Industrial revolution and Malthus

What is the Malthusian framework?

Explanations of the global stagnation in income per capita before the industrial-revolution typically rely on the counterbalancing effect of population growth and productivity growth in Malthusian Theory.

Thomas R. Malthus’ model (1798) has two essential elements. First, there is a positive effect of the standard of living on the growth rate of population. Second, because of the existence of some fixed resource, typically land, there is a negative feedback loop from the size of a population to the standard of living. These two components generate a number of predictions.

Firstly, in the absence of technological change or expansion in the stock of the fixed resource, the size of the population will stay stable at around a constant level.

More significantly, even if technology does improve or the fixed resource does expand, the level of income per capita will still remain unchanged the long-run. This is because higher productivity leads to temporary increases in income, but this in turn fosters population growth, ultimately driving income back down as resources are spread thinner relative to the labour force.

Thus, improvements in the technological environment or availability of land lead to larger but not richer populations.

Did the Malthusian dynamic actually hold?

Ashraf and Galor (2011) investigate whether this dynamic really held during the preindustrial era (1-1500 CE) by exploiting the timing of the Neolithic Revolution as an exogenous source of variation in technological advancement.

They uncover that improvements in the technological environment or land productivity had a statistically significant positive effect on population density over this period but insignificant effects on income per capita, which is consistent with Malthusian predictions.

What was the key event leading to the post-Malthusian regime?

Around the 18th century, technological progress accelerated at such a rate that output began to rise faster than the population, initiating the post-Malthusian regime. Here, sustained technological progress allowed both population and per capita income to grow - but the underlying Malthusian link between income and fertility had not yet broken, so rising prosperity was still partly absorbed into higher population growth.

Historical evidence suggests that the key event separating the post-Malthusian regime from our Modern Growth regime was a demographic transition that followed the Industrial Revolution. Galor and Weil (1999) argue that this transition was driven by changes in the returns to education, mortality rates, and gender wage dynamics.

What mechanisms do Galor and Weil rely on?

Firstly, industrialisation raised the rate of return to human capital, encouraging parents to substitute child quantity for child quality (education).

Declines in mortality also reduced fertility as fewer births were needed to achieve a desired number of surviving children and also because it raised the expected return on investment for each child, further encouraging parents to invest in their children’s education as these children were less likely to die early.

This increase in schooling led to more innovation within society which increased the returns to education further, pushing fertility down even more.

Finally, as women’s labour market opportunities improved, through the development of more complementary labour-saving technologies, the opportunity cost of childbearing rose which further discouraged women from having children.

What effects did these have?

Ultimately, lower fertility rates freed resources for human capital accumulation, which in turn accelerated technological progress and created a self-reinforcing cycle of sustained per-capita income growth.

This demographic shift allowed societies to completely escape the Malthusian trap and marked the transition to the Modern Growth regime, characterised by persistent technological advancement, rising living standards, and a negative link between income and population growth.

The four mechanisms above are theoretical predictions of Galor and Weil's (1999, 2000) unified growth model, not empirical findings in the paper itself.

What is the Q-Q trade-off?

The quantity-quality (Q-Q) trade-off refers to the idea that parents face a resource allocation decision between having more children (quantity) and investing more human capital per child (quality) - particularly in terms of education.

Unified growth theory, which seeks to explain the historical transition from Malthusian stagnation to modern economic growth, see the Q-Q trade-off as a central mechanism. In these models, new technologies that emerged during the process of industrialization increased the demand for education, which in turn triggered the demographic transition at the end of the nineteenth century.

Demonstrating that the Q–Q trade-off existed even before the demographic transition is crucial to validating the assumptions of unified growth theory.

What does Becker show?

Becker et al. (2000) show that a significant negative relationship between fertility and education existed in Prussia in 1849, well before the onset of the fertility transition (which started around 1880). Countries with higher enrolment rates had significantly lower fertility which supports the idea that the Q–Q trade-off was not merely a consequence of industrialisation, but already operative in the pre-transition economy.

To address endogeneity, the authors use IV regressions which prove mutual causation.  Higher education causally reduces fertility (a 10-percentage point increase in enrolment causes a decline in fertility of about 5%) but also that higher fertility causally reduces education. This mutual causation supports theoretical models where a feedback loop between education and fertility drives the transition to sustained growth.

