2

February 2015 beta

INNOVATION AND THE

TRANSITION FROM STAGNATION
TO RAPID GROWTH

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HOW IN THE 19TH CENTURY SOME COUNTRIES, LED BY BRITAIN,

BROKE THE VICIOUS CYCLE OF ECONOMIC STAGNATION AND
POPULATION GROWTH.
You will learn:

What a Malthusian population trap is.

How technical progress allowed some countries to escape it.

Why the Industrial Revolution started in Britain.

How relative wages, the cost of machinery and other prices matter for economic
decisions.

How innovation creates temporary rewards for the innovator that are subsequently
destroyed by competition.

See www.core-econ.org for the full interactive version of The Economy by The CORE Project.
Guide yourself through key concepts with clickable figures, test your understanding with multiple choice
questions, look up key terms in the glossary, read full mathematical derivations in the Leibniz supplements,
watch economists explain their work in Economists in Action and much more.
Funded by the Institute for New Economic Thinking with additional funding from Azim Premji University and Sciences Po

coreecon | Curriculum Open-access Resources in Economics

in 1845 a mysterious new disease appeared for the first time in Ireland. It caused
potatoes to rot in the ground; by the time it became clear that a plant was infected,
it was too late. The potato blight, as it became known, devastated Irish food supplies
for the rest of the decade. Starvation spread. By the time the Irish famine had ended
about a million people had died, out of an initial total of 8.5 million. This was a far
worse mortality rate than any country would suffer during the second world war.
The Irish famine sparked a worldwide relief effort. Former slaves in the Caribbean,
convicts in New Yorks Sing Sing prison, Bengalis both rich and poor, and Choctaw
Native Americans all donated money, as did such celebrities as the Ottoman Sultan
Abdulmecid and Pope Pius IX. Then as now, ordinary people felt empathy for others
who were suffering, and acted accordingly. But many economists were much more
hard-hearted. One of the best-known, Nassau Senior, consistently opposed British
government famine relief, and was reported by a horrified Oxford University
colleague as saying that he feared the famine of 1848 in Ireland would not kill more
than a million people, and that would scarcely be enough to do much good.
Seniors views were morally repulsive, but did not reflect a genocidal desire to
see Irish men and women die. On the contrary, they were a reasonably logical
consequence of one of the most influential economic doctrines of the early 19th
century, Malthusianism. This was a body of theory developed by an English
clergyman, Thomas Malthus, in An Essay on the Principle of Population first published
in 1798. In this unit we will look at how Malthuss theory can help us understand
the long, flat section of the hockey stick graph we saw in Unit 1. That, in turn, can
help us to better understand Nassau Seniors views, although it certainly does not
excuse them. We will also look at how and why some parts of the world moved on to
the upward sloping portion of the hockey stick at some point in the late 18th or early
19th centuryironically, at more or less the same time that Malthusian theory was
formulated.

2.1 MALTHUSIAN ECONOMICS

one of the most important concepts in economic theory is the idea of

diminishing returns. To understand what this means, imagine an agricultural society
that produces just one good, food. Imagine that food production is very simpleit
involves only farm labour, working on the land. In other words, ignore the fact that
food production also requires a variety of equipment and buildings, from spades
to combine harvesters, and from chicken coops to grain elevators and silos. In the
language of economic theory we are going to ignore these inputs and assume that
food is produced with only two factors of production: land and labour. Now think
about what would happen if, for some reason, the population started to increase

UNIT 2 | INNOVATION AND THE TRANSITION FROM STAGNATION TO RAPID GROWTH

(we will see why this might happen later). As it does so, the land under cultivation
expands as well. It seems reasonable to assume that the best land was cultivated first.
Over time, therefore, as population expands, the farmer will be forced to cultivate
less fertile and less productive land. This means the additional workers will be less
productive, and produce less additional food over time. Eventually, all the available
land in the country will be cultivated. As the population continues to expand, what
happens then? The amount of available land for each worker will start to decline.
Once again, it seems reasonable to assume that, as we add successive workers to the
fixed land area, the total output will increase; but the extra output obtained by each
successive worker declines. So the average output per worker falls.
To summarise, as we add extra workers to the fixed land area in the country
concerned, the extra food produced by each additional worker declines over time.
Economists call this the law of diminishing returns. Diminishing returns implies that
as population increases, farmers incomes on average will fall. This makes sense: a
greater population means that worse land is being cultivated, or that more workers
are having to be squeezed into a fixed amount of land; and this implies that living
standards decline.
Is it sensible to assume that production is characterised by diminishing returns?
After all, the real world is much more complicated than the simple thought
experiment outlined above. Nevertheless, there is evidence for diminishing returns
in the historical record, if we know when and where to look. A famous example is the
Black Death of the 14th century which we discussed in the previous unit: between a
quarter and a third of Europes population died between 1348 and 1351, and the plague
reoccurred frequently in the succeeding centuries. If diminishing returns predict
that a rising population should lead to falling living standards, then it should also be
true that a falling population increases living standards.
As we saw in Unit 1, this is exactly what happened: the real wages of English building
workers started to rise at the time of the Black Death, and had doubled by the middle
of the 15th century. Real wages also rose sharply in other countries for which we
have real wage evidence, such as Spain, Italy, Egypt, the Balkans and Constantinople
(present-day Istanbul). In Italy, an irate Florentine complained in 1363 that wage costs
were much higher than they used to be, and commented that ordinary people now
wanted the dearest and most delicate foodswhile children and common women
clad themselves in all the fair and costly garments of the illustrious [people] who had
died.

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DISCUSS 1: DEFINING ECONOMIC PROGRESS

Why do you think our Florentine observer in 1363 was irritated about the fact
that real wages had increased? Compare the use of the growth of real wages
and of GDP per capita as measures of economic progress; what arguments can
you propose in favour of each, and what are the drawbacks of each measure?
The philosopher John Rawls would have proposed a third: the living standard
of the least well off segment of the population. What are the advantages and
disadvantages of this measure?
Try out your arguments on others. Do you agree or not? If you disagree, are
there any facts that could resolve your disagreement, and what are they? If there
are not, why do you disagree?

