By George

This is a revision guide to one of my economics modules at Oxford, named History of the World Economy (previously Development of the World Economy since 1800).

1. Part I: Theories of How the World Became Rich
   1. A. Geography and Development
   2. B. Institutions and Economic Development
   3. C. Culture and Economic Development
   4. D. Demography and Economic Development
   5. E. Colonisation and Exploitation
2. Part II: Why Some Parts of the World Became Rich First, Why Other Parts Followed, and Why Some Are Not There Yet
   1. A. Why Did Northwestern Europe Become Rich First?
   2. B. Britain’s Industrial Revolution
   3. C. The Rise of the Modern Economy and Global Diffusion
   4. D. Case Studies of Diffusion

This comprehensive revision guide delves into the multifaceted historical origins of economic growth, specifically focusing on the period since 1800. Drawing extensively from Koyama and Rubin’s (2022) “How the World Became Rich: The Historical Origins of Economic Growth,” the module’s lecture notes, and insights from first-class essay examples, this guide aims to synthesise the various theories and historical evidence that explain why certain parts of the world became rich first, why others followed, and why some continue to lag. The approach adopted is thematic and conceptual, exploring the major hypotheses and debates within the literature while demonstrating their interactions and nuanced implications.

The core question addressed throughout this guide, mirroring the central motivation of the module, is: Why are some countries rich and others poor? This fundamental inquiry underpins the exploration of economic growth, defined not merely as temporary increases in per capita income, but as sustained economic growth – continuous positive growth rates, akin to those experienced by the UK and US since the mid-19th century. This differs from earlier economic improvements, which were often temporary, marked by periods of growth offset by contraction, a phenomenon Broadberry and Wallis (2017) term “shrinkage”. Sustained economic growth is intimately linked with economic development, signifying a fundamental and transformative restructuring of the economy, including urbanisation and the growth of non-agricultural sectors like manufacturing and services, alongside new organisational forms such as factories.

Understanding the historical context is crucial, as the modern world’s wealth, while unevenly distributed, far surpasses any prior historical epoch. Most people today are significantly better off than their ancestors, with extreme poverty rapidly declining over the last two centuries. Prior to the 19th century, the wealthiest regions rarely saw average incomes above $4 a day (in 2011 USD), with $2–3 a day being the norm for most of humanity. This highlights the profound, unique nature of the economic transformation since 1800.

Measuring this historical economic performance involves reconstructing data from various sources, as national statistics offices are a relatively modern invention. Key methods include:

• GDP Estimates: Pioneered by Angus Maddison, more recent work by the Maddison project (Bolt & van Zanden, 2020) and scholars like van Zanden and van Leeuwen (2012) provide updated estimates.
• Wages and Prices: Economic historians like Robert Allen, Jean-Pascal Bassino, and Jeffrey Williamson have compiled comprehensive estimates of workers’ purchasing power by constructing consumption baskets, allowing for comparisons across time and space that account for varying preferences.
• Height: A strong positive relationship exists between height and per capita GDP, reflecting nutritional standards. Historical data, such as that for the English army, indicates significantly shorter average heights in the past, suggesting lower living standards.
• Life Expectancy: Modern economic growth is associated with large increases in life expectancy, which not only signifies improved welfare but also encourages human capital investment.

Any credible hypothesis explaining “how the world became rich” must address several key facts:

• Sustained Technological Innovation: Modern growth is driven by continuous innovation, first taking hold in Britain during the Industrial Revolution. The central puzzle is why this occurred in Britain in the 18th century and not elsewhere.
• Europe’s Ascent from Backwater Status: Around 1000 CE, Europe was an “economic, technological, and cultural backwater” compared to China, India, and the Middle East. A compelling explanation must elucidate what changed to allow Europe to pull ahead.
• The Great Divergence: The debate over the “Great Divergence” between Western Europe and China, popularised by Pomeranz (2000), highlights the need for global perspectives. While Pomeranz argued for a late divergence (after 1750), new data suggests it may have occurred earlier.
• The Great Convergence: More recently, the “Great Convergence” describes the dramatic poverty reduction and faster economic growth in poor countries compared to rich ones over the last half-century, particularly in China and other parts of Asia.

This guide will systematically explore the leading theories: geography, institutions, culture, demography, and colonisation, highlighting how they interact and contribute to the complex narrative of global economic development. The underlying premise is that the origins of modern economic growth are almost certainly not monocausal, and understanding the conditions under which different factors are important is paramount.

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Part I: Theories of How the World Became Rich

This section surveys the principal theories and debates concerning the origins of sustained economic growth, examining how geographical, institutional, cultural, and demographic factors, as well as the history of colonisation, have shaped the economic trajectories of nations.

A. Geography and Development

Geography plays a significant, largely exogenous, role in shaping long-run economic development, influencing initial endowments and conditions. However, its static nature makes it challenging to explain dynamic shifts like economic reversals or the timing of the Industrial Revolution.

1. Geography and Modern Development
   • Mountains, Coasts, and Climate: Geographic features like ruggedness, access to coasts, and climate influence development. While rugged terrain generally impedes trade and farming, Nunn and Puga (2012) found a positive effect in Africa, as it mitigated the impact of the slave trade by making it harder for raiders to traverse and easier for people to hide.
   • Disease Burden: Endemic diseases, particularly malaria and sleeping sickness (transmitted by the tsetse fly), have had profound economic consequences in sub-Saharan Africa. Sachs and Malaney (2002) estimated malaria lowered growth rates by 1.3%, while Alsan (2015) documented how the tsetse fly historically hindered livestock domestication, intensive agriculture, and the development of centralised states.
   • Climate Change: Climate, though often considered fixed, can change and impact economic activity. The Roman Climatic Optimum (around 0 CE), characterised by warmer and wetter conditions, facilitated agricultural expansion and the rise of the Roman Empire, while its decline was associated with political crises. Similarly, the European economy revived after 1000 CE partly due to climatic change.
2. Geography and Transport Infrastructure
   • Favourable geography or investments in transport infrastructure can stimulate Smithian growth, where increased market size leads to greater specialisation, division of labour, and productivity improvements.
   • Roman Empire: Investment in transport infrastructure, like the Roman road network, played a critical role in Roman economic growth, aiding inter-regional specialisation by lowering transportation costs. The effects of this network persisted long after the empire’s decline.
   • Imperial China: The Grand Canal, constructed by the Sui and Tang dynasties, greatly aided Chinese economic development by connecting major rivers and facilitating cheap, safe transport, thereby integrating large and productive spaces. This market integration in China was comparable to parts of Europe until the late 18th century.
   • Industrialising Britain: Prior to 1700, Britain faced extremely high transport costs, but this was transformed by 1870 due to steam power, railways, and investments in roads and canals starting in the 18th century. Stagecoach speeds significantly increased, and by 1840, Britain had twice the road density of France or Spain. Railways, in particular, dramatically improved speed and market access, as shown by Donaldson and Hornbeck (2016) for the US, who found that removing all railroads in 1890 would have decreased agricultural land value by over 60%. Donaldson (2018) also showed how British-built railroads in India integrated regions previously in near autarky.
   • Lock-in Effects: Prior transport investments can lead to inefficient economic configurations. Michaels and Rauch (2018) contrasted England and France, showing that Roman city locations persisted in France, which was detrimental in the long run as water travel became dominant. In England, the urban network reset after the Roman collapse, allowing medieval cities to relocate along more beneficial coasts and rivers.
3. Geography and Industrialisation: The Role of Natural Resources
   • Coal in Britain: Nef (1932) argued that 16th-century England faced an energy crisis due to timber shortages, which coal alleviated. The improvement of the steam engine in the late 18th century, combined with cheap coal from northern England (Allen, 2009a, 2011b), allowed Britain to harness vastly more energy.
   • Wrigley’s “Organic vs. Mineral Economy”: Wrigley (1989, 2010) distinguished between an organic economy (muscle, wood) and a mineral economy (fossil fuels), arguing that coal allowed Britain to escape the low productivity constraints of the former, making industrialisation possible.
   • Pomeranz’s “Great Divergence” Argument: Pomeranz (2000) contended that British industrialisation crucially depended on proximate coal deposits and New World resources, particularly the potato, which increased land productivity, and precious metals for Asian trade. This shifted Britain and northwestern Europe towards an energy-intensive, innovative development path.
   • Criticisms of Coal as Decisive: Mokyr (1990) argued that coal was unlikely decisive, as water power was a substitute, and coal could have been imported. Clark and Jacks (2007) suggested coal supply was highly elastic, expanding with demand, implying industrialisation could have occurred without abundant domestic coal. Fernihough and O’Rourke (2020) found that proximity to coalfields only became significant for city growth after 1750, supporting its role during the Industrial Revolution but not as a pre-existing determinant.
   • The “Resource Curse”: Access to abundant natural resources, while initially enriching, can negatively impact long-run economic growth by strengthening autocratic power and undermining representative institutions, as seen in Spain with its control over American silver (Acemoglu, Johnson, & Robinson, 2005b; North, 1981; Drelichman & Voth, 2008).
4. Limitations of Geographic Explanations
   • Geography cannot provide a full explanation for comparative economic development.
   • Limited Per Capita Differences: Before 1800, better-endowed lands were not significantly richer in per capita terms, tending only to be more densely populated.
   • Agglomeration Effects: Economies of scale and network effects (agglomeration effects) often explain why certain cities thrive, rather than just geographic fundamentals.
   • Inability to Explain Timing and Reversals: Geography, being largely unchanging, cannot account for the timing of the Industrial Revolution, the onset of modern sustained economic growth in the 19th century, or historical reversals of fortune (e.g., Middle East surpassing Europe by 1000 CE, then falling behind by 1800).

