economic and political policies [Parente- Prescott (1997)]  Family mode transition [Galor-Weil (2000)]