On their own, diminishing returns do not explain the long, flat portion of the
hockey stick. All the concept says is that living standards depend on the level of
population. It doesnt say anything about why, over long periods, living standards
and population didnt change much. The other main element of Malthusian theory
is Malthuss explanation for what determined the change in a countrys population.
Some years before Malthus developed his theories, an Irish economist, Richard
Cantillon, had stated that Men multiply like mice in a barn if they have unlimited
means of subsistence. Malthusian theory essentially regarded people as being not
that different from other animals. This may be one reason why Malthuss essay was
an important influence on Charles Darwin (1809-1882), who pioneered the study of
biological evolution.
Imagine a herd of antelopes on a vast and otherwise empty plain. There are no
predators to complicate their lives (or our analysis). When these antelopes are better
fed, they live longer and have more offspring. When the herd is small the antelopes
can eat all they want, and the herd gets larger. Eventually the herd will get so large,
relative to the size of the plain, that the antelopes can no longer eat all they want. As
the amount of land per animal declines, their living standards will start to fall. This
reduction in living standards will continue as long as the herd continues to increase
in size.
Since each animal has less food to eat, the antelopes will have fewer offspring and
die younger; population growth will slow down. Eventually, living standards will fall
to the point where the herd is no longer increasing in size. The antelopes have filled
up the plain. At this point, each animal will be eating an amount of food that we will
define as the subsistence level. When the animals living standards have been forced

UNIT 2 | INNOVATION AND THE TRANSITION FROM STAGNATION TO RAPID GROWTH

down to subsistence level as a result of population growth, the herd is no longer
getting bigger. If animals were eating less than the subsistence level, the herd would
actually start to get smaller.
Much the same logic would apply, Malthus reasoned, if we considered a human
population living in a country with a fixed supply of agricultural land, rather than
antelopes on the savannah. As Malthus said, Elevated as man is above all other
animals by his intellectual facilities, it is not to be supposed that the physical laws to
which he is subjected should be essentially different from those which are observed
to prevail in other parts of the animated nature. As long as people have unlimited
subsistence they would multiply like mice in a barn; but eventually they would fill
the country, and further population growth would push down real wages as a result of
diminishing returns. Falling living standards would slow population growth, as death
rates increased and birth rates fell; ultimately real wages would settle at subsistence
level, again defined as the level at which population would neither rise nor fall.
It is worth pausing for a moment to ask what would happen if population growth
did not slow down as real wages fell. With no mechanism to slow down population
growth, population would continue to rise to the point where people started to
starve. Malthusian economists thought that something like this had happened in
Ireland, and blamed the Irish famine on overpopulation. Its ultimate cause, they
believed, was the failure of the Irish peasantry to have fewer children, despite their
extreme poverty. As long as Ireland remained overpopulated, famine was inevitable.
The only sustainable solution as far as Malthusians were concerned was a radical
decline in both the Irish population and the Irish birth rate. Nassau Senior and many
of his contemporaries interpreted the famine with the economic ideas they had
at their disposal. Their mistake was to allow these theories to harden their hearts
towards the suffering of other people.
In the more general version of Malthusian theory, as we have seen, there is a
mechanism to prevent famine: population growth will slow as real wages fall and
eventually come to a halt when living standards have declined to the subsistence
level. As long as this subsistence level is high enough to prevent starvation there
will be no famine. That is the good news. The bad news is that, in the long run, the
combination of population growth and diminishing returns will always drive the real
wage down to the subsistence level. Workers will never see their living standards rise
in the long run.
Malthus recognised, however, that human beings are different from animals: we
are smarter. As we saw in the previous unit, one consequence of human ingenuity
is technological progress, which can squeeze a lot more output from the same
amount of inputsand therefore makes us better off. At any time it is possible that
technological progress could raise the total amount produced per worker. If the
bargaining power of workers were sufficient, as would be the case when labour was
scarce, real wages would rise above subsistence. But Malthusian theory predicts that
this improvement in living standards would only be temporary. Increasing real wages
above the subsistence level would lead to population growth, and hence to labour

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abundance rather than labour scarcity. The reduced level of output per worker, and
diminished bargaining power of the poor, would eventually force real wages back
down to subsistence. Even if the workers productivity were to increase, therefore,
their numbers would go up, but not their wages. The writer H.G. Wells, author of War
of the Worlds, wrote in 1905 that humanity spent the great gifts of science as rapidly
as it got them in a mere insensate multiplication of the common life.

2.2 MODELLING MALTHUSIAN ECONOMICS

IncomeHigh

Average income of people

who work the land

Income

Income

malthuss argument is summarised in Figure 1, using two diagrams.

Population
growth

B'

A'

IncomeLow
(subsistence)

Population
PopLow

PopMedium

Population growth
decreasing

increasing

Figure 1. A Malthusian economy.

INTERACT
Follow figures click-by-click in the full interactive version at www.core-econ.org.

UNIT 2 | INNOVATION AND THE TRANSITION FROM STAGNATION TO RAPID GROWTH

We start in the left portion of the figure at point A, which shows that the average
income of people who work the land is low at a medium population level. We
can see that average income would be higher at point B, where the population is
smaller. Both A and B are answers to the hypothetical question: if population were
the amount indicated on the horizontal axis, then what would the average income
be? There are many such points, each for a different level of population. If we plot
all of these points, including A and B, the resulting line gives the relationship
between population and living standards. It slopes downward to the right because of
diminishing returns: higher population implies a lower average income.
Malthus argued that the economy moves from a situation with high population and
low living standards like A (like Ireland prior to the potato famine) and a situation
like B, with a lower population and higher living standards (like Ireland prior to the
famine), and also in the reverse direction.
To fully understand the Malthusian model as a movement between A and B, it is also
useful to plot the relationship between average income and population growth. We
do this in the right-hand part of Figure 1.
Let us assume that when the average income of people that work the land is low,
living standards are at the subsistence level. Tracing this across to the population
growth diagram at point A, we can see that population growth is equal to zero
(that is, the population is constant). When average income rises above this level,
population growth is positive, as shown by point B. If we join points A and B this
shows the relationship between population growth and living standards. It slopes
upward to the right because higher incomes imply more births and lower death rates.
We can see that if average income should fall below the subsistence level, population
growth will be negative (meaning that the population falls).
Putting together both parts, the diagram explains what we refer to as the Malthusian
population trap. Population will be constant when average income is at the
subsistence level, it will rise when average income is above subsistence, and it will
fall when average income is below subsistence. The trap is that even if productivity
increases, living standards in the long run do not.

TEST YOUR UNDERSTANDING

Test yourself using multiple choice questions in the full interactive version at
www.core-econ.org.

Average income of people

who work the land

Average income of people

who work the land: after a
new technology is introduced.

IncomeHigh

IncomeLow

Income

coreecon | Curriculum Open-access Resources in Economics

Income

Population
growth

B'

A'

C'

(subsistence)

Population
PopMedium PopHigh

Population growth
decreasing

increasing

Figure 2. The introduction of a new technology in a Malthusian economy.

Figure 2 shows how the effects of the introduction of a new technology can be
modelled in a Malthusian economy. The economy starts at point A, where there is
a medium-sized population and the average income is at the subsistence level. An
advance in technology (for example, better seeds) means that the average income will
be higher for any level of population. This results in the entire average income line
shifting outward as shown by the blue line in Figure 2. At the initial population level,
average income increases and the economy moves to point B on the new average
income curve. At point B, average income has risen above subsistence and therefore
the population starts to grow. As population increases, the economy moves down
the average income curve in the left hand panel, and the average income starts to
fall again. As average income falls back toward the subsistence level, population
growth slows and the economy moves back down the population growth curve in
the right hand panel. The process eventually comes to a halt at a new, higher level of
population. At point C, wages are once more back at their original subsistence level.

