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11.6 Modern Economic Growth in Historical Perspective

In addition to the ‘Great Depression’ of the 1930s, and the ‘Great Inflation’ of

the 1970s, the third phenomenon that has dominated the macroeconomic

history of the twentieth century has been the spread of economic growth

among the economies of the world. Indeed, Robert Lucas (see interview at

the end of Chapter 5) believes ‘that economic growth, and particularly the

diffusion of economic growth to what we used to call the Third World, is the

major macroeconomic event of the twentieth century’. As Maddison’s (2001)

data show, before the modern era living standards for the vast majority of the

world’s population progressed at a glacial pace. In reflecting on the ‘Economic

Possibilities of Our Grandchildren’, Keynes (1930b) commented that

‘From the earliest times of which we have record … there was no very great

change in the standard of life of the average man living in the civilised

centres of the earth … This slow rate of progress, or lack of progress, was due

to two reasons – to the remarkable absence of important technical improvements

and to the failure of capital to accumulate.’

Since an increase in the capacity to produce can either be absorbed by an

increase in population or lead to an increase in per capita income, it is

important at the outset to distinguish between extensive and intensive growth.

Reynolds (1985) defines extensive growth as a situation where an increase in

GDP is fully absorbed by population increase with no upward trend in per

capita income. The pre-modern world economy was not characterized by

persistent stagnation. The fact that for thousands of years the world’s population

increased, even if ‘glacially slowly’, is evidence of extensive growth. If

we assume that for the vast majority of people, subsistence living was the

norm, then a larger population is only possible if total output also rises

(Kremer, 1993). So extensive growth has been ‘fairly common’ throughout

human history (Lal, 1999).

In contrast, intensive growth is where GDP growth exceeds population

growth, allowing a sustained rise in living standards as measured by real

income per capita. As Reynolds shows, periods of intensive growth have

usually been preceded by a long period of extensive growth, often lasting

several centuries, and the significant ‘turning point’ for any economy is the

period of transition from extensive to intensive growth. The ‘turning point is

actually a period of a decade or two around the cited year, during which one

observes a significant and continuing rise in per capita income’ (Reynolds,

1994). In the past, in predominantly agrarian (organic) economies, the possibilities

for sustained intensive growth were extremely limited. The availability

and productivity of land determined the amount of extensive growth, but once

the supply of suitable agricultural land was exhausted, diminishing returns

set in. When these forces are combined with Malthusian population dynamics

it is hardly surprising to find that many classical economists predicted the

inevitability of a long-run stationary state involving subsistence standards of

living for the vast majority of humanity.

It is also useful to make a further distinction when discussing intensive

growth. Eric Jones (1988) distinguishes between two forms of intensive

growth, namely, ‘Smithian growth’ and ‘Promethian growth’. Smithian intensive

growth relies on the gains to productivity that can be made from the

division of labour, specialization and trade. Such growth must eventually run

into diminishing returns as there are limits to the gains from resource reallocation.

In contrast, Promethian intensive growth is sustainable, being driven

by technological progress and innovation. It was in the latter part of the

eighteenth century that we began to see the emergence of Promethian growth

in Britain as during the Industrial Revolution a predominantly organic economy

was replaced by a mineral-based one. Of course, the billion-dollar question

that many economists and economic historians have tried to answer is: why

did Promethian growth begin in a specific geographical location (that is,

Britain) and why at a specific time in history? (See Landes, 1969, 1990,

1998; Crafts, 1983, 1985; E. Jones, 1988; Wrigley, 1988; Mokyr, 1990, 1993,

2005; Diamond, 1997; Lal, 1999; Jay, 2000; Pomeranz, 2000, Jones, 2001b.)

The phenomenon of intensive Promethian growth represents, in Easterlin’s

(1996) view, a distinctive ‘regime change’. Easterlin divides world economic

history into three epochs, each of which possess distinctive characteristics in

terms of the main form of occupation, principal type of population settlement,

and the growth rates of population and real GDP per capita. Easterlin’s

epochs consist of first, a prehistoric epoch ending about 8000 BC; second, an

epoch of settled agriculture, initiated by the Neolithic agricultural revolution,

which lasted until the middle of the eighteenth century; and third, an epoch of

modern economic growth involving an enormous transformation in the structure

and character of economic activity. In the modern growth regime, initially,

the positive Malthusian relationship between income per capita and population

growth persists, leading to a population explosion. Eventually, however,

the modern growth regime ‘is characterised by steady growth in both income

per capita and the level of technology’ and this leads to ‘a negative relationThe

renaissance of economic growth research 595

ship between the level of output and the growth rate of population’ as the

demographic transition kicks in (Galor and Weil, 2000). Several economists

have recently argued that any story of the growth process, in addition to

accounting for the modern experience of sustained growth, should also be

able to account for the long period of Malthusian stagnation (see Galor and

Weil, 1999, 2000; Galor and Moav, 2002; Hansen and Prescott, 2002; Parente

and Prescott, 2005; see also section 11.21).