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 per head 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 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

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 = 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 Percent Italy Low Countries (Northern France, Belgium, Netherlands) Continental Western Europe B ritai n China

Illustrations

Historical results Persson investigated two advanced areas, Netherlands and Tuscany, two to three centuries before the Black Death and found annual growth of between 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.