UNIT 2 | INNOVATION AND THE TRANSITION FROM STAGNATION TO RAPID GROWTH

2.3 WAGES AND LAND RENTS IN A MALTHUSIAN ECONOMY

we now have a theory to explain the long, flat portion of the hockey stick.
Human beings periodically invented better ways of making things, both in
agriculture and in industry, and this periodically raised real wages above subsistence.
But on each occasion the higher real wages led young couples to marry earlier and
have more children, and it led to lower death rates. This caused population growth,
which eventually forced real wages back to subsistence levels. The major long run
impact of better technology in this Malthusian world was therefore more people,
which might explain why China and India, with their relatively sophisticated
economies, ended up with such large populations.
This is an over-simplified account of economic life before the Industrial Revolution,
but there is some evidence to support it. As we saw in Unit 1, real wages were
remarkably constant over the very long run before the 19th century, just as the theory
predicts. The stately homes and palaces of 17th and 18th century Europe are not
inconsistent with the theory, even though they suggest that living standards were
rising substantially before 1800 in Europeat least for some people. As population
continued to grow, the demand for food also grew, and the land on which that food
was cultivated became more valuable. Crowded land is valuable land. Real wages
would be flat in the long run, but the income that aristocratic landowners made from
hiring others to cultivate it, or renting out their land, would rise.
In a Malthusian world, therefore, population growth should have led to the relative
economic position of labour falling, and to the relative economic position of
landowners rising. In other words, the division of the economic pie should have
moved in favour of the aristocrats who built the stately homes, and against ordinary
workers. Figure 3 shows that this increase in economic inequality is exactly what
happened in England between 1500 and approximately 1850. It plots an index of
the ratio of unskilled wages to the income derived from owning an acre of land,
where the index is set equal to 100 in 1900. The figure does not allow us to compare
workers and landlords incomes at any point in time; different landowners owned
different amounts of land, so this would be an impossible calculation. Rather, it
allows us to see how the relative incomes of these two groups changed over time.

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700
600
500
400
300
200
100
1925

1900

1875

1850

1825

1800

1775

1750

1725

1700

1675

1650

1625

1600

1575

1550

1525

0
1500

Ratio of unskilled wages to income from land

10

Figure 3. Ratio of unskilled wages to income from land in England, 1500-1936.

Source: ORourke, K. H., and Williamson, J. G. 2005. From Malthus to Ohlin: trade, industrialisation and
distribution since 1500. Journal of Economic Growth 10, pp. 534.

DISCUSS 2: LIVING STANDARDS IN THE MALTHUSIAN WORLD

Imagine that the population growth schedule in Figure 1 shifted to the left (with
fewer people being born, or more people dying, at any level of income). What would
happen to long run living standards in a Malthusian world?

2.4 ESCAPING FROM MALTHUSIAN STAGNATION

the model of the economy outlined above does not offer an optimistic vision
of economic progressat least as far as ordinary workers are concerned. Even if
people succeeded in improving technology, in the long run workers were condemned
to enjoy no more than the subsistence level of real wages. And for many centuries,
real wages increased slowly, if at all.

UNIT 2 | INNOVATION AND THE TRANSITION FROM STAGNATION TO RAPID GROWTH

Yet living standards did eventually increase, and they did so rapidly and permanently.
This means that the Malthusian model we have presented stopped providing a
reasonable description of the world. The top panel of Figure 4 is one way to see this.
It shows English real wages and population levels from the 1280s to the 1860s.
100

Real wages

15

75

10

50
Population

25

0
1280

1380

1480

1580

1680

Real wage index (1860=100)

Population (millions)

20

0
1880

1780

1860s

100

Real wage index (1860=100)

90
80
70

1730s

60
1800s

1650s

50
40
30
20
10
0

10

12

14

16

18

20

Population (millions)

Figure 4. Escaping the Malthusian population trap: Population and real wages in England,
from the 1280s to the 1860s.
Source: Clark, G. 2005. The condition of the working class in England, 12092004. Journal of Political Economy
113: 130740, pp. 1310, 1312.

The bottom panel of Figure 4 is a different way to track the movement of two
variablesin this case, population and the real wageover time. It shows the same
data as in the top panel. In this case, each point in the figure shows the combination
of the level of the population and the level of the real wage at a given year. This figure
can be matched to the model in Figures 1 and 2, in which we have the same variables
on the two axes.

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In the bottom panel of Figure 4 we can see that in earlier centuries there was a clear
negative relationship between population and real wages: when one went up the
other went down, just as simple Malthusian theory suggests.
Eventually, however, the relationship began to break down. First population started
increasing without real wages falling much, if at all. Eventually the economy moved
to what seems to be an entirely new regime, with both population and real wages
simultaneously increasing.
The Industrial Revolution was essential to Britains escape from stagnation. What
changed?
First, our simple thought experiment illustrated in Figure 2 looked at the
implications of a one-off improvement in technology. This led to real wages
increasing and then falling again as population started to grow. But what if
technology started to improve constantly? What if it became sufficiently rapid and
strong that the average income curve shifted so much that population could not
entirely catch up; so real wages never had the time to fall back to their subsistence
level, despite population growth? In that case, the economy might be able to take off
and achieve a durable increase in living standards as long as the technical progress
continued.
Britain could also import food from its land abundant colonies in the New World.
As a result, population growth in Britain did not have to be accommodated by
putting more farmers on a strictly limited area of land. This reduced the pressure of
diminishing returns on which the Malthusian population trap is based. As you can
see by looking back at Figure 3, this had implications for income inequality as well.
Real wages not only increased in absolute terms from the middle of the 19th century,
they increased relative to the incomes enjoyed by aristocratic landowners.
We will see in Unit 17 that this change in the relative fortunes of workers and
landlords was probably partly due to the growing integration of the world economy,
which allowed the demand for food in Britain to be met in part from crops grown in
North America, reducing the scarcity of land in Britain.
Eventually something else also changed: as people gained higher incomes, many
chose to have smaller families. This was the beginning of the demographic transition
mentioned in Unit 1. If the population growth curve in Figure 1 stopped sloping
upward, or even started to slope downward, then population growth and diminishing
returns would not prevent sustained wage rises. The demographic transition would
make the escape from the Malthusian population trap irreversible.
By the end of the 19th century, the old, Malthusian relationship between living
standards and population growth was breaking down in many rich countries.

UNIT 2 | INNOVATION AND THE TRANSITION FROM STAGNATION TO RAPID GROWTH

DISCUSS 3: DEMOGRAPHIC TRANSITION

Why do you think the positive relationship between living standards and population
growth in Figure 1 broke down? Explain why population growth might become
slower when countries become richer.