B. Institutions and Economic Development

Institutions, defined as the “rules of the game” that shape incentives for individuals and determine the costs and benefits of actions, are central to understanding historical economic growth. They are legal, political, economic, social, and religious features of a society.

1. Property Rights
   • Definition and Importance: Property rights, defined as an owner’s right to use, transfer, or contract on an asset (Besley & Ghatak, 2010), are fundamental. Secure property rights ensure individuals earn a return on their investments, crucial for economic success. Expropriation risk, where the state confiscates private assets, is disastrous for investment.
   • Pre-modern Restrictions: Feudal property rights in pre-modern Europe, such as the English law of entails (requiring land to pass undivided to a male heir to preserve noble estates for military service), often impeded market development and investment. While militarily justified, they limited economic productivity.
   • Flexibility and Political Institutions: For property to be used most efficiently, rights must be renegotiable and reallocable. In 18th-century England, Parliament became a centralised forum for adjudicating these claims, overcoming local veto players that hindered reallocation in France, where the monarchy could not credibly commit not to abuse such powers (Cox, 2016). This highlights that property rights cannot be viewed in isolation from the broader legal and political system.
   • Weak Property Rights Discouraging Investment: Van Bavel, Buringh, and Dijkman (2018) showed that the decline in capital investments (water mills, windmills, cranes) in the Middle East from 900–1600 coincided with a decline in property rights security, while their use increased in Western Europe.
   • Overlapping Property Rights: Multiple parties claiming rights to the same good can generate “holdup problems,” impeding investment. Pre-Revolutionary France, with its complex and rigid overlapping property rights, prevented investment in irrigation projects (Rosenthal, 1992).
   • Seeds of Demise: Van Bavel (2016) demonstrated a feedback loop where secure property rights in factor markets initially fostered growth in Abbasid Iraq, medieval northern Italy, and the Dutch Republic, leading to specialisation. However, this growth also increased political and economic inequality, as owners of factors of production gained political power and used it to dominate markets, ultimately stifling further productivity for the rest of society.
2. Rule of Law
   • Components and Importance: The rule of law, rather than rule by men, provides stability and certainty for economic exchange. It depends on a political system that constrains the executive and a standardised legal system with clearly defined standards not subject to corruption. Many scholars, including Hayek (1960) and Weingast (1997), argue it was critical for Western Europe’s rise.
   • Origins of Western Legal Tradition: Harold Berman (1983) attributes significance to the emergence of the Western legal tradition in the Middle Ages, with roots in ancient Roman law.
     • Roman Law: As the Roman economy commercialised, Roman legal scholars developed theories of contracts and property (Arruñada, 2016). Rediscovered in the 11th-12th centuries, Roman law principles formed the basis for French and Germanic legal systems.
     • English Common Law: Unifying Germanic and local legal systems in the 12th-13th centuries, common law, indirectly influenced by Roman law, protected property rights and enabled complex organisational forms (Pollack & Maitland, 1895; Dicey, 1908).
   • Legal Origins Theory: La Porta, de Silanes, Shleifer, and Vishny (1998) argued that the English common law tradition is associated with better property rights protection, less onerous regulations, and a more favourable market environment than Roman Law systems, particularly stronger investor rights.
     • Criticisms: Other research finds little evidence that civil law was worse for economic development within countries like France (Le Bris, 2019), and financial development varies over time (Rajan & Zingales, 2003). Furthermore, Klerman & Mahoney (2007) argue that there was no attempt to decentralise litigation in medieval England; the key divergence in law centralisation was the Glorious Revolution in England versus Napoleon in France, suggesting a later, more sudden change than a deep historical path dependence.
   • Colonial Legacy: Countries colonised by Europeans often inherited their legal institutions (e.g., common law in English colonies), influencing long-run outcomes (Berkowitz, Pistor, & Richard, 2003; Oto-Peralías & Romero-Ávila, 2014).
3. Institutions and the Commercial Revolution
   • The period 1000–1300 saw sustained economic growth in Europe (population, per capita income, urbanisation, trade), known as the Commercial Revolution, which set the stage for future growth, even if it eventually petered out.
   • Enforcement of Contracts: Long-distance trade in the Middle Ages, spanning political borders, faced challenges without central authorities to enforce contracts. Merchants used informal mechanisms, such as reputation and collective action through guilds, to mitigate reneging.
   • Merchant Guilds: Dominant in late medieval Northern European free towns, merchant guilds like the German Hansa protected members from state predation and enforced trade norms. According to Greif, Milgrom, and Weingast (1994), they served as a collective voice against rulers.
   • Craft Guilds: Regulated urban economies from the late Middle Ages, restricting entry and requiring apprenticeships. They allied with local authorities for privileges.
     • Controversies: Debates exist whether guilds were rent-seeking organisations imposing costs (Ogilvie, 2019) or served important economic functions.
     • Positive Views: Richardson (2008) argued guilds helped verify product quality and maintain “name brand” reputation (e.g., London pewter). Epstein (1998) suggested they incentivised investment in industry-specific human capital, as rents recouped the costs of training apprentices. De la Croix, Doepke, and Mokyr (2017) showed how they encouraged minor improvements and diffusion of tacit knowledge via journeymen.
     • Negative Views: Ogilvie (2019) provides evidence that guilds restricted non-members, lobbied for privileges, and opposed innovations that threatened profits, holding back the late medieval economy.
4. Limited Government and Parliaments
   • Origins: Parliaments emerged from councils of medieval kings and nobility. In England, the Magna Carta (1215), signed by King John, played a crucial role.
   • North, Wallis, and Weingast Framework: In their “natural state” framework, political elites restrict economic entry to generate monopoly rents, which are distributed to powerful groups to maintain political order. This relies on “personal enforcement” and “identity rules,” where treatment differs based on status.
   • English Parliament’s Evolution:
     • Feudal Constraints: King John’s exploitation of feudal rights for revenue to fund wars led to baronial resistance and the Magna Carta. His inability to freely impose taxes forced reliance on noble cooperation.
     • Tudor Era: Henry VII and Henry VIII, facing weak legitimacy, increasingly relied on Parliament for support (Greif & Rubin, 2021). Henry VIII’s break with Rome further weakened royal legitimacy, making Parliament more crucial. Subsequent female monarchs also relied heavily on Parliament.
     • 17th Century Divergence: England’s political institutions diverged from continental Europe in the 17th century (Henriques & Palma, 2020).
       • English Civil Wars (1642–51): Conflict over the proper institutional structure, with Parliamentarians challenging King Charles I’s autocratic aspirations. Victory for Parliamentarians accelerated limited governance. Overseas economic opportunities helped form a coalition favouring constrained monarchy, as landed elites’ interests aligned with merchants (Jha, 2015).
       • Glorious Revolution (1688): James II’s attempt to establish an autocratic monarchy led to Parliament inviting William of Orange and Mary to overthrow him. The Bill of Rights limited crown power, marking a major turning point for limited governance.
   • Credible Commitment (North & Weingast, 1989): The Glorious Revolution solved the credibility problem of the English monarchy regarding debt repayment. Parliament, by controlling the purse-strings, made creditors more confident in repayment, leading to a substantial drop in borrowing costs (Table 7.1) and enabling enormous growth in state power.
     • Beyond Debt: This commitment to repay debts translated into more secure property rights generally. Parliament became a forum for reallocating land to more productive uses, improving transport investment (Bogart & Richardson, 2009, 2011). Parliamentary regulation kept internal trade unimpeded, unlike in France or the Holy Roman Empire.
     • Limits to Democracy: While providing political stability and enabling fiscal power, 18th-century British Parliaments were not modern democracies, with limited suffrage and entrenched power of the propertied classes. However, they allowed for “voice” through elections and provided greater religious freedom for minorities. Mokyr and Nye (2007) noted a decline in purely redistributional actions and a defence of privileges as the 18th century progressed.
5. State Capacity and Warfare
   • Fiscal Fragmentation: Pre-industrial states often suffered from fiscal fragmentation and local tax free-riding. Fiscal centralisation helped overcome this, increasing revenues and complementing market expansion.
   • Warfare as a Driver: Tilly (1990) argued that incessant European warfare fostered state formation and encouraged innovation in military technology, giving Europe an upper hand in colonising the world (Hoffman, 2015). Hoffman attributes this to a cultural proclivity for warfare.
   • Impact on Economic Activity: Rosenthal and Wong (2011) argued that European warfare disproportionately affected the countryside, pushing trade and manufacturing to urban areas (which were better fortified), leading to higher urban wages and encouraging labor-saving technologies, unlike in China.
   • City-States and Public Debt: Italian city-states (e.g., Venice, Genoa, Florence) developed sophisticated financial institutions and public debt systems where capital holders were represented in government, ensuring credible repayment and lower interest rates than territorial monarchies. Tilly (1990) suggested the path to the modern economy lay in hybrid models combining coercion and capital, enabling states to encourage capital accumulation and tax large populations, as seen in England.
   • Dutch Republic: Despite being a leading 17th-century economy, the Dutch Republic’s small size and immense costs of fending off French invasions (e.g., 7% of GDP on debt financing by mid-18th century) limited its capacity for rapid, sustained growth, leading to stagnation.

