1

Introduction: Economic History and Economic Development

Why are some nations rich and others poor? This seemingly simple question is d i -rected at the heart o f one of the world's most pressing contemporary problems, that of uneven economic development. Only war and peace, population pressure, and en-vironmental salubrity—and thus the survival of the human race—are issues o f sim­ilar magnitude. Because of unequal economic development, revolutions and coups d 'état have occurred; totalitarian governments and military dictatorships have de-prived whole nations o f political liberty, and many individuáis of their personal free-dom and even their lives. Mi l l ions have died miserably and unnecessarily o f starva-tion, malnutrition, and disease—not because food and other resources were unavailable, but because they could not be delivered to those in need. The United States and severa! other wealthy nations have expended bül ions o f dollars in wel l - in-tentioned attempts to assist their less fortúnate neighbors. In spite o f these varied ef-forts, the income gap between the relativcly small number of affiuent nations and the vast majority of impoverished ones not only persists but grows wider year by year.

The situation appears to be paradoxical. I f some nations are rich and others poor, why do not the poor ones adopt the methods and poücies that have made the others rich? In fact, such attempts have been made but, in most instances, without strilcing success. The probiem is far more complicated than it appears on the surface. In the first place, there is no general agreement on which methods were responsible for the higher incomes of the wealthy nations. Second, even i f such agreement existed, it is by no means certain that similar methods and policies would produce the same results in the different geographical, cultural, and histórica! circumstances of today's low- in-come nations. Finally, although much research has been devoted to the probiem, scholars and scientists have not yet produced a theory of economic development that is operationally useful and generally applicable.

There are various approaches to the study of economic development—fortunately not mutually exclusive. The historical approach employed in this book does not aim at producing a general, universally applicable theory of economic development. In -stead, historical analysis can focus, as other approaches cannot, on the origins o f the presently existing unequal levéis of development. A correct diagnosis of the origins of the probiem does not, in itself, guarantee an effective prescription, but without such a diagnosis one can scarcely hope to remedy the probiem. Second, by focusing on in -

4 A C O N C I S E E C O N O M I C H I S T O R Y O F T H E W O R L D

stances o f growth and decline in the past, the historical approach isolates Ú\& funda­mentáis o f economic development, undistracted by arguments over the efficacy or de-sirability of particular policies for specific current problems. In other words, it is an aid to objectivity and clarity o f thought.

Policymakers and their staffs of experts, faced with the responsibility o f proposing and implementing policies for development, frequently shrug off the potential contri-butions o f historical analysis to the solution of their problems with the observation that the contemporary situation is unique and therefore history is irrelevant to their concerns. Such an attitude contains a double fallacy. In the first place, those who are ignorant of the past are not qualified to generaliza about it. Second, it implicitly denies the unifor-mity o f nature, including human behavior and the behavior of social institutions—an assumption on which all scientific inquiry is founded. Such attitudes reveal how easy it is, without historical perspective, to mistake the symptoms of a probiem for its causes,

This book is offered as an introduction to the study of both economic history and economic development. I t is not, however, intended to be comprehensive in either área. There are many valid reasons for studying history apart from its potential con-tribution to solving contemporary practical problems; for a complete understanding of the probiem of economic development other methods o f study and observation must be employed as wc l l . In this general survey of the economic development of hu-mankind from prehistoric times to the present, certain "lessons o f history" are high-lighted. Although some historians believe their function is to "let the facts speak for themselves," "facts" respond only to specific questions posed by the analyst who deals with them; posing such questions inevitably involves a process o f selection, conscious or unconscious, especially in so brief and synoptic a volume as this.

Before we undertake the historical narrative it is necessary to define certain terms and to formúlate some basic concepts to guide the subsequent analysis.

Development and Underdevelopment

In 1999, the average (or per capita) annual income of residents o f the United States was nearly $30,000. In Norway, the most prosperous country in Europe, it amounted to more than $26,000. (These figures are adjusted to account for purchasing power parity.) For western Europe as a whole, the average was almost $23,000. The United States and western Europe together contain just over 11 percent o f the world's popu­lation but account for over 56 percent o f the world's measured economic output. I f we add Japan, Canadá , Australia, and New Zealand to include all the world's high-income industrialized economies, the figures rise to over 14 percent for population and to nearly 77 percent o f economic output (gross domestic product in purchasing power parity dollars). There are an equal number o f other high-income countries, but they are comprised mainly of urban enclaves such as Hong Kong and Singapore, the small Gul f oi l states, or small islandsconcentrating on money laundering, all of which cater to the demands of the industrialized wor ld . ' Clearly, the key to high per capita

' The niodern nation-state is used as the unit of analysis here because comparative data are collected and presented in national terms, and the state is nsually the policy-niaking entity; but it is not the ideal unit of analysis for all purposes.