In this unit, however, we will concentrate on the earlier shift towards more rapid and
continuous technological change that occurred during the Industrial Revolution.
The Industrial Revolution saw an extraordinary number of radical inventions in
many different sectors; but the most important, economically speaking, were in the
textiles industry, metallurgy, and energy production.
Making textiles involves several stages of production. The raw fibre (for example
wool, or raw cotton) is cleaned and prepared for spinning; the prepared fibre is then
spun into yarn; the yarn is then woven into cloth; and the cloth can then be bleached
or dyed. The most famous inventions involved spinning, traditionally carried out by
women (known as spinsters, meaning female spinner, not older unmarried woman,
as the term now means in English), and weaving, traditionally carried out by men.
In 1733 John Kay invented the flying shuttle, which greatly increased productivity in
weaving. This increased the demand for yarn, to the point where it became difficult
for spinsters to produce sufficient quantities using the spinning wheel technology
of the day. According to some, it now took five spinsters to supply the yarn needed
by one weaver. Three famous inventions followed which increased productivity in
spinning: James Hargreaves spinning jenny, Richard Arkwrights water frame, and
Samuel Cromptons mule, which (as the hybrid animal for which it is named suggests)
combined the best features of the previous two inventions. The spinning wheel
had just one spindle, onto which the yarn was wound as it was spun; early spinning
jennies had 12; Cromptons first mule had 48. Later inventors found ways of operating
mules using animal, water or steam power. In the 1820s Richard Roberts invented
the self-acting mule, which did away with the need for skilled and highly paid mule
operators. By the 1890s mules had 1,320 spindles each. Eventually weaving was
mechanised as well, and by the 1830s handloom weavers, who had enjoyed a golden
age as a result of growing supplies of ever-cheaper yarn, were displaced by machines.
A major breakthrough in iron-making was Henry Corts development of the puddling
process in 1784. This produced wrought iron, which was easily shaped and durable,
far more efficiently than earlier techniques. Another key challenge was how to smelt
iron ore using coal rather than charcoal (which was produced from wood). Abraham
Darby solved the puzzle in 1709, smelting ore with coke (a form of purified coal), and
the technique became widespread from the middle of the 18th century onwards.

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Coal was also the key to the steam revolution. Thomas Newcomen developed a steam
engine in 1712 to pump water from mines. James Watt began working on an improved
design in 1765, and his engines were in commercial use by 1776. Steam engines were
a typical invention of the period in many ways. They relied on developments in
other areas, notably metallurgy: great designs would have been of no use without
engineering skills and cheap supplies of the right sort of metal. They were gradually
improved over a long period of time. And they were eventually used across the
economy: not just in mining, but also in textiles, in other manufacturing sectors, and
in the railways and steamships that drove the integration of the world economy in
the 19th century. They are an example of what is termed a general purpose innovation
or technology, which we will study in more detail in Unit 20.
The growing use of coal in metallurgy and energy production was crucial. Prior to
the Industrial Revolution most of the energy used in the economy was ultimately
produced by edible plants, which converted sunlight into food for both animals and
people, or by trees whose wood could be burned or transformed into charcoal. More
energy production meant less land available for food production: this was a world
in which the available supply of land was a major constraint on production. This
partly explains why the Malthusian model was a reasonable description of how the
economy worked prior to 1800.
By switching to coal, humans were able to exploit a vast reserve of what is
effectively stored sunlight. This allowed them to greatly expand production. For
example, English coal production in 1800 yielded as much energy as would have
been produced by burning the timber growth from 11 million acres of woodland:
an enormous number, when you consider that the total English land area is just
32 million acres (13 million hectares). There is no way that the huge increase in
production after 1800 could have been sustained using traditional energy sources.
The cost has been that the switch to using fossil fuels has had major environmental
implications, as we saw in Unit 1 and will return to in Unit 18.

2.5 EXPLAINING THE INDUSTRIAL REVOLUTION

why did these inventions, and many others, emerge when and where they did?
This is one of the most famous and important questions in economic history, and
historians continue to debate the issue.
As we saw in Unit 1 the Industrial Revolution did not lead to economic growth
everywhere in the world. Because the Industrial Revolution originated in Britain, and
spread only slowly to the rest of the world, it also implied a huge increase in income
inequality between countries in the 19th and 20th centuries. One of the most famous

UNIT 2 | INNOVATION AND THE TRANSITION FROM STAGNATION TO RAPID GROWTH

historians of the Industrial Revolution, David Landes, once asked Why are we so
rich and they so poor? By we, he meant the rich societies of Europe and North
America; by they he meant the poorer societies of Africa, Asia and Latin America.
Landes suggested, a little mischievously, that there were basically two answers to this
question:
One says that we are so rich and they so poor because we are so good and they
so bad; that is, we are hardworking, knowledgeable, educated, well-governed,
efficacious, and productive, and they are the reverse. The other says that we are so
rich and they so poor because we are so bad and they so good: we are greedy, ruthless,
exploitative, aggressive, while they are weak, innocent, virtuous, abused, and
vulnerable.
If you think that the Industrial Revolution happened in Europe because of the
Protestant Reformation, or the Renaissance, or the Scientific Revolution, or the
development of superior private property rights, or favourable government policies,
then you are in the first camp. If you think that it happened because of colonialism,
or slavery, or the demands of constant warfare, then you are in the second.
You will notice that these are all non-economic forces that, according to some
scholars, had important economic consequences. You can probably also see how
the question of which of Landess two answers is right might become ideologically
charged; although, as Landes points out, It is not clearthat one line of argument
necessarily precludes the other. At the end of this unit there are some suggestions
if you want to read more about this fascinating issue. For now, however, we will point
out that the question of why the Industrial Revolution happened in Europe rather
than in Asia, and in Britain rather than in France, might also have something to do
with the simple economics of the relative cost of labour and other inputs and the
way that this promoted technical progress (which obviously does not rule out the
possibility that religion, culture, science, politics, oppression, geography, and warfare
mattered as well).
One of the most important assumptions in economics is that people respond to
economic incentives. Of course, in real life people are motivated by lots of factors:
love, hate, sense of duty, desire for approval. But the desire for material comfort is
definitely a prominent motive. When you are thinking about how people behave as
workers, as the owners of firms, as shoppers, as citizens or simply as family members,
it is always worth thinking about the economic incentives that we face and how they
influence the choices we make.
When owners or managers of firms decide how many workers to hire, or when
shoppers decide what and how much to buy, prices are going to be a crucial factor
determining their decision. When deciding whether to shop in a neighbourhood
convenience store, or in a discount supermarket, one obvious factor influencing your
decision will be how prices compare in the two stores, as well as the costs of getting
to the two stores. If prices are a lot cheaper in the discount store than in the corner
shop and it is not too far away, this will be a good argument for shopping in the