How does the fertility thesis support human capital?

Furthermore, the authors show that countries with higher initial schooling saw faster and larger fertility reductions during the demographic transition.

This finding suggests that investments in human capital long before the fertility transition laid the foundation for it to unfold later, reinforcing the idea that education was not merely a result of declining fertility but a key driver of demographic and economic modernisation.

Hence, rising human capital was a key mechanism driving the shift from Malthusian stagnation to modern economic growth.

Comment on the fertility transition:

The historical fertility transition took place in most of Europe and North America between the late eighteenth and early twentieth centuries, and saw a marked shift from a society where married women could expect eight or more births to one today where many women do not have children at all.

This fertility transition helped societies escape from the Malthusian world as higher wages, which were the product of capital accumulation and technological change, no longer translated into higher population density. Guinnane (2011) discusses a number of explanations for this transition.

What are two explanations for the fertility transition, and why they seem incorrect?

One such explanation, from Notesetein (1945), argued that couples in high-mortality societies have more children to ensure that sufficient number survive. This means that  as child-mortality declines, due to factors such as better food supplies, improvements in public health systems or developments in medicine, couples are induced to have fewer children because they do not need so many “spares.” However, as Guinnane (2011) notes, fertility in the United States declined for decades before any noticeable decline in mortality, which fails to support such an argument.

A second explanation for the fertility transition implies that couples long wanted smaller families, and improvements in contraceptive methods in the late 19th century made that goal easier to achieve. However, evidence available suggests these methods were still expensive, and that most couples continued to rely on “traditional” methods such as abstinence and withdrawal.

What is another explanation for the fertility transition?

Another explanation discussed in this article stresses the increase in the opportunity cost of childbearing following industrialization. Although married women did work prior to the Industrial revolution, lots of this work was done inside the home – such as spinning yarn – where women could still look after their children.

Industrialization, on the other hand, offered better-paying work that could not be combined with child-minding which raised the opportunity cost of having children.

Furthermore, some industries refused to hire married women at all, thus giving women an incentive to delay marriage. Several studies, such as Crafts (1989) and Shultz (1985), empirically demonstrate a strong negative relationship between women’s labour-force opportunities and fertility.

What are two final fertility explanations?

Other explanations point to changes in the direct costs of childbearing. For example, because housing costs are far more expensive in urban compared to rural areas, the growth of urbanization incentivized couples to have fewer children as they simply could not afford the space to raise as many children.

One common argument portrays children as a form of lifecycle savings: parents invest in them when they are young and healthy, and then expect their children to care for them in old age. Thus, one final explanation for the fertility transition suggests that the rise of social-insurance systems in Europe reduced the economic necessity of having many children to ensure support in later life.

However, whilst this may have been a factor, broader evidence suggests that social insurance alone is unlikely to explain the fertility transition. After all, the two forerunners, France and the United States, were latecomers in developing social insurance systems.

Why was demographic transition so important for Europe?

In many long-run models, a demographic transition is a necessary ingredient for self-sustaining growth. Such a transition is needed to allow productivity increases to finally translate into higher incomes instead of a larger population. Certainly, European incomes per capita only began to grow historically once fertility had fallen significantly and, even in the twentieth century, no developing countries (except for oil producers) have attained medium income levels without going through a fertility transition beforehand.

In contrast to the rest of the world, Europeans began to limit their fertility long before the onset of modern growth. A European Marriage Pattern (EMP), characterised by late female marriage and a high share of women never marrying, could be observed as early as the fourteenth century and was the first socioeconomic institution in history to systematically restrict fertility. This early fertility limitation contributed to higher per capita incomes thus, it is argued, helping Europe escape the Malthusian trap first.

How do Voigtlander and Voth explain the fertility transition?

Voigtlander and Voth (2013) argue that the Black Death crucially contributed to the rise of this fertility limitation in Europe.

Firstly, by killing between a third and half of the European population, it raised land-labor ratios. This reduced demand for labour-intensive grain farming, which favours male labour, and increased the demand for land-intensive pastoral agriculture, where women have a comparative advantage. Hence, after the Black Death, female employment oppurtunities improved.

Furthermore, most farm service contracts required celibacy so women began to delay their marriages due to the increased opportunity cost of early marriage, which lowered fertility levels. In a Malthusian world, this reduced population pressure, ensuring that per capita output never returned to pre-plague levels.