Introduction: Economic History and Economic Development

T A B L E I - I . G N P Per Capita, Selected Countries, ca. 1 9 9 9 (in 1 9 9 9 Dollars) (Purchasing Power Parity)

High-Income Economies Umer-Middle Income

United States Canadá Japan Germany France Israel United Kingdom Spain

Vpper-Middle Income

$29,605 $23,582 $23,257 $22,169 $21,175 $20,585 $20,906 $16,212

Russian Federation Turkey Colombia Thailand El Salvador China Egypt Indonesia

Low-Income Economies

$6,271 $6,177 $5,954 $5,757 $4,069 $3,345 $3,263 $2,626

South Korea Portugal Greece Hungary Poland Brazil

$14,806 $14,701 $13,943 $10,814

$7,980 $6,524

Bolivia India Ghana Bangladesh Tanzania Sierra Leone

$2,245 $2,217 $1,823 $1,430

$480 $425

Source: World Bank, Worid DevelopmenI Indicators, 2000 (New York, 2000).

income is to créate a modern industrial economy or to find a way to provide impor-

tant Services to such economies. A t the other extreme, per capita income in Sierra Leone, currently the world's

poorest economy, was about $425. Per capita income in Tanzania was about $480 (which is actually $ 100 less than in 1993), $2,200 in India, and $ 1,430 in Bangladesh. In the People's Republic o f China, which contains more than one-fifth of the world's population, per capita income is believed to be about $3,345. Per capita income in South America ranged from $ 11,524 in Argentina—which is nearly double the $6,524 in Braz i l—to $2,245 in Bolivia. Table 1-1 shows recent per capita income for a rep-resentative sample of nations.

In 1998 there was a total o f sixty-three nations in which per capita incomes were lower than $760, and an additional ninety-three where the average income was be­tween $760 and $9,360. The nations in these two latter categories are variously re-ferred to as "poor," " low income," and "underdeveloped" (or, euphemistically, "less developed" or "developing"). I t is obvious that, because o f their low incomes they are poor, but why are they underdeveloped?

Statistics of per capita income are, at best, crude measures o f the level o f eco­nomic development. In the first place, they are only approximations. Moreover, for a number of technical reasons, International comparisons of income are especially un-reüable . But there are other measures o f development and underdevelopment that, al­though less global or comprehensive, are more graphic. Table 1-2 presents a number of these, ranging from how long a typical citizen might expect to live to how easy it is to communicate wi th others or travel to another place. As a consequence o f high death rates, life expectancy ranges from forty to sixty-nine years in the underdevel-

T A B L E 1 - 2 . Indicators of Economic Development, Selected Countries

Crude Birth Crude Death Rate (1998)" Rate (1998)"

High-Income Economies

United States 14 9 Switzerland 11 9 United Kingdom 12 11 Spain 9 9 Japan 10 7

Middle-Income Economies

Bolivia 32 9 Costa Rica 22 4 Belarus 9 13 Hungary 10 14 Indonesia 23 8 México 28 5

Low-Income Economies

Chad 45 16 China 16 8 Ethiopia 45 20 India 27 9 Honduras 33 5

Life Expectancy Physicians per Energy Consumption at Birth (1998) 1,000 Population (1997) per Capita''

77 2.70 8,076 79 - 3,699 77 — 3,863 78 _ 2,729 81 — 4,084

62 1.30 548 77 1.44 769 68 — 2,449 71 3.50 2,492 65 — 693 72 1.30 1,501

48 _ _ 70 1.99 907 43 287 63 — 479 69 0.79 532

icontinued)

Distribution ofGross Domestic Product by Sector (%)

Agriculture Industry Services

Urban Population,

%of Total

(1998)

Tele-phones (1998)" TVs"

Adult Illiteracy,

(1990)

«Per 1.000 population.

Sources. World Bank. World Development Indicators 2000 (New York, 2000); World Bank, The Human Development Statistical Datábase 1999 (New York, 2000).

Educational Expenditure,

% ofGDP

High-Income Economies

United States 2 26 72 77 644 847 — 22

Switzerland — — — 68 661 535 — 28

United Kingdom — — — 89 542 642 3

39

Spain Japan

— — 77 403 506 3 — Spain Japan 2 37 61 78 503 707 — —

Middle-Income Economies

Bolivia 17 28 55 61 69 116 16 22

Costa Rica 15 24 61 47 161 387 5 —

Belarus 14 44 42 70 227 314 1 35

Hungary 6 34 60 63 304 437 1 43

Indonesia 16 44 40 38 25 134 15 18

México 5 26 69 74 97 254 10 16

Low-Income Economies

Chad 38 15 46 23 I 1 62 —

China 19 50 31 31 56 272 18 8

Ethiopia 56 7 38 16 3 5 65 —

Honduras 27 26 46 27 19 69 45 15

India 23 30 47 50 37 90 27

8 A C O N C I S E E C O N O M I C H I S T O R Y O F T H E W O R L D

oped nations o f Africa, Asia, and Latin America, wiiereas it is well over seventy years in western Europe and Nortii America. Most of the difference is explained by much higher rates o f infant mortality in poor countries. In the light of these figures it is not surprising that heahh care facihties are more plentiful in the wealthy nations: in the United States there are approximately 370 people per physician, and in Austria this ratio is 345. Compare this with 769 in Bolivia, 1,818 in Iraq, 25,000 in Nepal, and over 33,000 in Niger! In even more materialistic terms, for every 1,000 people in the United States there are 767 passenger automobiles, 530 in France, but only 9 on av­erage for the 63 low-incomc economies and 116 for the worid as a whole.