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former rather than the latter. Of course, not everyone will choose to do so, since there
are other factors influencing where we shop: brand loyalty, convenience or snobbery,
for example. But you would expect that if prices in the discount supermarket became
a lot cheaper than prices in corner shops, then on average we would see buyers switch
to the cheaper shops.
Note that it is not the price level in one shop or the other that matters, but the price
level in one shop compared to the other. In other words, relative prices matter for the
decisions of shoppers, or consumers, as we tend to call them in economic theory. If
supermarkets lowered their prices, but the corner shops then lowered their prices
proportionally in response, there would be no incentive for consumers to switch away
from convenience stores.
Relative prices are simply the price of one option relative to another. We often
express relative price as the ratio of two prices. We will see that they matter a lot in
explaining not just what consumers decide to buy, but why firms make the choices
that they do. For now we are interested in the choices made by inventors at the
time of the Industrial Revolution, and in the subsequent choices of firms regarding
whether or not they would implement the new industrial technologies described
above.
What did inventions such as the spinning jenny do? As we saw, the first spinning
jennies had 12 spindles. They therefore replaced 12 spinsters, working on 12 spinning
wheels, with one machine operated by just one adult. Later spinning mules had a
lot more spindles; more than a thousand by the late 19th century. They therefore
replaced more than a thousand spinsters each with a much bigger machine operated
by a very small number of people. These machines no longer relied on human energy.
Early in the Industrial Revolution, many were powered by water wheels. As time went
on, more and more were powered by steam engines using coal.
In other words, the old technology used a lot of workers, each worker using only
a small amount of machinery and other equipment and non-labour inputs (the
spinsters spinning wheel, for example). The new technology used a lot of what we
call capital goods such as spinning mules, factory buildings, and water wheels or
steam engines. They used a lot of coal and not much labour.
In the language of economics, the pre-Industrial Revolution technology was labourintensive, while the new technology was capital- and energy-intensive. Another way to
make the same point is to say that the new technologies of the Industrial Revolution
were labour-saving, and capital and energy-using. In other words, this was an
example of biased technological change: in this case a technological change that was
biased towards using more capital and less labour.
Why would someone bother to invent such a technology and why would anyone want
to use it, were it invented? We can guess that the main aim was to lower the cost of
production in order to make more profits. But when would switching from a labourintensive technology to a capital and energy-intensive technology lower costs? The

UNIT 2 | INNOVATION AND THE TRANSITION FROM STAGNATION TO RAPID GROWTH

answer has to do with the relative costs of labour on the one hand, and of capital
and energy on the other. The incentive to switch to the new technology would be
high when workers were expensive and machinery and other capital equipment, and
energy, were cheap: that is, when the relative cost of labour was high. There would
be much less of an incentive to switch if wages were low and capital and energy
were expensive. In other words the incentive to switch to the new technology would
depend, among other things, on the relative prices of labour, capital, and energy.
Why Britain was such an inventive country is a complex question. But an important
part of the answer is that there were many skilled workmen, engineers and machine
makers who could build the machines that inventors designed. Looking at how
relative prices differed among countries can help us understand why the laboursaving, capital- and energy-using technologies of the Industrial Revolution were
invented in Britain rather than elsewhere, and first adopted in Britain rather than
elsewhere.

4
3
2

Paris

Beijing

Strasbourg

London

Amsterdam

Newcastle

Wages relative to the

price of energy, early 1700s

Figure 5. Wages relative to the price of

energy, early 1700s.

Figure 5 shows the price of labour relative

to the price of energy in various cities in
the early 1700s. In other words, it shows
the wages of building labourers divided
by the price of energy (more precisely,
the price of a million British Thermal
Units (BTU), a unit of energy equivalent to
slightly more than 1,000 joules). What you
can see is that labour was very expensive
relative to the cost of energy in England
and the Netherlands. It was less expensive
in France (Paris and Strasbourg), and a lot
less expensive in China.

Wages were high in England, relative to

the cost of energy, both because English
wages were higher than wages elsewhere,
and because coal was cheaper in coal-rich
England than in the other cities in the
diagram. Factors raising English wages
included its overseas trade, which sucked workers into bustling merchant cities, and
productive agriculture. Coal was especially cheap in Newcastle and other northern
cities close to coalfields; which is why the price of labour, relative to the price of coal,
was so much higher there than in London. Wages were more expensive in London
than in Newcastle, but coal was even more expensive.
Source: Allen, R. C. 2009. The British Industrial
Revolution in Global Perspective. Cambridge:
Cambridge University Press, p. 140.

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18

Wages relative to the cost of capital

2.0
ENGLAND

1.5

1.0

FRANCE
AUSTRIA

1830

1810

1790

1770

1750

1730

1710

1690

1670

1650

1630

1610

1590

1570

0.5

Figure 6. Wages relative to the cost of capital.

Source: Allen, R. C. 2009. The British Industrial Revolution in Global Perspective. Cambridge: Cambridge
University Press, p. 138.

Figure 6 shows trends in the cost of labour, relative to the cost of capital goods, in
England, France and Austria from the late 16th to the early 19th century. It shows
the wages of building labourers divided by the cost of using capital goods. This cost
is calculated from the prices of metal, wood and brick, and the cost of borrowing,
and takes account of the rate at which the capital goods wear out, or depreciate. As
you can see, workers became steadily more expensive, relative to capital goods, in
England; but the price of labour divided by the price of capital remained constant, or
even fell, in France and Austria during the same period. In other words the incentive
to replace workers with machines was increasing in England during this time, but
the same was not true in the other two countries. In both France and Austria the
incentive to save labour by innovating had been stronger during the late 16th century
than it was 200 years later, at the time the Industrial Revolution began to transform
Britain.

2.6 INNOVATION RENTS AND THE INTRODUCTION OF NEW TECHNOLOGY

figures 5 and 6 showed that the incentive to replace labour-intensive

technologies with newer technologies that saved labour (and used capital and energy
more intensively) was higher in England than in other countries, and had been
increasing. The argument is summarised graphically in Figures 7 to 9. Together they

UNIT 2 | INNOVATION AND THE TRANSITION FROM STAGNATION TO RAPID GROWTH

show how firm owners choose between technologies that are more or less labourintensive, based on economic incentives; in particular, the cost of labour and other
inputs.
Since the graphs are two-dimensional, the figures show the owners choosing between
just two inputs, which we label as labour and energy. This is a simplification, just as
when we explained diminishing returns by assuming that the only inputs to farming
were land and labour. In fact, as we have discussed, there were three broad categories
of inputs that mattered in the textile industry: labour, energy and capital.
Firm owners and managers care about the costs of machines, as well as labour and
energy. But Figures 7 to 9, which simplify the problem to being one of choosing
between labour and energy, give us a good idea of the choices that these firm owners
faced, because technologies that used a lot of capital goods also used a lot of energy.
Imagine therefore that textiles are produced with just two inputs, labour and energy,
and that there are two ways of producing 100 metres of cloth. The first, labelled
A in Figure 7, uses the old technology. The second, labelled B in Figure 7, uses the
new technology. We can see that it requires four workers and two tonnes of coal to
produce 100 metres of cloth using the traditional technology but only one worker
and 6 tonnes of coal once the new technology is introduced. So A is labour-intensive,
and B is capital-intensive.
10

A: Isoquant: 100m of cloth

using old technology

9
8

B: Isoquant: 100m of cloth

using new technology

Tonnes of coal

7
B

CD: Isocost: 100, labour is

relatively expensive

5
4
3
A

2
1
0

C
0

10

Number of workers

Figure 7. Modelling a firm producing 100 metres of cloth.

