Lecture 4

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. Average output per worker C A B K’ K Labour A to B is the Malthusian move and B to C is generated by ‘Smithian’ forces

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

7. 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.1350. • The period after the Black Death was a period of slow down in TFP growth • Results indicate a ‘Boserupian’ mechanism

8. 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

9. 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

10. TFP in France 1520-1790

11. 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

12. 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

13. 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

14. 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

15. 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

16. 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

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

18. 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

19. Percent 40 30 20 10 0 500 1000 1500 1850 Italy Low Countries (Northern France, Belgium, Netherlands) Continental Western Europe Britain China Trends in urbanization

20. Illustrations

21. 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

22. Bob Allen on Early Modern Europe

23. 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?

24. 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.

25. 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

26. 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.