C. Culture and Economic Development

Culture, defined as a set of learned rules of behaviour or mental shortcuts for interpreting the world (Henrich, 2015), profoundly shapes economic outcomes. Cultural values can be highly persistent (Guiso, Sapienza, & Zingales, 2006; Nunn, 2012) and interact significantly with institutional development (Greif, 1994, 2006; Alesina & Giuliano, 2015; Bisin & Verdier, 2017).

1. Culture and the European Take-off
   • Values and Economic Potential: McCloskey (2006, 2010, 2016) argued that cultural values praising hard work, risk-taking, and wealth accumulation were essential for northwestern Europe’s take-off. Ancient Greek and Roman cultures, which disparaged work and finance, were unlikely to foster sustained economic growth despite sophisticated market economies.
   • Shift in Values: McCloskey claims these values changed in northwestern Europe in the 17th-18th centuries, particularly in the Netherlands and England, where the “bourgeois pursuit of profit” became lauded, encouraging the best and brightest to engage in productive pursuits and elevating financiers, innovators, and merchants socially.
   • “Eurocentric” Views: Early 20th-century “Eurocentric” explanations, attributing European economic dominance to inherent cultural superiority (e.g., hard-working, innovative), are often flawed. For instance, observations of Japanese workers in the late 19th century as “indolent” contrasted with later perceptions of their discipline, demonstrating how cultural stereotypes can reflect observer biases (Chang, 2008).
2. The Needham Puzzle: Why Not China?
   • China was the world’s technological and scientific leader for much of two millennia but fell behind Europe by 1850. The Needham puzzle asks why.
   • Cultural Explanations (Landes): Landes (2006) attributed China’s failure to realise its economic potential to “larger values of society,” suggesting a lack of “peculiarly European joy in discovery”.
   • Criticisms: This view struggles to explain China’s long history of innovation. Platt (2018) argues that the Qianlong emperor’s underwhelmed response to European goods in 1793 need not reflect a negative cultural attitude towards science, but rather a preference for established trade relations. Vries (2020) suggests that Chinese economic institutions were highly sophisticated, with well-functioning commodity markets, but lacked complementary political institutions and credit markets.
   • Institutional & Cultural Stifling of Innovation: The deeper cause of China’s decline after 1750 was the absence of sustained innovation, rooted in institutional and cultural factors. The unconstrained emperor and political unity, unlike Europe’s fragmentation and competition, stifled innovation and suppressed free thinking (Mokyr, 2016; Scheidel, 2019). The imperial bureaucracy, while meritocratic, was subject to imperial discretion, disincentivising bureaucrats from performing “too well” (Ma & Rubin, 2019). The “literary inquisitions” further promoted a narrow, traditional intellectual understanding. The imperial examination system incentivised Confucian education with little practical application to science or technology (Huff, 1993; Lin, 1995), a binding constraint under the Qing dynasty.
3. The Protestant Ethic and Economic Growth
   • Weber’s Hypothesis: Max Weber (1978) famously proposed a “Protestant work ethic” that encouraged frugality, investment, and developing businesses, linking Protestantism to the rise of capitalism.
   • Criticisms of Direct Causation: Tawney (1936) argued the “capitalist spirit” existed before Calvinism, citing Italian city-states. Akçomak, Webbink, and ter Weel (2016) and Andersen, Bentzen, Dalgaard, and Sharp (2017) found pre-Reformation religious innovation and Cistercian monasteries (known for hard work) contributing to improved literacy and productivity, suggesting earlier roots for the work ethic. Furthermore, a lax work ethic can be a response to low wages rather than an intrinsic preference.
   • Alternative Channels: Literacy and Human Capital: Becker and Woessmann (2009) proposed that Protestant economic success was an unintended consequence of Martin Luther’s emphasis on Bible reading, which boosted literacy. Their research in 19th-century Prussia found a strong positive relationship between Protestantism, education, income, and industrial employment. Dittmar and Meisenzahl (2020) showed that Protestant cities with compulsory schooling became hubs for elite human capital.
4. Trust and Social Capital
   • Importance of Trust: Trust is fundamental to economic transactions, particularly when there is a delay between payment and goods (Arrow, 1972).
   • Catholic Church’s Role: The Catholic Church in the High Middle Ages played a significant role in breaking down kinship groups, which typically impede the development of impersonal trust and larger-scale market exchange (Greif, 1994, 2006; Siedentop, 2014; Enke, 2019). This contributed to the emergence of market-supporting institutions.
   • Slave Trade and Mistrust: Nunn and Wantchekon (2011) argued that the transatlantic slave trade created a persistent culture of mistrust in affected parts of Africa, hindering cooperation and economic development today. Places with more slaves taken exhibit lower economic outcomes.
     • Criticisms: The causal direction can be questioned, as pre-existing lower trust might have led to more internal slave trade. Also, other factors like political instability and institutions could explain modern economic outcomes (e.g., Mauritius as a positive outlier due to good institutions).
   • Individualism vs. Collectivism: Gorodnichenko and Roland (2017) developed an endogenous growth model arguing for the economic benefit of individualism, common in the Western world, which rewards innovation. While collectivism has static benefits, individualism’s dynamic effect on innovation explains conditional convergence to a higher steady state in Western countries.
     • Criticisms: The cross-sectional measure of culture used is imperfect and potentially endogenous to economic outcomes, raising reverse causality concerns (e.g., capitalist societies fostering individualism). The mechanism of culture transmission (how it’s learned) is often vague, suggesting institutions (formal and informal) play a key role in transmitting cultural values.

D. Demography and Economic Development

Demographic factors, particularly birth and death rates, have profoundly shaped economic history.