Growth, Development, and Progress

In ordinary discourse the terms growth, development, and progress are frequently used as though they were synonymous. For scientific purposes, however, it is neces­sary to distinguish among them, even i f the distinctions are somewhat arbitrary. Eco­nomic growth is defined in this book as a sustained increase in the total output of goods and services produced by a given society. In recent decades this total output has been measured as gross domestic product (GDP), the total of all goods and ser­vices produced within the territory o f a country. In today's global economy, it is in-creasingly difficult for statistical authorities to keep track o f income payments be­tween countries, especially when goods and services are produced by their citizens in other countries. These payments have to be netted out to measure national income and gross national product (GNP). For most discussions in this book, the difference in these concepts can be ignored because the three aggregates almost always move to­gether in the same direction. Although no national income data exist for eariier epochs, they can in some cases be estimated; in any case, even without specific quan-titative data, one can usually determine, on the basis of indirect evidence, whether total product increased, decreased, or remained roughly constant during any given period.

Growth in total output may occur either because the inputs o f the factors of pro-duction (land, labor, and capital) increase or because equivalent quantities of the in­puts are being used more efficientiy. I f population is increasing, there may be growth in total output but not in output per capita; indeed, the latter may even decrease i f the rate o f population growth exceeds that of output. For welfare comparisons, economic growth is meaningful only i f it is measured in terms o f output per capita.

Difficulties also arise in comparing the outputs o f two different societies or out-puts wi thin the same society at widely different points in time, for two main reasons. As a rule, national income and similar measures are given in monetary units, but val­úes o f monetary units are notoriously unstable and frequently difficult to compare. In principie, what is wanted is a measure o f "real" income—that is, income measured in units of constant real valué. We are not concerned here wi th the practical obstacles to obtaining such a measure, but assume that the reader w i l l bear them in mind in eval-uating the comparisons made hereafter. A second difficulty is that o f comparing the valúes o f outputs of two different economies when the composition o f the two out­puts differs greatly—for example, when one consists mainly o f vegetable products

Introduction: Economic History and Economic Development 9

umed directly or wi th negligible processing and the other consists largely of ly processed manufactured goods. This probiem has no clearcut, definitive solu-but normally its quantitative dimensions do not hinder fruitful analysis.

Economic development, as the term is used in this book, means economic growth mpanied by a substantial structural or organizational change in the economy,

. as a shift from a local subsistence economy to markets and trade or the growth manufacturing and service outputs relative to agriculture. The structural or orga-ational change may be the "cause" o f growth but not necessarily; sometimes the sal sequence moves in the opposite direction, or the two changes may be the jo int uct of still other changes within or outside the economy. The concepts o f eco-

mic structure and structural change are discussed in somewhat greater detall later this chapter.

Economic growth, as defined here, is a reversible process—that is, it may be fo l -lowed by decline. Logically, economic development is equally reversible, although

'zations or structures rarely revert to precisely the same forms as existed eariier. ore often, during or fol lowing a prolonged period of economic decline some form economic retrogression takes place—a reversión to simpler forms o f organization,

igh not usually identical wi th those that formerly existed. Although they are widely regarded as "good things," both growth and develop-

'i^pai are, in principie, value-free terms in that they can be measured and described mt reference to ethical norms. Such is clearly not the case wi th the term eco-

mic progress, unless it be given a highly restrictive definition. In modern secular ics, growth and development are frequently equated wi th progress, but no con-tion necessarily exists between them. By some ethical standards an increase in ma-

well-being might be regarded as harmful to the spiritual nature of human be-Even by contemporary standards the increased production o f the means o f ical, biological, and nuclear warfare and the use of production processes that n the environment, although manifestations o f economic growth, can scarcely

regarded as signs of progress. Another reason economic growth and development cannot be automatically ited wi th progress is that an increase in per capita income tells us nothing about

distribution o f that income. What constitutes a "good" or "bad" distribution o f i n -is a normative question about which economies has very little to say. I t can say

it k ind o f income distribution is more favorable to growth in certain situations, from an ethical point o f view, that amounts to circular reasoning. Given certain

ical assumptions, it is possible to argüe that lower per capita incomes, more lally distributed, are preferable to high average incomes that are very unequally ibuted. Such arguments, however, lie outside the range o f this book. In the fo l -

ing, growth and development are described and analyzed without reference to the progress.