You will notice that there are two L-shaped lines plotted on Figure 7, whose right
angles occur at points A and B respectively. These two lines are known as isoquants.
They give combinations of worker inputs and coal inputs that produce equal amounts
of output, in this case 100 metres of cloth.
What does the fact that they are L-shaped imply? Take the old, labour-intensive
technology at point A: four workers and two tonnes of coal produce 100 metres of
cloth. The horizontal portion of the L-shaped isoquant implies that if you increase

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the number of workers employed from four to five, but do not change the amount of
coal that you are using, you will still produce only 100 metres of cloth. Indeed, no
matter how many more workers you employ, you will still only produce 100 metres
of cloth so long as you dont use more than two tonnes of coal. Indeed, no matter
how many workers you employ, you will still only produce 100 metres of cloth so
long as you dont use more than two tonnes of coal. Similarly, the vertical portion of
the L-shaped isoquant implies that as long as you are only employing four workers,
increasing the coal input from two tonnes to three or more would not have any
impact on production.
In other words, the fact that this isoquant is L-shaped implies that this technology
uses workers and coal in fixed proportions: four workers per two tonnes of coal. In
later units we will see that not all isoquants are L-shaped, and that some technologies
allow you to vary the ratio of workers to coal (or of any input to any other). For the
purposes of this chapter, this is an unnecessary complication, and so we will stick
with our assumption of fixed proportions.
What is the total cost of producing 100 metres of cloth? With just two inputs, the
cost will equal the cost of hiring the workers, plus the cost of buying the necessary
coal. Imagine that the cost of hiring a worker is 20, and that the cost of a ton of coal
is 10. In other words, the price of a worker, relative to the price of a ton of coal, is
(20/10) = 2. The cost of producing at point A will be 20 per worker, multiplied
by four workers, plus 10 per ton of coal, multiplied by two tons of coal, or (20 x
4) + (10 x 2) = 100. Notice that if you hypothetically were to hire five workers and
use no coal at all (that is to say, if you operated at point C on the graph), your cost of
production would be (20 x 5) + (10 x 0) = 100, but there would be no production,
because production requires coal. Notice also that if you used 10 tons of coal, and
hired no workers (at point D), your total cost of production would also be 100, but
also with no production, because production requires workers. More generally, the
dashed line joining C and D, and going through point A, shows all the combinations
of coal and workers that, if you bought them at these prices, would cost you 100.
We call this dashed line an isocost curve, because costs of production are the same
along it. Its slope is given by the height of point D, 10 tonnes of coal, divided by the
horizontal length between the origin and point C, five workers: two tonnes of coal per
workerignore the fact that the slope is negative. This is simply the price of workers
expressed in tons of coal, or the relative price of workers; that is, hiring one worker
is equivalent in terms of cost to using two tonnes of coal. LEIBNIZ 1 explains how you
can find the slope of the isocost curve algebraically.
(If you want to get familiar with the notations used in our calculus supplements, or if
you want to know why we used the name Leibniz for them, read LEIBNIZ 0.)

UNIT 2 | INNOVATION AND THE TRANSITION FROM STAGNATION TO RAPID GROWTH

LEIBNIZ
For mathematical derivations of key concepts, download the Leibniz boxes from
www.core-econ.org.

Now we turn to Figure 8 to show the effect on the firm of switching to the new
technology. The firm starts in the same position as it did in Figure 7, producing at
point A with total costs of 100. The advance in technology makes it possible to
produce the same amount of cloth cheaper by switching to the new isoquant and
producing at point B.
10

A: Isoquant: 100m of cloth

using old technology

9
F

B: Isoquant: 100m of cloth

using new technology

Tonnes of coal

7
B

CD: Isocost: 100, labour is

relatively expensive

EF: Isocost: 80, labour is

relatively expensive but
new technology is lower cost

4
3
A

2
1
0

E
0

C
5

10

Number of workers

Figure 8. The rents from switching to the new technology.

Figure 8 shows a new isocost curve EF, through point B. As you can see, this isocost
curve is parallel to the first one, but closer to the origin. It has the same slope, which
tells you that we assume that relative prices are the same as before, but the fact that
it is drawn closer to the origin tells you that total costs along this isocost line are
lower than total costs along the first isocost line. How much lower? Total costs at
point E are (20 x 4) = 80; total costs at point F are (10 x 8), and of course this is
also equal to 80 (because E and F lie on the same isocost line). Therefore, the total
cost of producing 100 metres of cloth using the new labour-saving and coal-using
technology at point B is (20 x 1) + (10 x 6) = 80: the new technology is cheaper than
the old one, at these prices of labour and coal.

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By reducing its costs of production from 100 to 80 per 100 metres of cloth, the
first firm to introduce this new technology will see its profits increase by 20 for
every 100 metres of cloth it produces. These extra profits are called economic rents,
meaning a payment received above your next best alternative, which in this case
means producing using the old technology. Notice that this use of economic rent
is different from the everyday usage, where rent is the payment by someone else to
the owner of land or a house for the use of it. We will see in later units that economic
rents are important to the functioning of a capitalist economy in other areas, for
example in the prices set by monopolists (Unit 7) and in the wages offered to workers
(Unit 6).
The prospect of earning these rents is what motivates firm owners to introduce
the new technology. The first adopter is called an entrepreneur. When we describe
a person or firm as entrepreneurial, it refers to a willingness to try out new
technologies and to start new businesses. The economist Joseph Schumpeter (see
below) made the adoption of technical improvements by entrepreneurs a key part of
his explanation for the dynamism of capitalism. Sometimes the extra profits made by
innovators are termed Schumpeterian or innovation rents.

PAST ECONOMISTS
JOSEPH SCHUMPETER
Joseph Schumpeter (1883-1950) was born in Moravia, then part of the AustroHungarian Empire, and was educated in Vienna. After a varied career including
spells as a politician and a banker he moved to the US in 1932, where he
taught for many years at Harvard. He is best known for his view that capitalism
involves a continual process of what he called creative destruction, with new
innovations displacing older ways of doing things.

Rents will not last forever: other firms noticing the rents accruing to the first
adopters will introduce the new technology; as they do so, they will also reduce their
costs. As more firms introduce the new technology, the price of cloth will start to fall;
costs of production are still lower, but so is the price of the firms output. The price
of coal may also rise due to the increased demand from the firms now using the new
energy-intensive technology. This process will continue until everyone is using the
new technology, at which stage prices will have declined to the point where no one is
earning innovation rents.

UNIT 2 | INNOVATION AND THE TRANSITION FROM STAGNATION TO RAPID GROWTH

Is the new technology always cheaper? No. Assume that the cost of hiring a worker is
10 rather than 20, and that the cost of a tonne of coal is 20 rather than 10. In this
case the relative price of workers, expressed in tonnes of coal, is 10/20 = 0.5, rather
than 2, in the previous example. We show the effect this has on the firms decision to
switch to the new technology in Figure 9.