Using historical data from England in the 14th-19th centuries, the authors demonstrate that in regions where pastoralism expanded, marriage ages rose and fertility declined. This suggests that changes in agricultural structure and female employment opportunities, not changes in human capital, triggered Europe’s early fertility restriction. Subsequently, by stabilizing incomes at a higher level by 1700, these changes may well have laid the foundations for Europe’s industrialization.

Challenge to this article:

Edwards (2022) argue there is no consensus that late female marriage emerged in rural England only after the Black Death, with evidence of late female marriage in some pre-plague regions. If the European Marriage Pattern already existed before 1349, the Black Death cannot be its cause. Voigtländer and Voth (2022) have contested this reading of the evidence.

How did this differ across the world?

In Northwestern Europe, servanthood was common and young people typically left home to work before marriage, which allowed fertility restrictions to emerge following the Black Death.

Such arrangements were rare in Southern and Eastern Europe, where dowries and stronger family ties meant that labor markets did not shift female labour into pastoral activities to the same degree, and marriage remained early.

Furthermore in China and India, patriarchal family systems and arranged early marriages limited any economic gains women could make from outside labor.

Finally, in the Islamic world, female seclusion and strong extended family systems discouraged late marriage and autonomous labor.

This explains why the pattern of delayed marriage and reduced fertility failed to emerge outside of Northern Europe.

Discuss the Morisco article:

In 1609, the Spanish Crown expelled roughly 300,000 Moriscos from Spain and there was substantial local variation in the severity of the population shock. Chaney and Hornbeck (2016) use this 1609 Spanish Expulsion of the Moriscos to assess the short and long-run predictions of the Malthusian model.

Consistent with Malthusian theory, the expulsion led to a sharp relative decline in population and an increase in output per capita in former-Morisco areas. However, inconsistent with the long-run predictions of the model, their regressions show that output per capita and population remained significantly higher and lower, respectively, for over 170 years instead of returning back to pre-shock levels.

What is the institutional approach to the morisco case?

One explanation for these abnormally slow convergence rates in former-Morisco areas focuses on the presence of extractive institutions. Archival data from 1786 show that these areas were more likely to be under noble control with greater extraction and taxation. Thus, extractive institutions discouraged in-migration of Christians to fill the hole left by the Moriscos and also prevented high output per capita from translating into higher-fertility. Together, these prevented population recovery.

However, if the institutional framework remained roughly constant before and after the expulsion, it is difficult to understand why the steady-state population remained significantly lower in former-Morisco areas in the absence of other factors.

What is a different non-institutional explanation for the morisco case?

A second interpretation stresses the systematic differences between Moriscos and Christians that, all else equal, would lead to higher population density in Morisco areas.

Historical accounts suggest that Moriscos married younger, had more children, and were able to survive on far less than their Christian counterparts. If this were actually the case, the expulsion of the Moriscos may have led to a shift in the cultural and demographic characteristics of the local population which altered the Malthusian equilibrium, explaining the persistent decrease in population and increase in per capita output.

However, it must be said, that historical testimony regarding differences between Moriscos and Christians was generally provided by Christian writers whose views were often biased.

Does the Malthusian model have any relevance today?

Weil and Wilde (2009) explore whether the Malthusian model has any relevance to the world today. The first part of the model – the positive causality running from income to population growth – has become obsolete, they argue, as countries now see falling rates of population growth as they grow richer.

The likeliest place to find Malthusian effects would be among poor countries because they continue to have the largest population growth and are least able to use trade as a means of avoiding resource constraints. The authors conclude that that the other element of  Malthusian theory – where high population lowers income per capita by straining fixed resources – is still relevant in today’s poorest countries, particularly those with large rural populations dependent on agriculture or heavy reliance on natural resource exports.

The agricultural channel is classic Malthus: people depend on a limited amount of land so population growth means that each person gets a smaller share, which reduces productivity and income. Interestingly, in resource-exporting economies, a very similar logic applies: if natural resources like oil or minerals are fixed in supply then a larger population means each person gets a smaller piece of the national income pie from those resources.