1. The Malthusian Model
   • Core Idea: Thomas Malthus (1798) argued that population growth tends to outstrip the growth of food supply, leading to a “Malthusian trap” where per capita income stagnates at subsistence levels. Any technological improvement or increase in resources leads to population growth, which then drives per capita income back down.
   • Historical Consistency: Ashraf and Galor (2011) found that a Malthusian framework explains many features of the world up to 1500, with countries undergoing agricultural transition earlier having higher population densities but not necessarily higher per capita incomes.
   • Limitations: Malthusian forces operate gradually. Short- or medium-run growth fluctuations and temporary economic improvements (e.g., in Classical Greece, Roman Empire, Song China) were possible. Epidemics and warfare also impacted populations more rapidly than gradual Malthusian feedback loops.
2. The Black Death (14th Century)
   • Impact: The Black Death killed between one-third and one-half of Europe’s population, as well as a similar amount in the Middle East. This severe demographic shock led to labour scarcity and falling land values.
   • Economic Consequences: Per capita income tended to rise for a few generations due to fewer mouths to feed. Wages for ordinary workers increased significantly (Dyer, 2005). Marginal lands were abandoned, and agriculture shifted from labour-intensive arable farming to more land-intensive pastoral farming.
   • Institutional Consequences: Demise of Serfdom: The most important institutional consequence was the decline of serfdom in Western Europe. In England, serfdom sharply declined from the 1350s onwards, as labour scarcity made it impossible for landlords to maintain or reinstate servile institutions. Serfs could easily find work elsewhere, preventing landlord coordination (Bailey, 2014). By 1500, serfdom largely disappeared in England, facilitating the rise of agrarian capitalism (Brenner, 1976).
3. The European Marriage Pattern (EMP)
   • Characteristics: The EMP, prominent after the Black Death, involved late and voluntary marriage and smaller nuclear families. This differed from ancient Rome, where early marriage led to high birth rates and low average incomes (Harper, 2017).
   • Impact on Demography and Wages: The EMP helped moderate Malthusian pressures, keeping wages relatively higher than they would otherwise have been. It encouraged women to enter the workforce and supported active agricultural labour markets (de Moor & van Zanden, 2010).
   • Link to Economic Growth:
     • Weak Claim: The EMP restrained fertility, maintaining per capita incomes in a Malthusian economy.
     • Strong Claim: Voigtländer and Voth (2006, 2013a) argued the Black Death’s differential effect in Northern Europe (suitable for pastoral agriculture, increasing demand for female labour) contributed to the EMP, which in turn fostered industrialisation by preventing rapid population growth from pushing down per capita incomes and reducing demand for manufactured goods.
     • Human Capital Investment: Foreman-Peck (2011) suggested that by lowering birth rates, the EMP also lowered death rates and encouraged human capital investment, as families traded off child quantity for quality (Becker & Lewis, 1973).
4. Demographic Change and the Transition to Modern Economic Growth
   • Unified Growth Theory (Galor): Galor (2000, 2005, 2011) proposed a unified theory of the transition from Malthusian stagnation to sustained economic growth, based on the interaction of demography and human capital investment.
     • Stages:
       • Malthusian Epoch: Low technological progress, low returns to human capital, parents invest in child quantity over quality, economy remains Malthusian.
       • Post-Malthusian Regime: Gradually increasing technological progress leads to sustained (but modest) per capita income growth, as population growth offsets some gains.
       • Demographic Transition: As incomes rise and technology becomes more complex, returns to human capital increase, inducing parents to switch to smaller families with highly educated children. This plummeting of fertility rates ensures that technological progress translates into sustained per capita growth.
     • Mechanism: The inherent Malthusian interaction between technology and population accelerates technological progress, creating industrial demand for human capital, stimulating its formation, and triggering the demographic transition that converts output into per capita income growth.
   • Criticisms of Unified Growth Theory:
     • Fertility Transition Causes: The precise causes of the fertility transition remain unclear, with various potential drivers (institutions, marriage customs, contraception, schooling, time costs of children) reducing the empirical grounding of human capital as the sole centrepiece (Bar & Leukhina, 2010; Guinnane, 2011).
     • British Fertility Rates: Clark (2014) notes that in Britain, aggregate fertility rates did not significantly drop before the late 19th century, with some studies even suggesting a positive link between fertility and economic status before 1780.
     • Methodological Weaknesses: The theory relies on Maddison’s GDP and population figures, which contain strong assumptions for pre-1820 periods, where data was scarce. Maddison’s interpolations (e.g., constant Chinese income 1300-1850) do not reveal Malthusian patterns but rather assume them (Broadberry et al., 2018; Temin, 2012). The theory’s threshold effect also lends itself to historians explaining their “favourite event…in terms of their favourite small change”.
     • Allen vs. Galor: Galor’s preferred path aligns with Diamond, Clark, and Mokyr for explaining why the Industrial Revolution happened in Europe generally. However, Robert Allen (2009) argues that his “induced innovation” theory, based on British factor prices (low fuel, high wages), better explains why it was British and not Dutch or French.

E. Colonisation and Exploitation

European colonisation, beginning in the 15th century with Portuguese exploration, profoundly shaped global economic history. While often brutal and extractive, its economic consequences are complex and subject to intense debate regarding its role in Europe’s rise and the long-term development of colonised regions.

