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Lecture 4

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.

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Lecture 4

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  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. 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 = sKr* + sLw* + sIi* • 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. 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

  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

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