Final comments on Weil and Wilde:

Whether these Malthusian effects are large or small is very subjective. Using an estimated elasticity of substitution of 2, which captures how easily labor and capital can substitute for land, Weil and Wilde suggest that developing countries would, on average, be around 26% richer in per capita terms if they had half as many people. This is a significant increment but very small compared to the actual differences in income between rich and poor countries, which exceed a factor of 20.

Ultimately though, the fertility decline in Europe was a voluntary response to external changes and incentives. Artificially restricting fertility through government policies would not be effective if the incentives and returns to having less children have not changed.

What is the bottom line on the demographic transition?

Ultimately, whatever factor we think is most important in driving modern economic growth, demographic transition was still necessary. There would be no modern growth without first the significant decrease in population growth.

What was the importance of warfare for Europe’s rise?

Much of the European advantage in per capita income emerged after the Black Death of 1350, which killed between one-third and one-half of the European population. Voigtlander and Voth (2013) argue that Europe’s early economic rise was driven by frequent warfare, following the Black Death, which sustained high land-labor ratios.

In a pre-industrial Malthusian world, per capita income is determined by the amount of land per person so, as population increases, per capita income declines due to diminishing returns. Populations tend to recover after shocks such as plagues or famines, pushing incomes back down.

However, frequent and intense warfare in Europe prevented the population from ever fully recovering after the Black Death which kept population density permanently lower than it would have otherwise been. This led to sustained higher wages and higher per capita incomes, meaning greater standard of living for the survivors.

Importantly, whilst warfare killed soldiers directly and civilians indirectly by spreading diseases, it left infrastructure, land and capital stock largely untouched, thus maintaining productive capacity for a smaller population. The survivors could then use the surplus resources to innovate.

What evidence supports this warfare view?

Persistent population suppression in Europe maintained higher wages and tax revenues, which funded even more warfare, creating a feedback loop that reinforced Europe’s economic advantage. Using historical data, they show that countries with higher war frequency between 1300-1700, such as the UK and Netherlands, experienced greater increases in urbanization and per capita GDP. One war per year on average correlates to a 7.6% increase in urbanization rates compared to a country without warfare.

More politically unified regions like China experienced fewer wars, faster population recovery, and thus lower per capita incomes. Not only was war less frequent in China but also caused fewer deaths, due to differences in the disease environment.

Allen (2009) suggests that the shortage of labour helped to encourage a search for labour-saving devices and that ongoing military conflict created pressure for innovations, resulting in Europe’s technological superiority.

However, it should be addressed that this notion that near constant warfare leads to economic development is undeniably counter-intuitive.

When did European growth really take off?

Contrary to popular belief, Fouquet and Broadberry (2015) demonstrate that European economies were not stagnant before the Industrial Revolution but experienced cycles of economic growth and decline. Structural shifts (from agriculture to industry), trade expansion and urbanization drove temporary growth whilst political, demographic, or external shocks caused subsequent reversals. At practically every point during the sixteenth and seventeenth centuries, at least one economy in Europe was experiencing a growth episode. After 1800, a qualitative shift occurred where economies experienced more sustained growth, driven by industrialization and institutional development. However, this is not to categorize the European divergence as an economic take-off following centuries of stagnation.

Why did the Industrial revolution occur in Britain, according to Allen?

Allen (2009) argues that Industrial Revolution occurred in Britain due to the country’s unique economic environment of remarkably high wages and cheap energy. This incentivised investors to develop energy/capital-intensive labour-saving technologies that were profitable in Britain but not elsewhere.

Commercial and imperial expansion across the globe led to urbanization and high wages, particularly in London, which were sustained through success in the international economy. Alongside this, Britain’s vast coal deposits meant that coal was abundant and cheap which contributed to the high ratio of labour costs to energy costs. Cheap coal also contributed to lowering the price of capital relative to wages, further incentivizing mechanisation. All of this made the costly R&D for inventions like the steam engine or spinning Jenny profitable in Britain, but not in other countries, such as France or Germany, due to differences in factor prices.

Give two examples of these inventions:

Coke smelting, for example, required substantial research and development to make it commercially viable and competitive with charcoal iron. However, the technology was a biased improvement meaning it significantly cut costs where coal was cheap, such as in Britain, but not where it was expensive. This explains why other countries chose to stick with charcoal and not invest in the expensive R&D as it wouldn’t have been profitable.