10

A: Isoquant: 100m of cloth

using old technology

9
8

B: Isoquant: 100m of cloth

using new technology

Tonnes of coal

7
B

CD: Isocost: 100, labour is

relatively cheap

5
D

4
3

2
1
0

C
0

10

Number of workers

Figure 9. The decision to switch to the new technology depends on the relative prices of
labour and energy.
We start with the same isoquants as in Figures 7 and 8; the combinations of worker
inputs and coal inputs that produce 100 metres of cloth have not changed just the
relative prices of the inputs. The change in relative prices affects the isocost line;
the isocost line corresponding to point A is now the dotted line joining C and D,
whose slope is, as expected, 0.5. Costs at C are equal to (10 x 8) = 80. Costs at D are
equal to (20 x 4) = 80. Costs at A are (10 x 4) + (20 x 2) = 80. Although we havent
plotted the isocost line going through point B, you can see that B lies further away
from the origin than the isocost line joining C and D, and that producing at B must
therefore cost more than 80. In fact, producing at point B, at these prices, costs (10
x 1) + (20 x 6) = 130.
What have we learned? If isocost lines are steep, like CD in Figures 7 and 8, then the
new technology is cheaper to use than the old one. If they are flat, like CD in Figure
9, then the old technology is cheaper. But the slope of the isocost line is simply the
relative price of labour in terms of coal, or if you prefer, the wage rate divided by the
price of a tonne of coal. So if wages are relatively expensive (isocost lines are steep),
you will prefer the new technology. This makes sense, since the new technology uses
relatively little labour and a lot more coal. If wages are relatively cheap (and coal is
therefore relatively expensive; isocost lines are flat), you will prefer to stick to the old
technology, which uses a lot of cheap labour and relatively little expensive coal.

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As we saw in Figure 5, England was a high-wage, cheap-energy country, and so it
makes sense that the energy-using, labour-saving technologies of the Industrial
Revolution were first used there. But what might have been a cheaper technology in
England was not necessarily a cheaper technology in China, or even France: wages
were lower there and energy was more expensive. In terms of Figures 7 to 9, these
other countries had flat isocost lines (look at CD in Figure 9 for an example), and this
meant that the old technologies were more profitable than the new ones. It makes
sense, therefore, that these new technologies were adopted first in England. This
meant that, during the early years of the Industrial revolution, technology advanced
more rapidly in England than on the continent of Europe, and even more rapidly than
in Asia. This, in turn, led to British living standards pulling further ahead of those in
the rest of the world.
What explains the eventual adoption of these new technologies in countries
like France and Germany, and ultimately China and India? One answer is further
technological progress, which reduces the cost of using the new technology.
Technological progress would mean that it would take smaller quantities of
inputs to produce 100 metres of cloth. Once the new technology had advanced far
enough it would be profitable to switch to it even in a low-wage, expensive-energy
economy. A second factor that promoted the diffusion of the new technologies was
wage growth and falling energy costs (due for example to cheaper transportation,
allowing countries to import energy cheaply from abroad). This made isocost lines
steeper in poor countries. Either way, the new technologies started to spread, and
the divergence in technologies and living standards was eventually replaced by
convergenceat least among those countries in which the capitalist revolution had
taken off.

2.7 CONCLUSION

in the pre-industrial economy the real wages of ordinary workers rose

slowly, if at all. This can at least partly be explained by Malthusian economic theory:
any increases in real wages above subsistence level were eventually eroded by the
combination of rising population and diminishing returns. Diminishing returns were
an important feature of the pre-industrial economy because land supplies were an
important constraint on total production.
The new technologies of the Industrial Revolution ushered in a new era of growth.
More rapid and continuous technological change allowed average living standards
to rise permanently above subsistence level. Food came to occupy a smaller fraction
of peoples consumption and, as a result, employment shifted away from farming
into the production of clothing and other manufactures. These made much less use

UNIT 2 | INNOVATION AND THE TRANSITION FROM STAGNATION TO RAPID GROWTH

of land, as opposed to capital goods and coal. This meant that land became a less
important constraint on production, weakening the grip of diminishing returns on
living standards. It also led to a decline in land rents relative to wages which started
late in the 19th century, as we showed in Figure 3.
Britain was the first country to industrialise and escape the Malthusian population
trap. There are many possible reasons for this, which you can discuss.

WHEN ECONOMISTS DISAGREE

WHAT WERE THE CAUSES OF THE INDUSTRIAL REVOLUTION?
The argument that Britain adopted labour-saving, and capital- and energy-using
technologies before the rest of the world because it was a high-wage and lowenergy-cost economy has been made by Robert Allen. He talks about one example
in the video below, and the most accessible introduction to his work is his book
Global Economic History: A Very Short Introduction.
But, like most arguments concerning the causes of the Industrial Revolution,
Allens is controversial. Joel Mokyr, who has worked extensively on the history
of technology, claims that the real sources of technological change are to be
found in Europes scientific revolution and Enlightenment, and in the skilled
artisans who made it possible to build the machines of the period. He claims
that, while relative factor prices might tilt the direction of invention in one
direction or another, they are more akin to a steering wheel than to the motor of
technological progress.
According to a similarly controversial argument by David Landes, Europe pulled
ahead of China for cultural and institutional reasons. The Chinese state was
too powerful, he argued, and stifled innovation, while Chinese culture favoured
stability over change.
Kenneth Pomeranz claimed that superior European growth after 1800 was more
due to the abundance of coal in Britain than to any cultural or institutional
differences with China. Pomeranz also claimed that access to the vast land in
the British colonies in the New World allowed Britain to escape the constraints
imposed by diminishing returns to land.

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Is the debate resolved? Scholars will probably never completely agree about
what caused the Industrial Revolution, and the great divergence between Europe
and the rest of the world that it gave rise to. One problem is that this change
happened only once, and it is more difficult for social scientists to explain oneoffs. Another problem is that, as most scholars agree, the European take-off
was probably the result of a combination of factors: scientific, demographic,
political, geographic, military, and so on. Several argue that it was partly due to
interactions between Europe and the rest of the world too, not just to changes
within Europe.
Historians tend to focus on peculiarities of time and place. They are more
likely to conclude that the Industrial Revolution happened because of a unique
combination of favourable circumstances (they may disagree about which ones).
Economists are more likely to look for general mechanisms that can explain
success or failure across both time and space. Economists have much to learn
from historians, but they often find their arguments are not precise enough to be
testable hypotheses. Some historians may regard the economists explanations
as simplistic and insufficiently informed by historical facts. This creative tension
is what makes economic history so fascinating.
While there will always be these debates, economic historians have made
progress in recent years in quantifying economic growth over the very long
run. By making it clearer what happened, their work makes it easier for us to
think about why it happened. Some of the work involves comparing real wages
in countries over the long run. This has involved collecting both wages and
the prices of goods that workers consumed. An even more ambitious series of
projects has calculated GDP per capita back to the middle ages.
Several scholars have written reviews of each others books, which are easily
accessible on the internet. For example, search for Gregory Clark review Joel
Mokyr or Robert Allen review Gregory Clark to see how one researcher reviews
the work of another.

