Chapter 2 - Technological Change, Population, and Growth Cartes

Overview

For thousands of years, human living standards remained stagnant in a "Malthusian Trap". Around 200 years ago, the Industrial Revolution broke this cycle, kicking off a period of rapid, sustained growth in real wages and population. This lesson uses economic models to explain both the long stagnation and the sudden takeoff into modern growth.

The Historical Turning Point

For over six centuries (1264-1750), the real wages of skilled workers remained nearly flat despite population fluctuations. Around 1750-1800, Britain experienced a sharp upward kink in real wages and productivity.

Thomas Robert Malthus

18th century

During the industrial revolution

Merchants, Workers united and Urban

Why do we use economic models ?

Economists build models to simplify complex interactions involving millions of individuals and focus on the essential mechanisms driving economic outcomes.

Capture essential features

Include relevant factors and omit unimportant details ("Less is more").

Describe agent behavior

Specify how agents act and interact with one another.

Determine the equilibrium

Identify self-perpetuating outcomes where no internal force causes change.

Conduct comparative statics

Analyze how the outcome changes when external conditions shift.

Clear

Helps clarify complex economic phenomena.

Accurate

Yields predictions consistent with empirical evidence.

Communicative

Fosters a shared understanding of assumptions.

Useful

Helps design policy interventions to improve outcomes.

Ceteris Paribus

"Holding other things constant" to isolate the effect of a single variable.

Incentives

Economic rewards or punishments that alter the costs and benefits of choices.

Relative Prices

The price of one option relative to another, enabling choice comparisons.

Economic Rent

The net benefit of taking an action compared to the next best alternative (the reservation option).

Entrepreneurship

First adopters (entrepreneurs) capture these innovation rents until competitors adopt the new technology.

Creative Destruction

The process where newer, more efficient energy-intensive technologies drive obsolete, labor-intensive techniques out of the market.

Why Britain First?

Real wages relative to capital/energy were higher in Britain than in France or elsewhere in continental Europe, creating a unique economic incentive to invent energy-intensive machinery.

Demographic Link

Higher living standards increase birth rates and decrease death rates, causing population growth.

Economic Link

Population growth forces more farmers onto fixed land, driving average output per farmer down to the subsistence level.

The Shock

The plague killed 30%-50% of the European population.

Malthusian Reaction

• Population fell drastically → Land per worker increased.

• Average product of labor and real wages rose sharply.

• Worker bargaining power increased, leading to events like the Peasants' Revolt of 1381.

• Higher living standards eventually drove population growth back up, which subsequently pushed real wages back down to subsistence levels by the 16th century.

What are the three conditions holding an economy in the Malthusian trap?

An economy remains stuck in the Malthusian trap only if three conditions hold simultaneously:

• Diminishing average product of labor.

• Rising population in response to higher wages.

• An absence of continuous technological progress to offset diminishing returns.

The permanent technological revolution

The Industrial Revolution introduced continuous, self-sustaining technological innovations (spinning jenny, steam engines, mechanized factories). This continuous productivity growth outweighed the effect of diminishing returns to labor, breaking condition and enabling permanent growth in both real wages and population.