Similarly, inventions such as the spinning jenny or water frame were based on adapting existing concepts, such as the spinning wheel, through expensive R&D rather than radical new ideas or scientific breakthroughs. The high cost of labour relative to capital made such R&D profitable in England but not in, for example, France which explains the lack of adoption across the continent even despite the technology being widely known. Allen demonstrates how the value of the labour saved with the jenny was not worth the extra capital cost in France.

Conclude Allen with one more invention:

Finally, the demand for the steam engine was driven by the large British mining industry who needed a solution to their drainage issues. The return to inventing such a machine was therefore far greater than in places like France or China. Furthermore, the early steam engines were incredibly energy-intensive and therefore only cost-effective where fuel was remarkably cheap which explains why the steam engine developed in Britain. Low potential profits and a limited market elsewhere meant the R&D would not have been worthwhile for investors.

In conclusion, Allen’s historical analysis of these key inventions show they were not the result of abstract scientific pursuits, British genius or cultural differences. Instead, they were economically motivated responses to the unique factor prices and market opportunities in Britain, making the necessary R&D investments profitable only in this specific economic environment.

Criticisms of Allen:

• Humphries (2013) is the standard critique. She argues Allen's "high wages" claim is partly an artefact of using London builder wages, which overstate the national wage level. Wages in much of Britain were not exceptionally high by European standards.

• Stephenson (2018) re-examines the wage series Allen relies on and argues Allen further overstates wages by treating contractor-quoted rates as actual wages received.

• Clark and Jacks (2007) is your filed counter. The coal-cheap-energy claim is weaker than Allen suggests; coal was cheap in Britain only at the pithead, and transport costs ate much of the advantage outside coal-producing regions.

• The "induced innovation" mechanism is theoretically debated. If high wages alone drove labour-saving innovation, why didn't earlier high-wage periods (post-Black Death Europe) produce similar innovation?

How should we understand the British industrial revolution?

According to Crafts and Harley (1992), the British industrial revolution should be understood primarily as a period of profound structural transformation rather than as an era of rapid GDP or productivity growth. They provide new estimates of industry growth and GDP which suggest that Britain’s transition to an industrial powerhouse occurred over a longer period than previous thought. They show that growth had begun to accelerate by the early eighteenth century and that Britain’s economy was wealthier and more industrial during this period than previously envisaged. Furthermore, real wages had begun to rise sustainably by the late eighteenth-century, signalling a break from the Malthusian trap. It was not the case that innovations in manufacturing caused British GDP growth to suddenly leap over one generation in the 19th century.

How did these changes reshape the British economy?

Although Crafts and Harley downplay the immediate impact of industrial innovations on aggregate growth, they argue that these changes were still historically significant because of how they reshaped the structure of the British economy. Most notably, there was a marked shift of labour out of agriculture and into a small number of rapidly growing, export-oriented sectors, such as cotton textiles and iron. These sectors, while limited in scope, had strong links to global markets and helped integrate Britain more deeply into the international economy. It was these structural changes, not endogenous innovation or rapid aggregate growth, which transformed Britain into the world’s first true urban industrial economy.

In sum, the article presents the Industrial Revolution as a historically unique structural reconfiguration: from a land-constrained, agrarian society to an export-led, industrial economy, driven not by rapid aggregate growth but by reallocation of labour and international positioning.

What is the human capital explanation of the Industrial revolution?

These authors advance a new interpretation of the British Industrial Revolution where, rather than geographic endowments or institutional superiority, the revolution occurred in Britain due to differences in human capital, particularly human capability. Past explanations involving human capital had been dismissed because of Britain’s mediocre schooling and literacy rates. However, Kelly et al. argue that it was practical competence, rather than skills learnt in formal education, that mattered for industrial growth.

What was the first factor?

Firstly, due to higher calorific and protein intake during childhood, British workers grew up to be on average healthier and taller than their counterparts around Europe. Comparisons show that English males were approximately four centimetres taller than French males on the eve of the Industrial Revolution. This meant both more physical strength and likely higher cognitive ability, making British workers more productive.

This finding may be linked to the English Poor Law, a unique institution to Britain which helped cushion the effects of malnutrition for those most in need and contributed to a higher quality labour force.

What was the next factor?