Other countries in northwest Europe, such as Belgium and Germany, soon followed.
From Figure 1 in Unit 1 we can see that Japan and Italy took off about a century after
Britain, with China and India following about 100 years afterwards, each taking a
slightly different escape route. The national trajectories of the early followers were
influenced in part by the dominant role that Britain had come to play in the world
economy. Germany, for example, could not compete with Britain in textiles; but the
government and large banks played a major role in building steel and other heavy
industries.

UNIT 2 | INNOVATION AND THE TRANSITION FROM STAGNATION TO RAPID GROWTH

DISCUSS 4: WHY DID THE INDUSTRIAL REVOLUTION NOT HAPPEN IN ASIA?

Use the readings at the end of the unit to discuss why the Industrial Revolution
happened in Europe rather than in Asia, and in Britain rather than in Continental
Europe. Which arguments do you find most persuasive, which arguments do you find
least persuasive, and why?

For the early followers, and for many who caught up later, the escape from
Malthusian stagnation was possible because of an economic systemcapitalism
that granted substantial rents to those who first adopted new technologies. There
was also a backlog of innovation, first from Britain and later from the first followers,
who had become leaders in different industries. Remember also that in Unit 1
we discussed how, in the Soviet Union, an economic system with very different
institutions achieved industrialisation using central planning, and why it was
later abandoned. In Unit 17 we will also explore the role played by international
tradeglobalisationin the adoption of new technologies and the growth of living
standards.

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UNIT 2 KEY POINTS

1. Malthusian economics uses the principle of diminishing returns to predict that, as the
population in a fixed area of land increases, the output obtained by each successive
worker will decline. The average output per worker will fall, and living standards will
decline as a result.
2. In the long run, in a Malthusian economy the response of population to changes
in living standards drives them down to a subsistence level, at which they remain
constant.
3. The Malthusian trap: a new technology increases income by raising the output per
worker. Increasing real wages above the subsistence level leads to population growth
and labour abundance. The reduced level of output per worker and diminished
bargaining power of the poor drives real wages back down to subsistence levels.
4. By the end of the 19th century rich countries escaped from the trap. Continuous
technological progress had created a durable increase in living standards.
Eventually, as people gained higher incomes, many chose to have smaller families too
resulting in the demographic transition.
5. In Britain the escape was made possible by labour saving innovations such as the
spinning jenny and the steam engine, which were continuously and rapidly improved.
6. The entrepreneurs who first introduced these innovations received innovation rents
which eventually were competed away as the innovations were also adopted by
competitors, raising the labour productivity in the entire economy and leading to a
wider sharing of the benefits of technical progress.
7. There are many explanations for why the Industrial Revolution happened in Britain
and Europe first, but economic incentives played a part: in Britain, labour was
comparatively expensive compared to energy. As a result there was an incentive for
British capitalists to capture innovation rents by adopting labour-saving technology to
lower the cost of production.

UNIT 2 | INNOVATION AND THE TRANSITION FROM STAGNATION TO RAPID GROWTH

UNIT 2: READ MORE

2.1 MALTHUSIAN ECONOMICS
The Black Death and the transformation of the west
David Herlihy argues that the Black Death transformed Europe.
Herlihy, D. 1997. The Black Death and the Transformation of the West, Cambridge, MA:
Harvard University Press.
2.3 WAGES AND LAND RENTS IN A MALTHUSIAN ECONOMY
Malthusian models and Chinese realities
James Lee and Wang Feng discuss ways in which Chinas demographic system
differed from Europes, and question the Malthusian hypothesis that Chinese poverty
was due to population growth.
Lee, J. and Feng, W. 1999. Malthusian models and Chinese realities: the Chinese
demographic system 1700-2000, Population and Development Review 25(1), pp. 33-65.
Gifts of Mars
Nico Voigtlnder and Joachim Voth use this logic to argue that the gradual rise in
European living standards between 1500 and 1800 was due to the widespread war of
the period: LINK.
Voigtlnder, N. and Voth, H. 2013. Gifts of Mars: Warfare and Europes Early Rise to Riches.
Journal of Economic Perspectives 27(4), pp. 165-186.
2.5 EXPLAINING THE INDUSTRIAL REVOLUTION
Why are we so rich and they so poor?
The full text of David Landess lecture: LINK.
Landes, D. 1990. Why are we so rich and they so poor?, American Economic Review 80(2),
pp. 113.
2.7 CONCLUSION
Global economic history
A short and accessible introduction to the topic of why some nations are rich, and
others poor.
Allen, R. 2011. Global Economic History: A Very Short Introduction, Oxford: Oxford
University Press.

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coreecon | Curriculum Open-access Resources in Economics

Understanding growth in Europe
This chapter provides an excellent introduction to the disagreements:
Mokyr, J. and Voth, H. 2010. Understanding growth in Europe, 17001870: theory and
evidence. The Cambridge Economic History of Modern Europe, Vol. 1: 1700-1870 (Eds,
Stephen Broadberry. and Kevin ORourke). Cambridge: Cambridge University Press, pp.
7-42.
Why Europe and the West? Why not China?
David Landes argues that economies in Europe and the West initially grew much
more quickly than in China for cultural reasons: LINK.
Landes, D. 2006. Why Europe and the West? Why not China?, Journal of Economic
Perspectives 20(2), pp. 322.
The great divergence
Kenneth Pomeranz argues that Europe benefitted from coal and colonisation.
Pomeranz, K. 2000. The Great Divergence: China, Europe, and the Making of the Modern
World Economy. Princeton: Princeton University Press.
A short article by Stephen Broadberry on reconstructing historical population and
GDP data to measure the great divergence: LINK.
Broadberry, S. 2013. Accounting for the great divergence. Voxeu.org, 16 November 2013.RE
Technological change and industrial development in Europe
Landes, D. 1969. The Unbound Prometheus: Technological Change and Industrial
Development in Europe from 1750 to the Present, Cambridge: Cambridge University Press.
Energy and the English industrial revolution
Wrigley, E. 2010. Energy and the English Industrial Revolution. Cambridge University
Press, Cambridge, UK.
The intellectual origins of modern economic growth: LINK
Mokyr, J. 2005. The intellectual origins of modern economic growth. The Journal of
Economic History, 65(02), pp. 285-351.
The institutional origins of the industrial revolution: LINK
Mokyr, J. 2008. The institutional origins of the industrial revolution. Institutions and
economic performance, pp. 64-119.
The spinning jenny in Britain, France, and India: LINK
Allen, R. 2009. The industrial revolution in miniature: The spinning jenny in Britain,
France, and India. The Journal of Economic History, 69(04), pp. 901-927.

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