Lecture 02_The Great Divergence

The Great Divergence

Overview of the Great Divergence

  • Around 1820, a significant economic gap (the Great Divergence) occurred between Europe and the rest of the world.

  • Europe emerged as the new center of global economic activity in under a century.

  • The cause: the onset of modern economic growth catalyzed primarily by industrialization.

  • Modern economic growth disrupted the long-standing Malthusian equilibrium that limited societal economic progress since the agricultural revolution.

  • Industrialization began in Britain before diffusing to other European regions.

Outline of Key Topics

  1. Modern economic growth.

  2. The end of the Malthusian equilibrium.

  3. The uniqueness of the British Industrial Revolution.

  4. Quantitative aspects of the Great Divergence.

Modern Economic Growth

Factors and Conditions for Economic Growth

  • Economic growth arises from:

    • Increased factors of production (physical capital, labor).

    • Improved overall efficiency (technology/knowledge).

  • Cobb-Douglas Production Function:

    • Y = A F(K, L)

      • Y: Output (GDP)

      • K: Stock of Capital

      • L: Labor employed

      • A: Total factor productivity (efficiency).

  • Continuous growth depends on persistent increases in A.

Mechanisms of Growth

  • Growth via:

    • Allocation of labor from low-wage agriculture to higher-wage industrial sectors.

    • Enhanced productivity in manufacturing and services post-industrialization.

  • Notable changes in Britain:

    • Decline in agriculture workforce from 40% to 15% (1800-1870).

    • Demographic improvements from advances in medicine and sanitation.

Industrial Growth in Britain

  • Economic growth during the Industrial Revolution was marked by:

    • Innovations in traditional sectors (coal, iron) and new industries (railways, chemicals).

    • Structural labor shifts enhancing urban industrial productivity.

Malthusian Equilibrium

Malthusian Theory

  • Birth and death rates determine population equilibrium:

    • Population Dynamics:

      • Births > Deaths: Growth

      • Births < Deaths: Decline

    • Income fluctuates around subsistence levels; no permanent improvement without industrial growth.

  • Economic outcomes depend on food production and population pressure.

  • Malthus' assertion: population growth outpaces agricultural production.

Agricultural Economy Dynamics

  • Traditional agricultural economies experience lower productivity growth.

  • Low increases in land availability restricts capital's effectiveness.

  • Continuous population fluctuations around subsistence conditions without industrialization.

The British Industrial Revolution

Key Factors for Industrial Success

  1. Knowledge and Technology:

    • A period of rapid innovation; new macro (major) and micro (incremental) inventions.

    • Technological advances not solely based on scientific principles, but practical skills of designers and engineers drive progress.

  2. Organizational Innovations:

    • Emergence of factories centralizing production.

    • Division of labor increasing efficiency and reducing transaction costs.

    • Establishes a more coherent production system replacing cottage industries.

  3. Spread of Knowledge:

    • A favorable patent system protecting inventor rights encouraged innovation.

    • Collective efforts sometimes bypassed patent systems promoting broad-based technological adoption.

Economic Incentives and Labor Dynamics

  • High labor costs vs. cheap energy led entrepreneurs to invest in labor-saving technologies.

  • The Jacquard machine exemplifies an innovation increasing efficiency in textile production.

Capital Formation in the Industrial Revolution

  • Fixed Capital: Necessary investments in physical assets (machinery, infrastructure) that drive production.

  • Capital Formation: Includes investments in infrastructure, inventories, and assets enhancing overall economic activity.

Transport Infrastructure Development

  • Roads: Turnpike trusts facilitate toll roads increasing travel speeds.

  • Waterways: Canal networks developed by private initiatives supported industrial movement.

  • Railways: Rapidly expanded network credentialed the decline of prior transport models, fostering economic connectivity.

Workforce Transformation

  • Shift to a commercialized agricultural economy driven by market demands.

  • Increase in rural households working more intensively, with contributions from family members, ensuring labor supplies for industries.

Comparative Analysis: Why Not Elsewhere?

  • The Dutch Republic had similar preconditions as Britain but lacked favorable political conditions and institutions that broadly supported innovation during the period.

The Great Divergence: Economic Disparities

  • Rise of Western economies in stark contrast to others; marked by GDP comparison between 1820 and 1913 reflecting growth and divergence in living standards.

  • Chart Analysis: Real GDP per capita shows growth patterns and socioeconomic trajectories across different nations highlighting Britain's dominance in the period.

Next Lecture Preview

  • Discussion on the consequences of the Industrial Revolution regarding reductions in trade costs.

  • Exploration of the emergence of a globalized economy framed around concepts such as comparative advantage and economic agglomeration.