Furthermore, alongside these physical advantages, Britain enjoyed a disproportionately large number of highly-skilled and capable technical workers, perhaps due to Britain’s unique system of apprenticeship. This was important because, whilst the Industrial Enlightenment provided the blueprints for industrial success, they needed to be implemented by competent workers who had the practical skills to build, install, operate and maintain new machinery.

Contemporaries noted the superiority of British artisans at the time and this practical competence is evidenced by the fact that tens of thousands migrated to other countries in Europe, such as France, to operate machinery and train local workers, where they earned significantly more than locals due to their perceived quality and productivity. Thomas Malthus explicitly asserted that wages were so much lower in France than Britain because the efficiency of French workers was much lower. This all indicates that high wages in Britain were a symptom of deeper productivity differences, not their cause.

In sum, these authors argue that British workers were of higher quality than French (or other European) workers, both in terms of physicality and practical competence. This explains their higher wages and also why British workers were best suited to help adopt and implement the new technologies of the Industrial Revolution.

Evaluate this paper:

This paper challenges the induced innovation hypothesis, Allen’s idea that high British wages and cheap coal incentivized labour-saving, energy-intensive innovations. As an explanation for the British Industrial Revolution, an argument based on high wage levels relative to other economies must assume that British employers faced high unit costs. However, this paper argues that wage differences were offset by productivity differences so that unit labor costs may not actually have been any higher in Britain.

Furthermore, Allen focuses on process innovation (much of it in the textile industry) where it is true that unit costs were reduced through mechanisation. However, patent data shows that labour-saving was explicitly intended in only a small fraction (4.2%) of inventions between 1660 and 1800 and that only 21% of all inventions can be said to have saved labour (MacLeod, 1998).

This paper provides an alternative view to the narrative that wages were high in Britain because the Black Death and warfare increased labour scarcity. Instead, they suggest that the English made better workers and so deserved better pay.

What problem does the industrious revolution solve?

The traditional concept of the Industrial Revolution faces challenges due to revisionist research indicating slower growth rates than previously thought and significant economic activity predating the classic Industrial Revolution period. One source of puzzlement has been evidence of increasing consumer demand from the seventeenth century onwards, despite little evidence of higher real wages or increased purchasing power.

What was the industrious revolution?

De Vries (1994) introduces the concept of the “industrious revolution” as a crucial behavioural shift at the household level that helped lay the groundwork for the later Industrial Revolution. Driven by an expanded material culture and increased aspirations for market-supplied goods, households from the seventeenth century onwards began to reorganise how they allocated their time and labour, despite real wages remaining largely stagnant. Rather than producing goods solely for their own use, households shifted towards market-oriented production and also chose to work longer hours, re-allocating time from leisure to work. This transformation, driven by a desire for market goods, increased labour participation - especially among women and children.

These demand-side changes were crucial for the subsequent supply-side developments that constituted the Industrial Revolution. The Industrious Revolution ensured there was both a workforce motivated to work in factories and a market eager to consume the increased output that the Industrial Revolution would provide.

Personally, I am sceptical that consumer tastes and preferences changed so dramatically without other external factors at play.

Who challenges the coal thesis?

Clark and Jacks (2007) challenge the widely held assumption that coal was a central driver of Britain’s Industrial Revolution. According to this article, the rise in coal production could have happened earlier as the technology required for deep mining already existed before 1760 and was possible without the steam engine, which brought only modest cost savings over horse-powered systems. Using total factor productivity estimates, they find that productivity in coal mining grew by just 0.14% per year from 1700 to 1860.

Instead of technological innovation or rising productivity in extraction, the massive increase in coal output was primarily driven by external demand factors: rising urbanisation, increased demand for industrial uses, lower taxes on coal, and cheaper transport. Coal prices in London fell by nearly 50% between the 1740s and 1860s, driven largely by reduced shipping costs and taxes, not by technological breakthroughs.

How do they support their thesis?

The authors show that coal contributed just 1.6% of GDP and, had there been no productivity growth at all in coal, overall industrial output would have been just 0.2% lower by the 1860s, suggesting its direct economic importance was minor. The low coal rents, and the importance of transport and tax costs in the final price of coal, imply that England gained little advantage from actually possessing the coal reserves themselves. Falling coal prices made energy more affordable, helping urban areas and industries to expand. However, coal prices fell due to lower taxes and cheaper transport, not because Britain was especially good at mining it. Growth rates would not have been much lower, they argue, if the British Industrial Revolution was based on coal reserves located in the Netherlands or Ireland.

