Lecture 3 - Transition to Modern Economic Growth Flashcards
BRITISH INDUSTRIAL REVOLUTION
Transition to modern economic growth occurred in Northwest Europe between mid C18th and mid C19th
Adoption of new technologies and continuous improvement.
1st country with technological progress driven growth.
Central role of Coal
New technologies expanded use in two ways:
1) Smelting iron with coke
2) Newcome steam engine
Coal unshackles economy from Malthusian land constraint
=> Energy & iron production become independent from land area
From Malthus to Solow
Pre-modern production function:
y = AL^(-a)
=> Negative relation between population level and p.c. incomes
Modern production functions:
y = Ak^(ß)
=> Substitution of land area for mineral energy
=> Population increase no longer implies lower p.c. income if accompanied by capital increase
Solow
P.c. income growth can come from:
1) Capital accumulation <=> Transitory growth
2) Technological progress <=> Steady state growth
=> Sustained p.c. income growth requires sustained technological progress
=> Exogenous Total Factor Productivity (TFP) growth
Induced innovation Britain
Driver of TFP growth?
Expensive labour and cheap energy
Cost minimisation = English firms will produce with as little labour as possible and as much coal as technologically possible
=> High new tech demand
=> Lucrative opportunity for coal innovators
INNOVATIONAL SPREAD OF INDUSTRIAL REVOLUTION
More efficient steam engines => become part of cost-minimisation of other coal abundant regions with high wages
Pre-railway logistics => restricted development to regions where coal was plentiful (or which had waterway access)
Coal geography mattered less => Once railway transport began to spread more in C19th
DEEP ROOTS OF MODERN ECONOMIC GROWTH
TFP growth led to modern economic growth
TFP summary term, that includes:
1) Human capital
2) Institutions
3) Culture and ideology
4) Geography
=> Growth has deep roots
Institutions
Strengthening of parliament / courts and constrains monarch
=> More predictable tax policy
=> Secure property rights
=> Lower risk premia / cheaper capital
Caveats:
- England not very low interest rates
- Powerful states may curb rent seekers
- Too tight property rights can be harmful
Intellectual property rights
Knowledge = undersupplied good; patenting solves underinvestment problem
Despite British paten system being cumbersome and complicated, patent system nevertheless resulted in higher TFP growth than rep. and fame
Scientific revolution
New scientific and philosophical institutions: facilitated interaction between scientists and engineers
Generated permanent TFP growth
Caveats:
- Not UK specific
- Probably more relevant for later waves of industrialisation (electrification & chemistry)
Human capital (deep root TFP)
Unified growth theory = Human capital key to modern economic growth
More technology increases returns to expensive education
Human capital increase <=> faster tech. progress
Rising p.c incomes <=> Rising opp. cost of having children
Demographic transition
British educational attainment
Low compared to other European countries
Industrial revolution => replaced skilled artisans with unskilled labour => child labour increased => higher opp. cost of schooling
Upper tail of human capital distribution probably driver: few individual grew TFP
Culture
Burgeois virtues = valued economic enterprise and innovativeness that drove industrial revolution
- Engineering superstars
- Creative destruction accepted
- Entrepreneurs and inventors more appreciated
Empires, trade , and market size
Without trade: limited market size would have halted industrialisation
Export led growth
=> British demand could not keep up with textile production