Determinants of Economic Development

•sical economies evolved the tripartite classification o f the "factors o f produc-"—land, labor, and capital. (Sometimes a fourth factor is included—entrepre-

1 0 A C O N C I S E E C O N O M I C H I S T O R Y O F T H E W O R L D

neurship, the effort or talent involved in combining or organjzing the other three.) A t any given time, subject to certain assumptions that w i l l be specified later, an econ­omy's total output is determined by the quantity o f the production factors employed. This classification and various formulas that can be derived from it, such as the fa-mous law of diminishing retums (see more on this later), are indispensable to mod­ern economic analysis and extremely useful in the study of economic history as well . As a framework for the analysis o f economic development, however, the classifica­tion is much too limited. It assumes that tastes, technology, and social institutions (e.g., the forms o f economic, social, and political organization, the legal system, and even religión) are given and fixed or, what amounts to the same thing, have no bear-ing on the process o f production. In historical fact, o f course, all o f these bear strongly on the process o f production, and all are subject to change. Indeed, changes in tech­nology and in social institutions are the most dynamic sources o f change in the whole economy. They are thus the deep wellsprings of economic development.

To put the matter another way, in analyzing an economy at a given time (economic statics), or even at successive points in time, provided the intervals are not great (com­parative statics or dynamics), it is permissible to regard such factors as tastes, tech­nology, and social institutions as parameters (i.e., constants) o f a system within which the quantities and pnces o f conventional production factors are the principal vari­ables. In moving from short-term economic analysis to the study of economic devel­opment, however, the parameters become the major variables. A broader classifica­tion o f the determinants o f output is therefore necessary for analyzing economic change in historical time.

One such classification envisages the total outpqt at any point in time, and its rate o f change through time, as functions o f the " m i x " o f population, resources, technol­ogy, and social institutions.^ O f course, these four factors are not single variables; each one is a cluster o f variables. I t is not sufficient to think o f population in terms of numbers alone; the age and sex distribution, the biological characteristics (size, strength, health, etc., o f the members), the level o f acquired skills (see more, later, on the concept of "human capital"), and the rate of labor forcé participation, among other features, have a bearing on a population's economic performance.

Resources is the "land" o f classical economies wri t large. The term embraces not merely the amount o f land, the fertility o f the soil, and conventional natural resources, but also climate, topography, availability o f water, and other features o f the natural environment, including location.

In recent centuries technological innovation has been the most dynamic source o f economic change and development. Lit t le more than a century ago the automobile, airplane, radio, and televisión, not to mention computers and numerous Instruments of destruction, did not exist; today, according to some social critics, they threaten to domínate our lives. But technological change has not always been so rapid. Stone-age technology endured for hundreds of thousands o f years wi th little change. Even today methods o f agricultura! production in some parts o f the worid remain essen-tially unchanged from biblical times. Wi th a given technology—whether that o f me-

^ See the appendix to this chapter for a simple mathematical model of this classification.

Introduction: Economic History and Economic Development 11

dieval Europe or of pre-Columbian America—the resources available to a society set the effective upper limits to its economic achievements. Technological change, how­ever, allows those limits to be expanded, both through the discovery o f new resources and by more efficient use o f the conventional factors o f production, especially human labor. The continental United States today supports a population o f more than 270 mi l l ion at one o f the highest material standards o f l iv ing ever achieved. Before the Europeans came the same área, whose inhabitants employed a stone-age technology, could support only a few mi l l ion with difficulty. The population of medieval Europe, with a far more advanced technology than that o f the pre-Columbian Americans, grew to a m á x i m u m of perhaps 80 mi l l ion at the beginning o f the fourteenth century be­fore declining to 50 mil l ion or fewer as the result of a disastrous demographic crisis. Four hundred years later, after a long period o f steady but undramatic technological and organizational change, the population had grown to approximately 150 mi l l ion . Today, after a mere two centuries of economic growth based on modern technology, the population o f Europe is more than 500 mi l l ion , and its members are far more af-fluent than their ancestors o f the fourteenth or even the nineteenth century could have imagined.

The interrelationship of population, resources, and technology in the economy is conditioned by social institutions, including valúes and attitudes. (This complex o f variables is sometimes also called the "sociocultural context," or the "institutional matrix" of economic activity.) A t the level o f national economies and other similar aggregates, the most frequently relevant institutions are the social structure (number, relative size, economic basis, and fluidity of social classes), the nature of the state or other political regime, and the religious or ideological proclivities o f the dominant groups or classes and (if different) o f the masses. In addition, a host o f lesser institu­tions may need to be taken into account, such as voluntary associations (business firms, labor unions, farmers' groups), the educational system, and even family struc­ture (extended or nuclear) and other value-forming agencies.

One social function that institutions perform is to provide elements of continuity and stability, without which societies would disintegrate; but in performing this func­tion they may serve as barriers to economic development by fettering human labor, withholding resources from rational exploitation (e.g., India's sacred cows), or in-hibiting innovation and the diffusion o f technology. But institutional innovation is also a possibility, wi th consequences not unlike those o f technological innovation, permitting a more efficient or intensive use o f both material resources and human en-ergy and ingenuity. Some historical examples are the institutional innovations o f or-ganized markets, coined money, patents, Insurance, and the various forms of business enterprisc, such as the modern Corporation. Many other innovations are highlighted in the chapters that follow.

A complete list o f all the social institutions o f relevance to the economy would cover many pages, and the analysis of their interactions wi th other relevant variables is the most difficult and frustrating aspect of the study of economic history. But any attempt to comprehend the nature and modalities of economic development without reference to them is foredoomed to failure. Wi th the present state o f knowledge there is no systematic a priori approach that can be used to study them in their relation to

12 A C O N C I S E E C O N O M I C H I S T O R Y O F T H E W O R L D

economic activity. Instead, the student or investigator must determine, in the context o f a specific probiem or episode, the relevant institutions and then seek to analyze the nature o f their interactions wi th more purely economic variables.

Marxist scholars claim to have found the key to not only the process of economic development but also the evolution of humanity. According to them, the "mode o f production" (roughly equivalent to technology in the schema outlined previously) is the key element; all the rest—social structure, nature of the state, dominant ideology, and so on—is mere "superstructure." The dynamic element is furnished by the strug-gle between social classes for control o f the means o f production. While some aspects of the Marxist analysis are useful in understanding economic history, the system as a whole is oversimplified and, in the hands of its practitioners, overly dogmatic. One of its weakest points, in view of its emphasis on mode of production, is that it fur-nishes no satisfactory explanation o f the process o f technological change. It also errs in regarding social institutions as being determined exclusively by the economic sub-structure.

A somewhat similar but less ideological theory views economic development as the product o f a permanent tensión or struggle between technological change and so­cial institutions. According to this theory, sometimes called the institutionalist theory, technology is the dynamic, progressive element, whereas institutions uniformly re-sist change.-'' This theory offers a number o f brilliant insights into the process o f his­torical change, but it, too, regards technological change as an automatic or quasi-au-tomatic process and oversimplifies the relationship between institutions and technology. Like the Marxist theory, it also regards the ultímate outcome as pre-dictable. In fact, as the fol lowing chapters demónstra te , the relationship between in ­stitutions, technology, resources, and population is complex, interdependent, and by no means whol ly predictable.

Production and Productivity

Production is the process by which the factors of production are combined to produce the goods and services desired by human populations. Production can be measured in physical units (or units of identical services) or in va lué—tha t is, monetary—terms. One can compare the output of, say, two apple orchards in terms o f the number of bushels produced by each; comparing the output o f an apple orchard and an orange grove in these terms is much less meaningful. To get a useful comparison in that case, it is necessary to convert the physical measure into valué terms, that is, to multiply the number o f bushels o f each by the respective prices to arrive at their aggregate valúes.

Productivity is the ratio of the useful output of a production process to the inputs of the factors o f production. As in the case o f production, it can be measured in phys­ical uni ts—X bushels o f wheat per acre, y widgets per man-hour—or in valué terms. To measure total factor productivity—that is, the combined productivity of all fac­to r s—va lué terms are necessary.

^ For a forceful and compreiiensive exposition, see Clarence Ayres, The Theory of Economic Progress (Chapel Hill,NC, 1944, 1978).

Introduction: Economic History and Economic Development 13

The productivity of the factors of production depends on a host o f elements. Some land is naturally more fertile than other land. Some workers are stronger or more ski l l -ful than others. The productivity of capital is in part a function of the technology it embodies; a mechanical tractor (in proper working order) is more productive than an equivalent valué of ox-drawn plow teams, and a hydroelectric generator is more pro­ductive than an equivalent valué of simple waterwheels. Moreover, certain combina-tions o f the factors of production increase productivity. For example, the fertility o f the soil is increased by the addition of fertilizer—that is, capital. Workers furnished wi th appropriate machines are more productive than those who work wi th their bare hands or wi th simple tools. In most instances literate workers are more productive than illiterate ones.

That consideration brings us to a most important special combination o f the fac­tors o f production, namely, the concept o f human capital. Human capital {not slaves, although they were once regarded as capital) results from investments in knowledge and ability or ski l l . The investment can take the form of formal schooling or training (a college education is a considerable investment), an apprenticeship, or "learning on the Job" (i.e., practice). However human capital is acquired, the differences in levéis of human capital per capita between the most and least advanced economies are among the most striking and important to be observed.

Empirical measurements in recent decades show unambiguously that increased inputs of the conventional factors of production account only in small part for in ­creased output in advanced economies. In other words, the productivity of all factors of production has increased greatly. What accounts for those increases? Various an-swers to that question have been advanced; it is clear that among the most important determinants are advances in technology, improvements in organization at both the macro and micro levéis (including so-called "economies of scale"), and especially in ­creased investments in human capital. The increases in productivity have been par-ticularly striking in the last hundred years or so, but as later chapters show, they have been important throughout recorded history, and even before.

A t this point it is useful to consider in somewhat greater detall the so-called law of diminishing returns, which might more accurately be stated as the law of d imin­ishing marginal productivity. A simple hypothetical example w i l l illustrate its signif-icance. Imagine a cultivated field o f 100 acres. (The exact size is irrelevant.) A sin­gle worker employing a given technology, whether simple or complex, is able to produce some output—let us say 10 bushels o f grain. The addition o f a second worker permits a simple división o f labor, which more than doubles production to perhaps 25 bushels; that is, the marginal product is 15. A Ihird worker may raise output still more, to 45 bushels, for a marginal product of 20; and so on. In other words, as more work­ers are added, up to a point, the marginal product increases. Eventually, however, as more and more workers are added they get in each other's way, trample on the crop, and so on, and the marginal product declines: that is the concept o f the law of d imin­ishing returns.

Now let U S transfer the lesson of this simplistic example to the case o f a whole so­ciety. Remember that the example assumed fixed resources (100 acres) and a given technology (no productivity-enhancing innovations). If, at some point in time, the so­ciety is underpopulated relative to its resources, its population and per capita income

14 A C O N C I S E E C O N O M I C H I S T O R Y O F T H E W O R L D

w i l l be able to grow even without technical or institutional change—for a time. Even­tually, however, as it fully uses its resources, the increase in numbers w i l l result in d i ­minishing marginal productivity, henee declining real incomes. In this situation only a significant productivity-enhancing innovation (technical or institutional, or both) could relieve the dilemma.

In 1798 the Reverend Thomas R. Malthus, an English clergyman turned econo-mist, published his famous Principie of Population. In it he assumed that "the pas-sion between the sexes" would cause populations to grow at a "geometric ratio" (2, 4, 8, . . .) but that food supply would grow in an "arithmetic ratio" ( 1 , 2, 3, . . . ) . In the absence of "moral restraint" such as celibacy and late marriage (he did not fore-see artificial contraception), he concluded, the law of diminishing returns and the "positive checks" on population o f war, famine, and pestilence would condemn the great majority o f people to a bare subsistence standard of l iv ing. Now, some 200 years later, it appears that Malthus was wrong, at least for industrializing nations. The other thing that Malthus did not foresee, o f course, was the host of productivity-enhancing technological and institutional innovations that have repeatedly postponed the oper-ation o f the law of diminishing returns. For many countries, however, especially now on the continent of Africa, the population checks o f war, famine, disease, and natural disaster are still a gr im reality.

Economic Structure and Structural Change

Economic structure (not to be confused wi th social structure, although the two are re­lated) deals wi th the relationships among the various sectors of the economy, espe­cially the three major sectors known as primary, secondary, and tertiary.'* The primary sector includes those activities in which products are obtained directly from nature: agriculture, forestry, and fishing. The secondary sector includes those activities in which the products o f nature are transformed or processed: that is, manufacturing and construction. The tertiary, or service, sector deals not wi th products or material goods at al l , but wi th services; these cover a wide range, from domestic and personal ser­vices (cooks, maids, barbers, etc.) to commercial and financial (retail clerks, mer-chants, bankers, brokers, etc.) to professional (doctors, lawyers, educators) to gov-ernmental (postal workers, bureaucrats, politicians, the military, etc.). (There are some ambiguities and anomalies. For example, mining logically belongs in the pr i ­mary sector, but it is frequently regarded as secondary; similarly, transportation, a ser­vice, is also often treated as part o f the secondary sector. Hunting, the most important activity of paleolithic times, is now regarded as a recreational activity—consumption rather than production.)

For thousands o f years, from the earliest civilizations until less than a century ago, agriculture was the principal occupation o f the vast majority o f the human race. As a perusal o f Table 1-2 w i l l show, this is still the case for the low-income nations. This

* The pioneering work on economic structure is Colin Clark's Condítions of Economic Progress (Lon-don, 1940, 1957). Simón Kuznets made major contributions to the claboration of the concept, notably in Modern Economic Growth: Rate, Structure, and Spread (New Haven, 1966), and The Economic Growth of Nations: Total Output and Production Structure (Cambridge, MA, 1971).

Introduction: Economic History and Economic Development 15

was true because productivity was so low that mere survival required concentrating on the production o f foodstuffs. A few hundred years ago, for reasons explained in subsequent chapters, agricultural productivity began to rise, slowly at first and then more rapidly. As it rose, fewer workers were needed for the production of subsistence goods and could be spared for other productive activities. Thus began the process of industrialization, which extended from the late Middle Ages to the mid-twentieth cen­tury (in western Europe and North America; i t is still continuing in much of the rest of the world) . The proportion o f the labor forcé engaged in agriculture fell from 80 or 90 percent o f the total to less than 50 percent by the end of the nineteenth century in the most advanced industrial nations and to less than 10 percent more recently. Con-comitantly, the proportion of total income, or GDP, originating in agriculture also fel l , even though in absolute terms the total valué o f agricultural production increased manyfold.

Meanwhile, as the percent o f the labor forcé engaged in agriculture fel l , that in the secondary sector rose, although not in proportion; typically, in highly industrial­ized nations, manufacturing and related occupations employ between 30 and 50 per-cent o f the labor forcé, with the remainder divided between the primary and tertiary sectors. As the share of the labor forcé in the secondary sector rose, so did that of in ­come originating in that sector.

The twin processes o f shifts in the proportions o f the labor forcé employed and o f income originating in the two sectors are major examples of structural change in the economy. Since about 1950 the most advanced economies have experienced a further structural change, from the secondary to the tertiary sector.

How can these structural changes be explained? The shift from agriculture to sec­ondary activities involved two major processes. On the supply side, increasing pro­ductivity, as already explained, made i t possible to produce the same amount of out­put wi th less labor (or more output wi th the same amount o f labor). On the demand side a regularity of human behavior called Engel's Law (named for Ernst Engel, a nineteenth-century Germán statistician, not Friederich Engels, Karl Marx's collabo-rator) came into play. Based on numerous family budget studies, Engel's Law states that as a consumer's income increases, the proportion o f income spent on food de­clines. (This, in turn, may be related to the law of diminishing marginal utility, namely, the more one has of a given commodity, the less one valúes any single unit o f it .)

The second structural change now underway, the relative shift from commodity production (and consumption) to services, involves a corollary o f Engel's Law: as in ­come increases, the demand for all commodities increases, but at a lower rate than in ­come, wi th an increased demand for services and leisure partly replacing the demand for commodities.

Changes in technology, wi th increased productivity, and in tastes are basically re­sponsible for such structural changes, but the immediate motivating forcé for the changes is usually change in relative prices (and wages). This is also true for many other economic changes, such as the rise o f new industries and the decline of oíd ones or the shift o f production from one geographic área to another. The prices o f com­modities and services are determined by the interaction o f supply and demand, as taught in elementary economies textbooks. A high relative price indicares that supply is scarce in relation to demand; a low relative price indicares the opposite. As a gen-

16 A C O N C I S E E C O N O M I C H I S T O R Y O F T H E W O R L D

eral rule, the factors o f production move to uses for which they are best rewarded, that is. those for which their prices are highest. The importance of relative scarcity and relative prices as dynamic elements in economic change w i l l become evident in the historical cases considered later.

The Logistics of Economic Growth

In ordinary usage the term logistics refers to the organization o f supplies for a large group of people, such as an army. But logistic (singular) is also a mathematical for­mula. The logistic curve derived from it has the form of an elongated S and is some­times called the S-curve (.see Fig. 1-1). Biologists also cali it the growth curve be-cause it describes rather accurately the growth o f many subhuman populations, such as a colony of fruit flies in a closed container with a constant food supply. The curve has two phases, one o f accelerating growth followed by a deceleration phase; math-ematically, at its l imi t the curve asymptotically approaches a horizontal line that is parallel to the asymptote of origin.

F I G U R E 1-1

It has also been observed that logistic curves can also roughly describe many so­cial phenomena, especially the growth o f human populations. In the case of Europe, long-period surges o f population growth have been identified, each being followed by a period of relative stagnation or even decline. The first o f these began in the ninth or tenth century, probably reached peak rates in the tweifth century, began to slow down in the thirteenth, and was abruptly terminated by the Great Plague of 1348, when Europe lost a third or more o f its total population. After a century o f relative stagnation, the population began to grow again around the middle o f the fifteenth cen­tury, reached peak rates in the sixteenth century, and again leveled off or possibly even declined in the seventeenth century. Toward the middle of the eighteenth century the process got underway again, this time much more powerfully, and continued at un-precedented rates until interrupted by the world wars and related misfortunes o f the first half o f the twentieth century. There is evidence of a fourth logistic, this time on a world scale, beginning after World War I I .

Although precise quantitative data are lacking, i t seems likely that the growth o f the Greek population between the ninth and fifth century B.C . followed a logistic pat-tern, as did the population o f the Mediterranean basin in the era o f the pax romana (ca. 50 B .C . -200 A.D . ) . Some scholars believe the three identifiable European logis­tics were, in fact, worldwide and related to climatic variations. The population of China, for example, seems to have kept pace wi th that of Europe. We are even more

Introduction: Economic History and Economic Development 17

ignorant about the pattern of population growth in eariier epochs, but, as Chapter 2 shows, the population of the present-day Near and Middle East definitely grew after the advent o f agriculture in the neolithic period, and the populations o f the great river valleys (the Ni le , Tigris-Euphrates, Indus, and Yellow River in China) likewise grew rapidly after the introduction o f irrigation agriculture.

Whether or not the growth o f population actually conforms to the logistic curve, other related aspects o f the phenomenon intrigue the scientific imagination. I t is vir-tually certain that each accelerating phase of population growth in Europe was ac-companied by economic growth, in the sense that both total and per capita output were increasing. ( I f per capita output merely remained constant as the population grew, the total output, o f course, would increase; but we are warranted in making the stronger statement.) This is most clearly attested for the third logistic (and the incipient fourth), for which statistical evidence is relatively plentiful; but there is also much indirect evidence for similar behavior during the first and second logistics.

The hypothesis of economic growth accompanying the growth of population is strongly supported by the unquestioned evidence o f both physical and economic ex­pansión o f European civilization during each of the accelerating phases of population growth. During the eleventh, tweifth, and thirteenth centuries, European civilization expanded from the heartland of feudalism between the Loire and Rhine rivers to the British Isles, the Iberian península, Sicily, and southern Italy, into central and eastern Europe, and even to Palestine and the eastern Mediterranean temporarily during the Crusades. In each lócale, the institutions of feudalism were adapted to local condi-tions and customs, creating a variety o f economic systems. In the late fifteenth and sixteenth centuries maritime exploration, discovery, and conquest took Europeans to Africa, the Indian ocean, and the Western Hemisphere. Finally, in the nineteenth cen­tury, through migration, conquest, and annexation, Europeans established their polit­ical and economic hegemony throughout the world.

There is also evidence that conditions of life for ordinary men and women were becoming increasingly difficult in the decelerating phases o f the first two logistics (the first halves o f the fourteenth and seventeenth centuries, respectively), suggest-ing a decline in or at least stagnation of per capita incomes. By the seventeenth cen­tury, however, the variety o f institutional arrangements in Europe created some pock-ets o f prosperity in the midst o f overall decline; for example, cities grew rapidly in the L o w Countries and northern Italy. In the third logistic the opportunity for large-scale emigration from Europe in the late nineteenth and early twentieth centuries pal-liated the condition of the masses; even so, a number of countries experienced local-ized subsistence crises, o f which the Irish famine o f the 1840s was the most dramatic. In the light of these observations Adam Smith's remark, written in the accelerating phase of the third logistic, to the effect that the position o f the laborer was happiest in a "progressive" society, dreary in a stationary one, and miserable in a declining one, takes on a new significance.

Another noteworthy similarity is that the final phases of all the logistics, and the intervals o f stagnation or depression that followed, witnessed the spread o f social ten­sión, c iv i l unrest and disorder, and the outbreak of unusually fierce and destructive wars. To be sure, wars and c iv i l strife occurred at other times as wel l ; and there is no obvious theoretical reason that the decline of population growth should have resulted

18 A C O N C I S E ECCJNOMIC H I S T O R Y O F T H E W O R L D

in the breakdown of international relations. Possibly the wars were simply fortiiitous occurrences that ended periods of growth that were already waning. But the question is worthy of further study.

It would no doubt strain credulity to suggest that notable periods of inteüectual and cultural ferment were also related somehow to the logistic. I t is nevertheless re-markable that the accelerating phases o f each period o f population growth in Europe witnessed outbursts o f intellectual and artistic creativity followed by a proliferation of monumental architecture—medieval cathedrals, baroque palaces, and the nine­teenth-century Gothic revival. Eariier, the "Golden Ages" o f Greece and Rome—and still eariier, those o f Mesopotamia and Egypt—were periods of population growth and ended with c iv i l strife and internecine warfare (the Peloponnesian War, the de­cline o f Rome).

O f course, human creative efforts are not confined to specific historical periods any more than our destructive tendencies. The origins o f the Renaissance were in the great depression of the late Middle Ages, and the century of genius that included Galileo, Descartes, Newton, Leibnitz, and Locke spanned the interval o f stagnation and upheaval between the second and third European logistics. St i l l , it is possible that periods o f crisis in human affairs, when the established order appears to be breaking down, may stimulate the best intellects in a variety o f fields to reexamine accepted doctrines. Such lofty considerations lie outside the scope of this volume, however.

A possible explanation for the correlation o f population growth/stagnation/de-cline wi th income movements can be fashioned by analyzing the interaction o f the fundamental determinants o f economic development introduced previously (pp. 9 -12). As indicated, w i th a given technology the resources available to a society set the upper limits to its economic achievements, including the size o f its population. Technological change, by increasing productivity and opening up new resources, has the effect of raising the ceiling, as i t were, thereby permitting further growth in pop­ulation. Eventually, however, without further technological change, the phenome­non o f diminishing returns sets in , the society encounters a new ceiling on produc­t ion, and population again levéis off (or declines) until a new "epochal innovation" (the phrase is that o f S imón Kuznets, a Nobel Prize winner in economies; see Chap­ter 8) again increases productivity and opens up sti l l newer resources. Figure 1-2 presents a simplified representation o f the relationship between population and epochal innovations.

F I G U R E 1 - 2

The chapters that fol low provide an empirical test for this hypothesis as they at­tempt to explain economic development in history.

APPENDIX

Let Y stand for national income (or output) and R R. T. and X for population, resources, tech­nology, and social institutions (the "great unknown"), respectively. Then

Y=f(P, R.T.X)

and the rate of change through time is dY _ dj 'dt~Yt'

For reasons noted in the text, the equation cannot be written in operational form.