1. Benefits for the Colonisers
   • Plunder and Resource Transfer: Early empires (Assyrian, Roman, Mongol) involved plunder and slavery, but did not lead to sustained economic growth. While individuals like Thomas Pitt and Robert Clive amassed wealth from India and the Americas, the total wealth plundered was small compared to the overall increase in national income after 1800.
   • Marxist Primitive Accumulation: Karl Marx (1868) proposed the theory of primitive accumulation, arguing that wealth generated through colonial exploitation (e.g., precious metals from the Americas, slave trade) provided the capital for Europe’s industrialisation.
   • “Ghost Acreage” (Pomeranz, 2000): Pomeranz argued that access to new land in the New World (“ghost acreage”) relieved population pressures in Europe and provided new raw materials, like the potato, which increased land productivity in the Old World (Nunn & Qian, 2010). Potatoes alone were estimated to be responsible for a quarter of Old World population growth and urbanisation between 1700 and 1900.
   • Atlantic Trade and Imperialism: The Atlantic economy, shaped by British successes in wars against France and Spain, centered on the Caribbean’s rich agricultural economy. This westward shift altered Britain’s economic geography, boosting ports like London, Bristol, and Liverpool, and led to the widespread availability of new consumer goods like tea and sugar, often produced by slave labour.
   • Slavery and Industrialisation Debate:
     • Williams’s Thesis: Eric Williams (1944) argued that profits from the transatlantic slave trade fuelled British industrialisation. Scholars like Solow (1987) and Inikori (2002) extended this, highlighting the connections between slavery, Caribbean sugar economies, and industrialisation. Derenoncourt (2019) found cities linked to the slave trade grew faster. Inikori (2002) stressed the role of expanded overseas trade driven by sugar and slavery in initial productivity increases.
     • Criticisms:
       • Lack of Direct Link: No clear link has been established between capital from slave exploitation and the innovative manufacturing sector in northern England. Entrepreneurs often funded firms from profits and savings, not London capital markets linked to slavery.
       • Limited Economic Significance: The sugar industry was small relative to the British economy, and long-run super-normal profits from slavery were not sustained due to competition (Eltis & Engerman, 2000). Harley (2004) argued that trade’s overall importance to the British economy was “sizable but not so significant to warrant being described as critical or essential,” with self-sufficiency costing only about 6% of national income in 1860.
       • Cotton Alone Not the Revolution: While cotton textiles were dynamic, reducing the Industrial Revolution to this one industry is problematic, as other innovations were crucial (Mokyr, 2009). Removing slavery would not have meant no cotton, just higher prices. Eltis and Engerman (2000) simply state no single industry was indispensable.
       • Portugal as Counter-example: Costa et al. (2014) showed Portugal benefited as much from colonial trade as England but did not industrialise, suggesting trade volume alone was not the decisive factor for unique success.
2. Detrimental Consequences for the Colonised
   • Extractive Institutions: Perhaps the most damaging aspect of colonialism was the establishment of extractive institutions, designed to maximise resource extraction. These often involved forced labour (e.g., Belgian Congo rubber quotas, Spanish mita in Peru). Such institutions limited rights, restricted public goods to those facilitating extraction, and often persisted after independence, contributing to “bad” governance (Acemoglu, Johnson, & Robinson, 2001).
   • Settler Mortality Hypothesis (Acemoglu, Johnson, & Robinson, 2001, 2002): Colonisers established different institutions based on settler mortality rates.
     • Mechanism: In high-mortality regions (e.g., African “malaria belt”), Europeans extracted resources with little incentive to build European-style institutions. In temperate climates (e.g., US, Australia), more Europeans settled, bringing “good” institutions (legal, political, religious) that were vital for their home continent’s growth.
     • Evidence: Places with higher settler mortality tend to have worse institutions and lower income today.
     • “Reversal of Fortunes”: This theory explains the “reversal of fortunes” (Acemoglu, Johnson, & Robinson, 2002), where places wealthiest in 1500 (often with easily exploitable natural resources) became the poorest by the 20th century due to extractive colonial institutions.
     • Latin America: Sokoloff and Engerman (2000) argued that in the Americas, areas with good agricultural suitability (Caribbean, Southern US) received institutions favouring small landholding elites, leading to extreme inequality. More marginal lands (Northern US, Canada) developed institutions favouring local enterprise and human capital, resulting in greater equality. Dell (2010) found persistent negative effects of the Peruvian mita system on consumption and health.
     • Critiques of AJR:
       • Proxies for Wealth: Criticisms point to vague proxies for wealth in 1500 and insufficient explanation for rejecting geography arguments.
       • Compression of History: The “reversal of fortunes” simplifies history by comparing two points (1500 and 1995) nearly half a millennium apart, during which the nature of “colonial rule” and “property rights” was not stable (Austin, 2008).
       • Botswana Example: Botswana, often cited as an exception to the rule for former non-settler colonies, grew rapidly primarily due to diamond mining, not superior institutional inheritance from light colonial rule (Jerven, 2008, cited in Austin, 2008).
       • Disease Environment Direct Effect: The assumption that settler mortality only affected development through institutions is challenged, as malaria and yellow fever could directly affect growth (Gorodnichenko & Roland, 2017).
   • Taxation Systems: Colonial taxation systems could also be damaging. Banerjee and Iyer (2005) found that in colonial India, areas where local landlords were given tax collection rights (creating absentee landlords) led to greater inequality, lower agricultural productivity, and less investment in health and education, persisting for decades after independence. Iyer (2010) found British-ruled areas of India had less access to schools, health centres, and roads than “Princely States,” suggesting local princes funnelled less tax revenue into their own pockets.
   • Pre-existing Decline: For regions like the Middle East and India, the divergence from Western Europe occurred before colonisation. The Indian economy, for instance, was in deep decline decades prior to British takeover (Broadberry & Gupta, 2006; Clingingsmith & Williamson, 2008; Gupta, 2019).
3. Some “Silver Linings” of Colonialism
   • While overall effects were negative, the colonial experience was heterogeneous.
   • Economic Benefits in British Colonial Africa: Real wages grew considerably, accompanied by urbanisation and structural change (Frankema & van Waijenburg, 2012).
   • Duration of Colonial Rule: Feyrer and Sacerdote (2009) found that former colonies on islands tended to be better off the longer they were under colonial rule, though this did not apply to Spanish and Portuguese colonisation.
   • Public Goods and Education: Some colonial powers invested in their colonies, even if for extractive purposes.
     • Railroads: British investment in Indian railroads (Donaldson, 2018) integrated previously isolated areas, increasing income, trade, and market integration, with evidence of improved literacy (Chaudhary & Fenske, 2020). In Ghana, Jedwab and Moradi (2016) found persistent positive effects of colonial railroads due to urbanisation around lines.
     • Unintended Positive Benefits: The Dutch Cultivation System in Java, while extractive, reorganised economic life around sugar factories, leading to unanticipated long-term benefits such as shifts away from agriculture, better transport networks, and reinvestment in the area, resulting in higher consumption and access to electricity and schools today (Dell & Olken, 2020).
     • Education and Health Facilities: Huillery (2009) found that colonial investments explained about 30% of current performance in education, health, and infrastructure in French West Africa. Grier (1999) noted that former British colonies outperformed former French colonies, partly due to education investment. Frankema (2012) cautioned that this was not a benevolent British policy, but largely due to missionaries operating in environments conducive to their work.
   • Missionaries: Christian missionaries, as part of the colonisation process, inadvertently had positive long-run economic effects.
     • Democracy: Woodberry (2012) found Protestant missions explained half the variation in democracy in former colonies, not through doctrine but by promoting mass education, printing, newspapers, and civil society, which are conducive to democratic prosperity.
     • Human Capital: Cagé and Rueda (2016) found that proximity to Protestant missions with printing presses in Africa correlated with better socio-economic outcomes, including more education and greater trust. Valencia Caicedo (2018) found similar effects for Catholic Jesuit missions in South America, persisting despite their expulsion. Waldinger (2017) observed higher literacy rates near Mendicant missions in Mexico. Bai and Kung (2015) reported a similar finding for Protestant missions in 19th-century China. These instances underscore how missionary activities, driven by conversion goals, often led to unintended positive externalities in human capital development.

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Part II: Why Some Parts of the World Became Rich First, Why Other Parts Followed, and Why Some Are Not There Yet

This section consolidates the theoretical arguments to explain the timing and location of modern economic growth, particularly focusing on the “Great Enrichment” that began in Northwestern Europe, especially Britain.

A. Why Did Northwestern Europe Become Rich First?

The question of why modern, sustained economic growth first took place in Northwestern Europe, rather than Southern Europe, the Middle East, or China, is central to the module. It requires accounting for Europe’s historical position as a backwater, the preconditions that developed over centuries, and the specific divergence within Europe itself.

1. Europe’s Historical Position: From Backwater to Leader
   • Around 1000 CE, Europe was technologically and culturally behind China, India, and the Middle East. The “Dark Ages” (post-Roman Empire collapse) saw economic decline and military weakness, partly due to the failure of European rulers to rebuild a continent-wide empire (Scheidel, 2019).
   • However, this fragmentation paradoxically laid foundations for long-run economic growth. The weakness of post-Roman polities meant political power became unbundled from economic/military power, and the Catholic Church gained ideological near-monopoly. This separation of sovereignty fostered the emergence of parliaments, independent cities, and other representative institutions unique to medieval Europe.
   • Interstate Competition: Political fragmentation also led to intense interstate competition, spurring economic, political, scientific, and technological breakthroughs (Hoffman, 2015; Mokyr, 2016; Scheidel, 2019; Kitamura & Lagerlöf, 2020).
   • Medieval Economic Growth: Between 1000 and 1300, Europe experienced the Commercial Revolution, with population growth, increased per capita income, urbanisation, and trade expansion. Medieval city-states (e.g., Florence, Genoa, Venice) fostered trust and cooperation, enforced property rights, and provided market-supporting public goods (van Zanden & Prak, 2006). However, this growth was not sustained and was prone to reversals, as merchant oligarchs often created barriers to entry, preventing transition to a fully open-access social order (Stasavage, 2014).
   • Knowledge Accumulation: Prior to movable-type printing, the costs of reproducing knowledge remained high (Buringh & van Zanden, 2009). Nevertheless, many preconditions for Europe’s eventual rise emerged in the medieval period, even if the path was not pre-ordained and took centuries to materialise.
2. Divergence within Europe Just before the Take-off
   • By the end of the medieval period, European economic resurgence was led by northern Italian trading and manufacturing centres. However, the economic centre shifted away from the Mediterranean during the 16th and 17th centuries, with Italy experiencing an absolute economic decline (Malanima, 2003, 2005, 2007).
   • Atlantic Economy: The discovery of the Americas and the Cape Route around Africa shifted trade routes, leading to the rise of the Atlantic economy, which ultimately set the stage for the modern economy.
   • Demography (EMP): The European Marriage Pattern (EMP), becoming prominent after the Black Death, moderated Malthusian pressures, allowing wages to remain higher than otherwise.
   • Spanish Decline: Spain, despite its immense wealth from American silver, declined due to institutions that allowed the Habsburg monarchs to pursue economically inefficient policies: granting monopolies, failing to tax the nobility, defaulting on debts, and confiscating property (North, 1981; Drelichman & Voth, 2008). The “royal fifth” from American mines strengthened the Spanish crown relative to its parliaments, resulting in extractive institutions that undermined commerce.
   • Dutch Republic’s Rise: The Dutch Republic became the world’s dominant economy from the late 16th century, experiencing rapid growth from structural changes, including the rise of limited, representative governance. Protestant (Calvinist) ideas motivated the rebellion against Habsburg rule, and the federal republic that emerged saw merchants and commercial interests hold political power (de Vries & van der Woude, 1997). Amsterdam became a financial capital, real wages grew, urbanisation increased, and large-scale investments in transport ignited a trade boom.
     • Limitations: Despite its success, the Dutch Republic did not achieve sustained economic growth until much later. Its growth pattern resembled earlier temporary, trade-driven “Smithian” growth (Goldstone, 2002). Factors leading to stagnation included rising inequality, entrenched merchant elites, high taxes, and large government debt from wars with France. Mercantilist policies by Britain and the Dutch failure to invest further in fiscal capacity also contributed to their relative decline (O’Brien, 2000).
3. Preconditions for Britain’s Rise
   • By 1700, Britain had many necessary preconditions for sustained economic growth. These included:
     • High Per Capita Incomes and Real Wages: Relative to pre-industrial standards.
     • Well-Developed and Extensive Markets: With a conducive institutional framework for internal trade.
     • Strong State Institutions: Providing law and internal peace.
     • Limited and Representative Government: Crucial institutional precondition (discussed above).
     • Diminished Guild Power: Unlike continental Europe, England’s guild power greatly diminished by 1700, facilitating economic development by reducing blockages to competition and innovation (Ogilvie, 2019).
     • Access to Atlantic Trading Networks: As Britain secured dominance in Atlantic trade, it altered the economic landscape and provided new opportunities.
     • Commercial Agriculture: English agriculture was highly commercialised, with large farms and wage labourers, contributing to high labour productivity.
   • However, these factors alone were insufficient, as the Dutch Republic possessed many but did not industrialise first. The specific combination and interaction of these factors, leading to an increase in the rate of innovation, were key.

