Citibank Workshop in Macroeconomics Department of Economics Brown University

1. Citibank Workshop in Macroeconomics Department of Economics Brown University

2. Income per Capita, 10,000 BC – 2000 AD Clark 2007

3. Income per Capita (India=1) Clark and Feenstra 2003

4. Outline • Fact versus Theory • Industrial Revolution (IR) • Demographic Transition (DT) • Modern Economic Growth (MEG) • Review how stylized facts do not entirely mesh with predictions of “unified growth theory” (Clark 2005, 2007) • Elements of a New Model • Endogenizes demography • Endogenizes direction of technological change (new in context of unified growth theory) • Simulate the model • Will it better match the facts?

5. Bottom Line Preview • We account for the decline in the skill premium – results because Industrial Revolution is a series of labor-intensive innovations. This incites fertility increases and limits human capital accumulation. • We generate an endogenous switch from unskilled to skill-intensive innovation, fostering a demographic transition.

6. Fact versus Theory • Growth discontinuity (output) • Many models have 2 regimes and a single discontinuity (or transition). • Industrial Revolution (IR) is conflated with the “take off” into Modern Economic Growth (MEG). • IR (1750–1850) growth was very slow • MEG did not really begin until much later (post 1850). • DT also slow to unfold (post 1850) • Exceptions include Galor-Weil (3 regimes) and Kremer (1 regime).

7. Three Apparent Regimes Living Standards in England Modern Economic Growth (fast growth, late-DT) Industrial Revolution (slow growth, early-DT) Malthusian era (no growth, pre-DT) Clark (2007)

8. Annual Growth Rates of GDP per Capita and Population in Western Europe, 1500 - 2000 Galor (2005), based on Maddision (2001)

9. Birth and Death Rates in England, 1540 - 1820 Galor (2005), based on Wrigley and Schofield (1981), Andorka (1978) and Kuzynski (1969)

10. Fact versus Theory • Demography and Education (L, H) • If IR=MEG, then we can have models where a complete DT occurs with a switch to Investment in “quality” (H). • But data suggest 2 transitions. • Circa 1750–1850 IR had slow growth, with part 1 of DT, rapid increase in L, not in H. • After 1850 MEG had faster growth, part 2 of DT, switch from L growth to H growth. • Galor-Weil and Galor-Mountford can match this timing for some parameters. • Income effect breaks subsistence constraint, more fertility • Demand for skills in M sector (rising skill premium) induces substitution effect (quality over quantity) • But this doesn’t solve all the problems…

11. Net Fertility Trends in England, 1540s – 1910s Wrigley and Schofield (1981), 528-9, table A3; Wrigley (1969), 196, table 5.16

12. The Demographic Transition across Europe (DT) Modern Economic Growth (fast growth, post-DT) starts about here Source: Galor (2005), based on Wrigley and Schofield (1981), Andorka (1978) and Kuzynski (1969)

13. The Demographic Transition in the U.S. eh.net

14. Beckerian Quality-Quantity Tradeoffs? Tan and Haines (1984)

15. Rising Levels of “H” (eventually) Clark (2005), based on Schofield (1973), Houston (1982), and Cressy (1997)

16. Rising Levels of “H” (eventually) Fraction of Children in Primary School Galor (2005), based on Flora et al. (1983)

17. Rising Levels of “H” in the U.S. Goldin and Katz (2008)

18. Benchmark modelGalor and Weil (2000) • Land in fixed supply: diminishing returns • Becker-style demographic model: quantity-quality trade-offs • Income and substitution effects • Technological change increases skill premia • Technological progress (“A”) a positive function of population size and education

19. Phase 1: Malthusian equilibrium • Population low • Rate of technological progress small • Low incentive to educate • Any technological progress leads to increased population growth • As population increases, rate of technological change slowly increases

20. Phase 2: Escape from Malthus • Eventually technological change is fast enough that you can escape diminishing returns • Technological change induces educational improvements (returns to education increase) • Effects on population growth: (1) higher education implies fewer children; (2) income effects imply more children • In post-Malthusian regime, (2) dominates

21. Phase 3: Post-Malthusian regime to modern growth • Post-Malthusian regime: technological growth, population growth, per capita income growth (but slow, due to population growth) • Eventually, substitution effects dominate income effects and population growth slows • Now per capita income grows due to technological progress and slower population growth

22. Fact versus Theory • Skill Bias (wL, wH) • In models where IR=MEG and with a single regime change, the IR/MEG has to coincide with a rise in the skill premium and the DT. (All models excl GW, GM) • In models where quality/quantity trade-off drives DT and IR has a constant skill bias IR has to coincide with rise in skill premium. (All models incl GW, GM) • But in the data, skill premium falls after 1750 and turns up much later, if at all. • This would seem to be a problem for all models, even the more successful Galor-Weil/Galor-Mountford models.

