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Economic growth in the very long run

How can we explain both the long period of stagnating living standards prior to the Industrial Revolution and the period of sustained economic growth since then? In a new survey, Stephen Broadberry considers how recent work by economic theorists and economic historians approaches this fundamental question about human development.

Why have some countries grown rich and others stayed poor? This question is so central to human development that, in the words of Nobel laureate Robert Lucas, "it becomes hard to think about anything else."

My study explores the latest research by economic theorists seeking to find a unified approach to growth across countries and over very long periods of time. It then compares this work with parallel efforts by economic historians to break away from specialisation by country and period and understand long-run developments. The two research programmes share the goal of moving beyond the traditional practice of using different methods to analyse the world before and after the Industrial Revolution.

Interactions between institutions, markets and technology play an important role in driving growth

There are common themes in the work of theorists and historians in three key areas. The first is growth itself, where "unified growth theory" has been developed to explain the transition from a pre-industrial, Malthusian setting, where real wages are negatively related to population, to a modern setting, where the relationship between real wages and population is positive. Within this framework, human capital is central in bringing about the Industrial Revolution.

Work on a related theme by economic historians finds that in addition to the Great Divergence between Europe and Asia, there was a "Little Divergence" within Europe. During the late medieval and early modern period, Britain and Holland accelerated ahead of the rest of the continent by maintaining the real wage gains of the post-Black Death period while limiting fertility and sustaining investment in human capital. Unified growth models need to be able to account for this divergence.

The second theme is the role of institutions, where the "new institutional economics" has identified the key role of institutions in solving the "fundamental problem of exchange" and creating an environment where economic growth is possible. Theorists have also developed a framework for modelling the link between institutions and technology via the patent system, which provides incentives for innovation.

Meanwhile, economic historians point to the important role that institutions played in the general economic development of late medieval and early modern Europe. For example, Britain and Holland were the only countries to succeed in overthrowing absolutist governments. These countries also played a leading role in the development of private institutions: growing commercialisation showed up in both a dramatic decline in the share of the labour force employed in agriculture and a sharp rise in urbanisation.

Interactions between institutions, markets and technology were also important in Britain's overtaking of Holland, which marked the final stages of the transition to sustained modern economic growth. Innovation flourished in an environment where a patent system protected intellectual property, there was a large market, and factor prices provided an incentive to use machine-intensive methods.

Human capital was crucial in allowing Britain and Holland to move ahead of the rest of Europe

The final theme is "general purpose technologies" (GPTs), an idea developed by theorists to help explain how technological progress and growth can be sustained. Although rare and sporadic, the effects of GPTs like electricity and information technology can be dramatic as they spread through the economy and spawn other innovations.

Research by economic historians has explored the impact of steam power as a GPT because of its wide range of applications in a variety of industries. The switch to fossil fuels was also important in sustaining growth by allowing industrial economies to escape from an energy constraint.

Both theory and history have made significant progress in understanding economic growth, but they are difficult to combine. As Joseph Schumpeter noted, "There are such things as historical and theoretical temperaments. That is to say, there are types of minds that take delight in all the colours of historical processes and of individual cultural patterns. There are other types that prefer a neat theorem to everything else. We have use for both. But they were not made to appreciate one another."

Schumpeter's words have particular force when applied to very long-run growth, where historical narrative without theory can seem to lack direction, but where theory without attention to historical detail can all too easily result in over-simplistic generalisations.  

Publication details

"Recent Developments in the Theory of Very Long Run Growth: A Historical Appraisal," by Stephen Broadberry, is available as Warwick Economic Research Paper No. 818.

Weblink: http://www.warwick.ac.uk/go/economics/research/papers/twerp_818.pdf 

The author

Stephen Broadberry is professor of economic history at the University of Warwick.