B. Britain’s Industrial Revolution

Britain’s Industrial Revolution, beginning in the latter half of the 18th century, was the pivotal event that set in motion modern, sustained economic growth, lifting billions out of poverty. Its revolutionary nature stemmed not from immediate rapid growth, which was modest by 20th-century standards (Crafts, 2018), but from the sustained and permanent per capita GDP growth that followed, accompanied by a transformation from an agricultural to an industrial economy.

1. Preconditions of the Industrial Revolution
   • A Consumer Revolution and Industrious Revolution:
     • Market Economy: By 1700, Britain had a fully developed market economy, with activities oriented around market exchange, and improved integration of domestic markets through transport networks (Bogart, 2014).
     • Rise of the Consumer: The Consumer Revolution saw households shift from within-household production to market-oriented production and consumption (McKendrick, Brewer, & Plumb, 1982). Retail shops emerged, offering ready-made goods, making items like textiles and hot drinks utensils accessible to wider populations, including working-class women (Lemire, 1991).
     • Industrious Revolution (de Vries): Jan de Vries (1993, 2008) argued that new consumption opportunities created an “industrious revolution,” where households worked harder to earn wages for new, affordable goods. This increased labour input (working hours and days) was a precondition for the factory system, which required a willing workforce for long hours. This also helps explain why real wages did not rise dramatically in the 19th century, unlike after the Black Death, as increased income was “consumed” in goods rather than leisure.
   • Capitalist Agriculture:
     • Productivity Increase: English agriculture became highly commercialised, with large, capital-intensive farms geared towards the market, leading to high labour productivity relative to the rest of Europe by 1750.
     • Enclosures: The shift from small-scale open-field farming (which shared risk but limited innovation) to consolidated, enclosed land, accelerated after 1500 and especially in the 18th century through Parliamentary Acts. While controversial, enclosures generally improved productivity (Heldring, Robinson, & Vollmer, 2021) and facilitated the growth of larger farms, helping to banish famine and sustain urbanisation. However, agricultural production eventually lagged population growth during the Industrial Revolution, and Britain became a net food importer.
   • Political Institutions:
     • Stability and Property Rights: Post-1688 British political institutions provided stability, allowing government borrowing to increase dramatically and fostering Smithian growth. This enabled confidence that property, innovations, and industrial output would not be seized.
     • Intellectual Property Rights: Britain had a patent system, but patents were not strictly necessary for all innovations; some innovators relied on secrecy or uncodified knowledge (Mokyr, 2009).
   • Mercantilism and Empire:
     • Atlantic Economy Boom: Economic policy was mercantilist, favouring exports and domestic market integration. British success in wars against France and Spain secured dominance of Atlantic trade routes, particularly for the Caribbean’s rich agricultural economy.
     • Urban Shift: This westward orientation of trade shifted Britain’s economic geography towards the Northwest, with ports like Liverpool and industrial centres like Manchester experiencing rapid growth (Table 8.1, Figure 8.2). These manufacturing centres required highly skilled workers.
     • Consumer Goods: Atlantic trade introduced new products like tea, tobacco, and sugar, which transitioned from luxuries to staples, fuelling the Consumer Revolution (Berg, 2004). Sugar became Britain’s most important import by the late 18th century, often produced by slave labour.
   • Market Size: Britain had large domestic markets, aided by transport improvements and the state’s commitment to free internal trade, unlike fractured continental states (Johnson & Koyama, 2017). Some economists theorised that this large market size incentivised innovation and growth (Smith, 1776; Desmet & Parente, 2012).
   • State Capacity: Britain’s state capacity was “second to none in Europe”. Unlike the Dutch Republic, which struggled with high debt and taxes from wars, Britain could finance numerous conflicts (1688-1815) without destroying its economy. British taxes, while higher than France’s, were mainly indirect (Brewer, 1988). This strong state capacity allowed for robust military engagement without impeding domestic growth.
   • Skilled Mechanical Workers: Britain had a large supply of highly skilled craftsmen, printers, watch-makers, carpenters, engineers, and wrights (Kelly, Mokyr, & Ó Gráda, 2014, 2020). These workers were crucial for creating, producing, and repairing the metal machinery hallmarks of the Industrial Revolution. The Dutch Republic lacked an equivalent workforce.
     • Apprenticeship System: A critical factor supporting this skilled workforce was the apprenticeship system, where private contracts, regulated by municipal authorities, allowed talented but poor individuals to gain training in exchange for labour, with masters recouping costs as apprentices became skilled (Humphries, 2010). Unlike the rest of Europe, English apprenticeships were less tied to guilds (Wallis, 2008), allowing for greater labour mobility and diffusion of skills (Minns & Wallis, 2012; de la Croix, Doepke, & Mokyr, 2017). This contributed to Britain’s relatively high human capital and low skilled-unskilled wage gap (van Zanden, 2009).
2. Key Explanations for Innovation
   • The Industrial Revolution’s core was an acceleration in innovation. Two primary theories explain this:
     • High Wages and Induced Innovation (Allen):
       • Argument: Robert Allen (2009a) argued that the Industrial Revolution occurred in Britain because labor was expensive, while capital and energy (coal) were comparatively cheap. This incentivised entrepreneurs to develop and adopt labor-saving technologies (induced innovation), which were profitable in Britain but not elsewhere.
       • Two Stages: First, initial relative factor prices determine technology choice (labour-saving when labor is expensive). Second, rapid technological progress in capital-intensive technology makes it profitable even where labour costs are low.
       • Examples: The spinning jenny, requiring capital and solving an engineering problem, was profitable to develop in Britain. The steam engine, particularly James Watt’s improvements, was driven by high British wages, as entrepreneurs sought to avoid paying them. Cheap coal provided a crucial spur to steam engine development.
       • Sources of High Wages: Allen links high British wages to comparative commercial success in the 17th and 18th centuries, with overseas trade playing a significant role. The Black Death had increased labour mobility and wages, setting a long-term trend (North & Thomas, 1973; Clark, 2005; Allen, 2017).
       • Criticisms of Allen:
         • Economising All Costs: Firms economise on all costs, not just the most expensive factor. The conditions for directed technological change focusing on one factor are not definitively met for Industrial Revolution Britain.
         • Specific vs. Overall Wages: Styles (2021) argued that the specific cost of labor in regional textile centres (e.g., Lancashire) mattered more than the overall level of wages. Humphries and Schneider (2019) provided counter-evidence that female spinners did not earn as high wages as Allen claimed.
         • High Wages Reflect Human Capital: High real wages in Britain reflected high levels of human capital (better fed, taller, more skilled, numerate workers) rather than just high labour costs (Kelly & Ó Gráda, 2014).
         • Neglect of Skilled Workers and Science: Allen’s explanation does not account for Britain’s large supply of highly skilled mechanical workers, who drove the Industrial Revolution, nor the role of scientific advancements (e.g., for the steam engine and metallurgy), which were crucial for many key inventions.
     • An Enlightened Economy (Mokyr):
       • Argument: Joel Mokyr (2009, 2016) posits that an “Industrial Enlightenment” in Britain, rooted in cultural and intellectual developments, propelled technological innovation. He emphasises the Republic of Letters, a Europe-wide forum for Enlightenment elites to disseminate and dispute scientific and philosophical insights, fostering a culture that rewarded innovation.
       • Characteristics of Republic of Letters: It crossed national and religious borders, followed strict intellectual rules, and created a meritocracy where individuals were judged on ideas, not social pedigree. It weeded out bad ideas and diffused good ones. This was supported by a Europe-wide postal service.
       • Cultural Unity and Political Fragmentation: Mokyr argues Europe’s uniqueness lay in its combination of cultural unity (facilitated by Republic of Letters) and political fragmentation. Fragmentation allowed innovative thinkers to escape heavy-handed authorities, preventing suppression of ideas (e.g., Descartes, Locke) and providing multiple patrons. The cultural unity ensured that inventors in Britain and the Dutch Republic could build on European-wide Scientific Revolution advances.
       • Synergy in Britain: The pan-European Enlightenment facilitated industrialisation in Britain due to the presence of other preconditions. Mokyr (2009) stresses the capacity of British skilled craftsmen and artisans to take Enlightenment ideas and put them into practice (“useful knowledge”), providing a crucial complement to scientific inquiry. Most other parts of the world lacked such a large group of highly skilled mechanical workers.
       • Mentality of Improvement: British skilled workers internalised the Enlightenment idea that the world could be transformed for human betterment, driving continuous technological change (Howes, 2017). Innovators like Edmund Cartwright contributed across diverse fields.
       • Role of Newtonian Science: Newtonian culture, as a mechanistic worldview, facilitated technological innovation. In Britain, manufacturers linked easily with scientists, allowing new ideas to be applied on the shop floor (Mokyr, 2000a). The Act of Toleration (1689) led to an educational system relatively independent of the Anglican church, unlike in France.
       • Empirical Validity: While plausible, testing the central claim that ideology was responsible remains difficult due to data limitations.
   • Synthesis of Causes: Neither Allen’s nor Mokyr’s theory alone fully explains the Industrial Revolution. A more appealing synthesis involves:
     • Geographic and Institutional Stability: England’s undisturbed history (no major invasions since 1066) fostered stable institutions and democratic principles accessible to the middle classes earlier than elsewhere. This, combined with the apprenticeship system, allowed the Enlightenment’s effects to reach craftsmen and business-owners.
     • Favourable Factor Prices: Positive agricultural conditions, substantial coal reserves, the Black Death (increasing labour mobility and wages), and access to Atlantic trade (driven by a growing middle class shifting away from protectionism) led to a demography with lower birth rates and higher average productivity. This resulted in a price-wage structure where labour was relatively expensive, making innovation more attractive.
     • Interaction: The potential profitability of invention was realised due to an institutional and social context profoundly influenced by the Enlightenment, augmenting agents’ responsiveness to the price-wage structure. This created a slightly positive economic feedback loop that, over time, led to unprecedented growth.
3. “Engels’ Pause” and the Standard of Living Debate
   • The Problem: The Industrial Revolution did not immediately result in large gains in per capita income for the common person; sustained modern growth began in the mid-19th century. This period, termed “Engels’ Pause” by Allen (2009b), saw real wages stagnate in the early 19th century despite expanding output per worker. Inequality rose, with gains accruing to owners of land and capital.
   • Pessimistic View: Critics like Friedrich Engels and Karl Marx (1848) condemned the dehumanising nature of industrial work and saw no improvement in living standards. Poets like William Blake coined “dark satanic mills”. Classical economists like David Ricardo and Thomas Malthus were also pessimistic, envisioning wages returning to subsistence. E.P. Thompson (1965) remained certain of the “catastrophic nature of the Industrial Revolution”.
   • Optimistic View: Thomas Macaulay (1830) offered a contrasting, optimistic view, correctly envisioning the long-term benefits of sustained economic growth, including improved living standards, increased wealth, and reduced mortality rates. He highlighted how Britain’s wealth had increased a hundredfold while its population increased tenfold.
   • Reality: Wages for workers only picked up around 1850. The initial decades of the Industrial Revolution saw profits largely reinvested in technology and capital (e.g., iron, bricks, railways, steam engines), benefiting capitalists (owners of these industries) rather than workers directly.

C. The Rise of the Modern Economy and Global Diffusion

The Industrial Revolution represented a technological revolution whose economic fruits, while initially modest, ultimately transformed the global economy. Modern economic growth, characterised by sustained per capita income increases without major reversals, did not fully begin until the mid-19th century.

1. From Industrial Revolution to Sustained Growth
   • Shift in Trajectory: By the mid-19th century, the British economy was on a new trajectory, with sustained labour productivity growth driven by steady technological progress and higher investment levels, allowing significant real income per person despite rapid population growth (Crafts, 2018). This was a period of true economic development.
   • Structural Change: The most important change was the fundamental restructuring of the economy away from agriculture towards industry, a shift unprecedented for a large state since the Neolithic Revolution.
2. The Second Industrial Revolution (1870-1914)
   • Science-Based Innovation: This period marked a seismic shift, often called the “marriage of science and technology” (North, 1981), where major technological advances were built on scientific knowledge. This accelerated the rate of technological change, with new inventions in medicine, chemicals, and energy creating a feedback loop between science and technology (Mokyr, 1990, 1998, 2002). Key technologies included dynamite, soda-making, aspirins, and the internal combustion engine (Table 9.1).
   • “Useful Knowledge”: These technologies required useful knowledge – understanding the deeper scientific processes that make inventions work (Mokyr, 2002). Once this knowledge base was large enough, directed trial and error using scientific principles became more likely to succeed.
   • Role of Education: Education was crucial for the spread and adoption of Second Industrial Revolution technologies, as “educated people make good innovators” (Nelson & Phelps, 1966). While the First Industrial Revolution didn’t require high formal education levels (Mitch, 1999), the Second Industrial Revolution saw “capital–skill complementarity,” where basic literacy and numeracy became economically valuable for factory work, and upper-tail human capital (highly educated individuals) became critical for accelerating innovation (Mokyr, 2009; Goldin & Katz, 1998; Squicciarini & Voigtländer, 2015).
     • Prussia/Germany: Prussia’s early 19th-century reforms emphasising education, despite being a late industrialiser, positioned it to adopt and improve technologies, leading Germany to become a leader of the Second Industrial Revolution.
3. The Uneven Diffusion of Modern Economic Growth
   • Catch-up Growth: The Solow model (Solow, 1956) provides insights into the diffusion of economic growth, suggesting that poorer economies, with lower capital stock, should attract high investment and grow faster (catch-up growth). Gerschenkron (1962) argued that late industrialisers (e.g., Germany, Japan, Russia) could quickly reach the technological frontier by skipping intermediary steps and mobilising capital through investment banks or state investment rather than private markets.
   • Institutional Barriers: Convergence was not universal due to institutional differences. Where autocratic power lacked the Napoleonic Wars fostered rapid technology diffusion. World trade grew significantly, driven by declining international freight rates and improved transport and communication technologies (e.g., steamship, Suez Canal). This “grain invasion” from land-abundant North America benefited European workers through rising real wages (O’Rourke & Williamson, 1999).
     • Institutional Importance: The benefits of increased trade were dependent on institutions; increased exposure to international trade led to economic development only in countries with strong constraints on executive power (Pascali, 2017).
   • Non-Industrial Paths to Riches: Not all countries industrialised to become rich. Denmark, the Netherlands, Australia, and New Zealand prospered by specialising in commercial food production or processing for export markets. This involved applying scientific ideas to agriculture and relied on international markets and globalisation. Denmark’s butter industry, for example, benefited from educated elites and cooperative dairies (Lampe & Sharp, 2018). Australia, initially a penal colony, saw rapid immigration and rising real wages after gold discoveries, prospering through global trade of merino wool (McLean, 2013).
   • Continued Divergence: While Western Europe and North America grew, per capita incomes stagnated in China, India, and the Middle East due to colonial institutions, rapid population growth (remaining Malthusian), and specialisation in volatile primary products (Williamson, 2006).