23. Skill Premium-Britain (Clark 2007)

24. Skill Premium-Britain Williamson (1982)

25. Rates of Return on Education – the U.S. Goldin and Katz (2008)

26. Skill Premium-BritainThis paper takes the Luddites seriously

27. Skill Premium-Comparative • Van Zanden 2006 • Circa 1750 skill premium (craftsmen vs unskilled) was much higher in South than in the North • England ~50% • India, Japan, Korea ~100% • Pre-industrial technologies similar? • Endowments very different? • South unskilled abundant relative to North

28. Skill-Premia – Cross-Country Comparison, 1913 van Zanden (2006)

29. Returns to Education, 1960 - 2000 Psacharopoulos and Patrinos (2002)

30. Mokyr (2002, 2005) • Scientific revolution of 17th century, Enlightenment crucial in explaining IR • Propositional (Ω) knowledge • Prescriptive (λ) knowledge • Baconian knowledge: “by and large the economic history of the Western world was dominated by materializing his ideals” • But why did growth only occur in late 18th/19th century?

31. The Nature of Innovation During the First Industrial Revolution • Only in a few core industries • Textiles • Steam and Water Power • Metallurgy • Unskilled-Intensive • Increases in the employment of women and children • Lack of importance for literacy • “Capital-saving”

32. Textiles - inventions

33. Patents per Year in England, 1660 - 1851

34. Spinning

35. Weaving

36. The Nature of Innovation During the Second Industrial Revolution • Technological Progress Spread to Previously Unaffected Industries • Services, Construction, Food Processing and Apparel Making, for example. • The Complexity of Technological Systems Increased • Custom-made Designs and Special-purpose Machinery Complemented Mass Production

37. Context for this Paper Model features Grand Unified Theory Kremer Hansen Galor Galor THIS Prescott Weil Mountford PAPER Endogenous productivity? YES NO YES YES YES NO (GPT) Endogenous Tech Biases? NO NO NO YES Scale effect or R&D Model Scale Exog Scale+H Scale+H R&D Basic vs. Applied Tech? NO NO NO NO YES Endogenous fertility? YES YES YES YES YES Micro-foundations? NO NO YES YES YES Trade? (North-South) NO NO NO YES NO

38. Context for this Paper Match with facts Grand Unified Theory Kremer Hansen Galor Galor THIS Prescott Weil Mountford PAPER IR distinct from MEG? NO NO YES YES YES Timing of DT NO NO YES YES YES Path of skill premium NO NO NO NO UP TO A POINT Great Divergence NO NO NO YES NO

39. Modelling Goals Previous models. What should we keep/discard? • Impose exogenous paths for TFP in “old” and “new” sectors (eg, Hansen-Prescott; Galor-Mountford) • Assume DT rather than model it, eg dN/N is a nonlinear function of Y/L calibrated to the data (eg, Hansen-Prescott) • Take off relies on scale effect: more people=more ideas (eg, Kremer, following Romer; many others) • Take off relies on positive feedback between H and TFP (eg, Becker et al. [static], Galor-Weil [dynamic]) Our goal: Try to avoid 1, 2, and 3. NEW GROWTH MECHANISM Embrace 4 but avoid timing problems above. How?

40. Things To Do Fact versus Theory Elements of a New Model Simulations

41. Elements of a New Model Directed Technical Change (impact next period) AH AL Factor Rewards wH wL B Factor Markets H L Baconian knowledge (public good) Quantity/quality choice (myopic) (impact next period)

42. New Supply wh/wl Supply Demand New Demand H/L Supply and Demand for Relative Skills(First Industrial Revolution)

43. wh/wl Supply New Supply New Demand Demand H/L Supply and Demand for Relative Skills(Second Industrial Revolution)

44. Elements of the Model – Production • Two sectors – skilled (uses H) and unskilled (uses L). • Factors are paid their marginal products.

45. New Model - Technology Productivity for each factor is a function of average (quality-adjusted) machines per worker-type. Machines are indexed on [0,1] with quality q(j). Eg: Costly innovation can raise q(j)

46. New Model – Gains from Innovation • Directed technical change (cf Acemoglu 1998) • Innovation results from costly research, which is paid for by temporary profits (short-run excludability) • Could be patents, or simple first-mover advantage • Endowments and incentives • Endowments of H and L affect the gains from innovation (do costly research) to raise AH vs AL. • Eg. Larger L sector means more gross profit from an L-oriented machine improvement.

47. New Model – Costs of Innovation • Two types of knowledge (cf Mokyr 2002) • A = TFP in each sector; B = Baconian knowledge • Growth of B is an increasing function of H (and >0). • Cost of innovation depends on B and is decreasing in B, but more so for H sector than L sector. • Innovation cost also depends on quality-index.

48. New Model – The Beginnings of Industrialization • Positive net profit condition for innovation • Machine producers have monopoly on innovation for one period. Thereafter, blueprint is public. • Innovation happens only if • Eg, for L sector Machines are substitutes Costs decrease in B Benefits increase in L

49. New Model – Demography • Demography (this is all fairly standard) • OLG with 2 periods (young, adult) • Adults decide number of children (nt) and education level of each child (et) • Children divide time between costly schooling (et) and remunerated unskilled work (1–et) • Adults work as skilled workers* and maximize weighted sum of current household income and future skilled income of their children *they would not want to work in the L sector. • Skill premium and incentives • Impact of rising skill premium and/or rising income: et rises, nt falls • In aggregate Ht+1(et) rises and Lt(nt,Lt-1) falls.

50. New Model – Demography Representative household’s objective: Current-period consumption: Aggregate factors: Key parameter restrictions: