1. Lecture 4 Nature and extent of pre-industrial economic growth

2. 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

3. 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

4. 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

5. 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

6. Smithian and Malthusian forces Population Growth + Division of Labour enhances economies of practice + + Learning by Doing based Technological Change + + Income per head Diminishing Returns -

7. Two methods of measuring total factor productivity Conventional total factor productivity measurements need data on output and input quantities from national income accounts Historical national accounts have not yet been produced for periods before 1800. The conventional method cannot therefore be used.

8. Residuals matter TFP = increase in output – increase in the weighted sum of inputs. If TFP is positive there is a residual output increase that cannot be accounted for by inputs. That residual output can be explained by more efficeint use of the inputs = technological progress

9. A new approach to TFP analysis The appendix of Chapter 4 derives primal (Solow-residual) version of TFP as well as the dual approach which is more suitable for analysis of poorly documented economies. Dual approach: TFP = s K r* + s L w* + s I i* s is share of factor and r, w,i are rates of profit, wage and land rent.* means proportional change.

10. Intuition behind the ‘Dual approach’ Imagine that both the wage per unit of labour and the rent per unit of land increase. The value of output equals the value of factor incomes. If real factor rates (incomes) increase per unit of input factors then output must be increasing for given inputs TFP measures that increase

11. High TFP growth in England before Black Death Using the ‘Dual approach’ Persson (that’s me) found TFP growth around 0.18 per cent per year during the 100 years before the Black Death c.1350. The period after the Black Death was a period of slow down in TFP growth Results indicate a ‘Boserupian’ mechanism

12. 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

13. Ph. Hoffman’s TFP analysis of French agriculture Hoffman at CALTECH analyzed French agriculture in the Early Modern area using the ‘Dual approach’. Results similar to Persson’s But there are additional insights: large regional differences

14. TFP in France 1520-1790

15. 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

16. 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

17. Labour productivity vs. TFP In preindustrial economies capital per labourer is constant and land, if anything, falls per labourer. Implication: labour productivity is equivalent to or slightly lower than TFP.

18. 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 1.053 = 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

19. 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

20. 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

21. 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

22. Further insights Q/A = czN/A If c increases (falls) labour productivity increases (falls) If z falls (increases) labour productivity falls (increases)

23. Trends in urbanization 0500100015001850 Percent 10 20 30 40 Italy Low Countries (Northern France, Belgium, Netherlands) Continental Western Europe B ritai n China

24. Historical results Persson investigated two advanced areas, Netherlands and Tuscany, two to three centuries before the Black Death and found annual growth of between 0.1-0.2 per cent Bob Allen at Nuffield College, Oxford, used a similar method indicating large regional variations in the Early Modern period

25. Bob Allen on Early Modern Europe

26. 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?

27. 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