Can productivity alone explain the wage-rent ratio?

The wage-rent ratio, the level of wages relative to land rents, is a key indicator of income distribution between workers and landowners. It fell steadily in England from 1500 to 1800, due to a declining land-labour ratio, but then rose sharply after 1840. Certainly, the Industrial Revolution played a major part through raising industrial productivity. However, O’Rourke and Williamson (2005) argue that such a sharp rise in the wage-rent ratio cannot be explained by increases in productivity alone.

What was the importance of international trade?

Instead, they show that the key complementary mechanism was the opening of the British economy to international trade. Trade liberalisation, exemplified by the repealing of the Corn Laws in 1846, combined with declining transportation costs due to new technologies, such as steamships, allowed Britain to import cheap land-intensive goods like grain and cotton from land-abundant countries (mainly the colonies). This lowered the domestic price of agricultural goods and thereby reduced land rents relative to wages, contributing directly to the rise in the wage–rent ratio.

This explanation is supported by evidence of commodity price convergence where, after 1840, intercontinental price gaps for key goods like grain, textiles and spices fell sharply, indicating true commodity market integration.

Using counterfactual models, the authors demonstrate that industrialisation and globalisation of commodity markets each contributed roughly equally to the structural change.

How did international trade help the English economy escape the Malthusian trap?

Prior to 1750 the English economy was a closed economy, so any decline in land-labor ratios – due to a rising population - led to a fall in the wage-rent ratio. This is consistent with a Malthusian framework where factor prices adjust to demographic changes. It was international trade that caused a decoupling of commodities and commodity prices and ultimately helped Britain escape the Malthusian trap. The ability to import food from the colonies allowed Britain to sustain a growing population without putting downward pressure on wages and upward pressure on land rents, as had historically been the case. (O’Rourke and Williamson, 2005)

What is there to say about the industrial revolution and institutions?

The Industrial Revolution was the product of the Glorious Revolution, Atlantic trade and colonisation. The institutional settlement of 1688 secured property rights and constrained the executive (North and Weingast 1989), while Atlantic trade enriched a merchant class whose political power then locked in those constraints (Acemoglu, Johnson and Robinson 2005). These institutional foundations were even more important drivers than factor prices and coal: Britain's high wages and cheap energy (Allen 2009) only translated into sustained industrialisation because the institutional environment made the returns to innovation and investment appropriable in the first place. Without the incentives created by secure property rights, credible commitment and parliamentary constraints on arbitrary taxation, the same factor prices would have produced no equivalent take-off — as the absence of industrialisation in similarly resource-rich but institutionally weaker economies demonstrates.

What calls into question institutional explanations of the industrial revolution?

This paper challenges the view that Europe’s early industrialization was driven by superior institutions that led to more efficient markets. Scholars such as North argue that as early as 1700, countries like Britain and the Netherlands had developed legal, political and economic institutions that allowed markets to function more efficiently. Proposed institutions in the literature include secure property rights, common law and representative governments, leading to greater incentives to trade and accumulate capital.

Keller and Shiue test whether the alleged institutional superiority of Europe had any real manifestation in actual market performance in the 17th and 18th centuries. They argue that if Europe’s rise was rooted in centuries of institutional evolution, it should be observable in the efficiency of its markets well before the 1770s.

What evidence do they provide?

However, using data on the spatial dispersion of grain prices from the 17th-19th century, to measure the degree to which prices across regions respond to arbitrage opportunities, the authors show that markets in China were equally as or more efficient than those in much of pre-industrial Europe right up until the late 18th century. Only England showed significantly higher market efficiency just before industrialization, and improvements in European market performance actually occurred suddenly and concurrently with industrial growth, not before it. This suggests that market efficiency was likely a result of industrialization rather than its precondition, calling into question institution-first explanations of economic divergence. If institutions truly shaped market outcomes, and if Europe’s institutions were better, then Chinese markets should have lagged behind.

Under their view, market efficiency and growth co-evolved and were possibly mutually enforcing.

As the divergence in market efficiency appears sudden and localized – most visible in England after the 1770s – it suggests that we should look elsewhere for drivers of the  Industrial Revolution: to new technology, access to coal and colonial resources, or flexible responses to new economic opportunities.