Growth and Development in Long-Run

Historical Perspective

Roberto Bonfatti
University of Nottingham

Lecture 2
The era of stagnation
Introduction

Source: Maddison (2006)

Introduction

I 130,000 BC - 18th c AD: no sustained economic growth

(Era of Stagnation).
Introduction

Figure : Laborers’ wages in wheat equivalent. A star denotes farm

wages. Source: Clark (2007)
Introduction

Map of Ancient Babylonia.

Introduction

The Ishtar Gate, 585 BC, Babylon (now at the Pergamon Museum, Berlin).
Introduction

City of London, 18th century illustration

Introduction

I Lack of growth until 18th c AD confirmed by the fact that

real wages did not change much over the last millennia.

I Puzzling fact: surely England in 18th c more

technologically advanced than Ancient Babylonia in 1800
BC?

I Why didn’t technological progress make people richer?

Introduction

I Any idea?
Goals, contents, and moving forward

I Goal: build a theory explaining lack of growth in the Era of

Stagnation.

I Today:
I Build a model of a traditional economy;
I Use it to start learning things about a traditional economy.

I Next lecture: use the model to find an answer to our

question - why was there no growth in the Era of
Stagnation?
A model of a traditional economy
Introduction

I Economists develop theories by building and studying

models.

I Model: simplified, easy-to-study representation of the real

world.

I Good models must:

I Make reasonable assumptions about the real world;
I By studying them, we must be able to learn something
interesting about real world.
A model of a traditional economy
A verbal model?

I Models can be verbal or mathematical.

I Simplest possible verbal model of a traditional economy:

1 “GDP is produced using labour and land”.

I Can we extend this model by making further assumptions

about reality?
A model of a traditional economy
A verbal model?

2 “For given amounts of labor and land, the more efficient

the way in which they are combined, the higher is GDP”;
A model of a traditional economy
A verbal model?

3 “For a given amount of land, the more labor there is, the
higher is GDP (and vice-versa)”;
A model of a traditional economy
A verbal model?

4 “If there is too much labor on a given amount of land, it is

not true anymore that the more labor there is, the higher is
GDP; if there is too much land for a given amount of labor,
it is not true anymore that the more land there is, the
higher is GDP”
A model of a traditional economy
A verbal model?

I So our full model is:

1. “GDP is produced using labour and land”;

2. “For given amounts of labor and land, the more efficient the way in
which they are combined, the higher is GDP”;
3. “For a given amount of land, the more labor there is, the higher is
GDP (and vice-versa)”;
4. “If there is too much labor on a given amount of land, it is not true
anymore that the more labor there is, the higher is GDP; if there is
too much land for a given amount of labor, it is not true anymore
that the more land there is, the higher is GDP”

I You see that a verbal model can become very wordy.

A model of a traditional economy
A mathematical model!

I A mathematical model is a great alternative:

Y = AX β L1−β (1)

where Y represents GDP, X land, L labor, and A a

measure of how efficiently they are combined (β is just a
number between 0 and 1).

I This 1-line model makes all of the assumptions about

reality that we have just discussed.

I Clearly, it does assume “GDP is produced using labour

and land”.
A model of a traditional economy
A mathematical model!

I Next, our function such that:

∂Y
= X β L1−β > 0
∂A

I So model assumes that “For given amounts of labor and

land, the more efficient the way in which they are
combined, the higher is GDP”.
A model of a traditional economy
A mathematical model!

I Next, our function such that:

∂Y
= βAX β−1 L1−β > 0
∂X
∂Y
= (1 − β)AX β L−β > 0
∂L

I Second fact illustrated on next slide: for given X , Y is

increasing in L.

I So model assumes that “For a given amount of land, the

more labor there is, the higher is GDP (and vice-versa)”.
A model of a traditional economy
A mathematical model!
A model of a traditional economy
A mathematical model!

I Finally, our function such that:

∂ 2 (Y )
= (β − 1)βAX β−2 L1−β < 0
∂X 2
∂ 2 (Y )
= −β(1 − β)AX β L−β−1 < 0
∂L2

I Second fact illustrated on previous slide: for given X , Y is

concave in L.

I So model assumes that “If there is too much labor on a

given amount of land, it is not true anymore that the more
labor there is, the higher is GDP; if there is too much land
for a given amount of labor, it is not true anymore that the
more land there is, the higher is GDP”.
A difficult question

I Suppose we put some extra worker into our traditional

economy. What would happens to per capita GDP?
A model of a traditional economy
From GDP to per capita GDP

I We first want to derive a function for per capita GDP:

Y AX β L1−β
y≡ = = AX β L−β (2)
L L

I What else do we need to do to find an answer to our

question?
A model of a traditional economy
From GDP to per capita GDP

I Equation (??) reveals that if, for given land, labour

increases, per capita GDP decreases.

I This clear from the fact that (see also next slide):

∂y
= −βAX β L−β−1 < 0
∂L

I Making sense of this result:

I Higher L means higher numerator of YL ;
I But higher L also mean higher denominator of YL ;
I Model suggests second effect always prevails.
A model of a traditional economy
From GDP to per capita GDP
A model of a traditional economy
From GDP to per capita GDP

I Intuition for this result? Easy to grasp for the case of high
L: additional L have small effect on Y , but they are still
extra people that Y must be shared with.

I Notice that we could have inferred this from our verbal

model, but it was more difficult.

I What we learn: if the real world behaves as assumed,

putting more workers on a piece of land will make them all
poorer.
Perhaps the model can explain this...?

Figure : Source: Clark (2007)

Conclusions

I We have built a model of a traditional economy that satisfy

some intuitive assumptions.

I We have started to put the model to use, showing that an

increase in population leads to a decrease in per capita
GDP.

I Next lecture: we’ll use the model to explain lack of growth

in the Era of Stagnation.