D. Case Studies of Diffusion

1. How the US Became Rich
   • The US became the world’s fastest-growing major economy in the second half of the 19th century, surpassing the UK as the economic leader by the early 20th century.
   • Early Growth (1790-1860): Driven by enormous increases in effective land and natural resources per worker rather than efficiency.
   • Cotton and Slavery: The cotton gin (Eli Whitney, 1793) enabled Southern states to specialise in cotton exports, which-fold (1790-1850).
     • Shared Culture: A shared Anglo culture with Britain facilitated the rapid spread of new ideas.
     • High Wages/Cheap Energy: High real wages and cheap energy (water power, timber) provided strong incentives for labor-saving innovation (Allen, 2011a). The US became the world’s productivity leader due to applying inventive engineering across industries, driven by high labor costs.
   • Political Institutions and Public Goods: Like Britain, the US had limited and representative government (though not universal), which was crucial for public good provision, especially transport networks. The Interstate Commerce Clause prevented states from impeding inter-regional trade or granting monopolies.
     • Transport Infrastructure: Improvements began in the early 19th century (e.g., Erie Canal, 1825), knitting regions and markets together and permitting greater specialisation. Railroads, funded publicly and privately, had an enormous impact by improving market access (Donaldson & Hornbeck, 2016) and contributing to a large, homogeneous market for manufactured goods (North, 1966).
   • Education Investment: The US invested in formal public education, mostly at the local level. Engerman and Sokoloff (2012) linked this to decentralised, egalitarian, and democratic local government in the North. In the South, landlords kept labor uneducated to limit options and keep wages low. The “high school movement” in the early 20th century further expanded secondary education, leading Claudia Goldin (2001) to call it the “human capital century”.
   • Immigration: The US experienced rapid population growth and westward expansion, with significant immigrant shares (Figure 9.6).
2. The Soviet Detour
   • Pre-Soviet Russia: Imperial Russia was a closed, agrarian economy in the mid-19th century but grew rapidly by the late 19th and early 20th centuries, joining other late industrialisers like Meiji Japan (Gregory, 1994). Agrarian reforms (Stolypin Reforms) had the potential to unlock productivity.
   • Communist Era: This growth ended with World War I, the Russian Revolution, and Civil War. Lenin’s War Communism abolished markets and private property, causing famine. The Soviet economy recovered under Lenin’s New Economic Policy (NEP), which revived market activity49, 164]. While excelling at military innovation, command economies were “abysmal at providing new goods that consumers actually wanted to buy”. The Soviet case is a reminder of the “potentially devastating economic consequences of unchecked political power”.
3. Asia’s Rise: Japan and China
   • The spread of riches to Asia, home to around 60% of the world’s population, is a crucial part of how the world became rich.
   • Japan:
     • Tokugawa Period (1603-1868): Experienced significant economic development, with high urbanisation, Smithian growth from market expansion and internal trade (Sugihara, 2004), and an intensification of labor in agriculture. Peasants had de facto property rights over land, and a market for land existed despite formal prohibitions.
     • Factor Prices and Innovation: Japanese real wages were low by European standards, disincentivising labor-saving technologies (Allen’s framework). Instead, there was an incentive to economise on scarce land, energy, and capital.
     • Human Capital: Levels of human capital (literacy, numeracy) were high for a pre-industrial society, comparable to Western Europe, with thousands of commoner schools (Platt, 2004).
     • Meiji Restoration (1868 onwards): Brought wholesale institutional change, with the creation of an industrial economy driven by high investment and mobilisation of an industrial workforce. Women entered textile factories under harsh conditions (Hunter, 2003).
     • Education and Adaptation: While literacy was high pre-Meiji, tertiary education was lacking. A three-tier Western-modelled educational system was introduced, significantly increasing enrollment in scientific and technical education (Vries, 2020). Japan overcame factor price differences by redesigning Western technology to be cost-effective in its low-wage economy (Allen, 2011a), becoming the world’s lowest-cost cotton producer (Ma, 2004).
     • Global Economy: Japan lacked natural resources, requiring access to international markets for its manufacturing. Its textile exports thrived during WWI but were hit by the Great Depression, fueling hardliners’ pursuit of empire, leading to WWII. Post-war growth, starting in the 1950s-60s, followed the Meiji path, eventually moving into high-tech industries due to its1796), facilitating market integration (Grand Canal), low taxes, and a large, meritocratic bureaucracy (Sng, 2014; Wong, 1997). Chinese market integration was comparable to parts of Europe around 1750 (Shiue & Keller, 2007).
     • Post-1750 Decline: China declined after 1750, experiencing peasant rebellions (Taiping Rebellion), defeats in the Opium Wars, and economic collapse. The deeper cause was the absence of sustained innovation.
     • Stifling of Innovation: Unlike fragmented Europe, China’s imperial bureaucracy, while meritocratic, was subject to imperial discretion, disincentivising innovation. The centralised “hub-and-spoke” structure impeded information flow and innovation (Root, 2020). Qing rulers became more autocratic, implementing “literary inquisitions” that stifled dissent and promoted a narrow, traditional intellectual history (Xue, 2021). The imperial examination system, while encouraging human capital, reproduced existing knowledge, with Confucian education having little practical application to science or technology (Huff, 1993; Lin, 1995). This lack of competition and a forum for new ideas prevented anything like the Scientific Revolution or Enlightenment (Mokyr, 2016).
     • Modern Rise: China’s rapid growth since the 1980s, driven by reforms like restoring private agricultural production and creating special economic zones, defied the “Washington Consensus” by maintaining significant state control. Its historical emphasis on education contributed to its success, with places producing more imperial bureaucrats historically still having higher educational attainment today (Chen, Kung, & Ma, 2020).
   • East Asian Tigers (South Korea, Taiwan, Singapore, Hong Kong):
     • Catch-up Potential: Geographically proximate to Japan, these economies followed Japan’s path, benefiting from a larger “backlog” of modern technologies to import.
     • International Markets: Their small size forced reliance on international markets, avoiding the protectionist trap of larger developing countries like India or Brazil. Post-1945 freer trade (GATT) was beneficial.
     • Institutions and Culture: While not always adhering to Western “best practice” institutions, their institutions (e.g., * billions out of extreme poverty. While significant progress has been made, roughly a billion people still live in abject poverty, primarily in sub-Saharan Africa, parts of Latin America, and Central/South Asia. Understanding the historical origins of wealth is crucial for addressing this ongoing challenge.
4. Synthesising the “How”: Interacting Factors
   • The process of the world becoming rich is a complex, multifactorial phenomenon.
   • Institutions as Central: Institutions, as the “rules of the game,” are of central importance, shaping incentives and actions. However, they do not operate in a vacuum; their effectiveness is context-specific and interacts with other variables.
   • Interaction with Culture: Culture – the learned rules and heuristics individuals use to interpret the world – interacts profoundly with institutions. For example, the Roman Empire, despite a sophisticated market economy, may have been culturally hindered from industrialisation by valuing leisure over productive work. Britain, in contrast, combined institutional prerequisites (limited government, apprenticeship system, public goods investment) with complementary cultural attributes (valuing hard work, belief in progress).
   • Beyond Monocausality: No single factor explains the entire story. The unique combination of cultural attributes and institutional characteristics, particularly in 18th-century Britain, was unprecedented.
5. Role of Markets and Innovation
   • Markets are Crucial: While command economies can achieve short-term growth by mobilising resources through coercion (e.g., Soviet Union), they ultimately face diminishing returns without innovation and market coordination. Market economies, through competition and price signals, provide incentives for innovation and entrepreneurship, driven by countless individual decisions to experiment and invest.
   • Markets are not a Panacea: Adam Smith (1776) understood that the beneficial outcomes of market forces are conditional on an appropriate institutional environment.
6. Context-Specificity of Institutions
   • Once sustained growth emerged, a “blueprint” from early developers could be adapted elsewhere, but its application varied significantly based on local institutional and cultural contexts.
   • Japan vs. China: Meiji Japan underwent wholesale institutional change to succeed without considering local context, culture, history, demography, and geography.
7. Future Challenges: Climate Change and Technology
   • Modern economic growth, particularly industrialisation and fossil fuel use, has contributed to environmental degradation and climate change.
   • Resources for Mitigation: Wealthier countries have more resources to combat deforestation and invest in mitigation, and many have reduced pollution recently.
   • Technological Progress as Solution: Future solutions to climate change will likely depend on continued technological progress (e.g., clean energy, carbon capture). Prosperity is vital for this, as it frees human intellect to focus on pressing global issues rather than basic survival.

Understanding history is crucial for addressing modern problems. While history does not simply repeat itself, the “blueprints of the past” offer valuable information on “what worked, why it worked, and in what context it worked,” providing a framework for effective economic policies, even if local knowledge is required for their precise application.

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