Chapter 4 From Stagnation to Growth: Unified Growth Theory

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Abstract

The transition from stagnation to growth and the associated phenomenon of the great divergence have been the subject of an intensive research in the growth literature in recent years. The discrepancy between the predictions of exogenous and endogenous growth models and the process of development over most of human history, induced growth theorists to advance an alternative theory that would capture in a single unified framework the contemporary era of sustained economic growth, the epoch of Malthusian stagnation that had characterized most of the process of development, and the fundamental driving forces of the recent transition between these distinct regimes.

The advancement of unified growth theory was fueled by the conviction that the understanding of the contemporary growth process would be limited and distorted unless growth theory would be based on micro-foundations that would reflect the qualitative aspects of the growth process in its entirety. In particular, the hurdles faced by less developed economies in reaching a state of sustained economic growth would remain obscured unless the origin of the transition of the currently developed economies into a state of sustained economic growth would be identified, and its implications would be modified to account for the additional economic forces faced by less developed economies in an interdependent world.

Unified growth theory suggests that the transition from stagnation to growth is an inevitable outcome of the process of development. The inherent Malthusian interaction between the level of technology and the size and the composition of the population accelerated the pace of technological progress, and ultimately raised the importance of human capital in the production process. The rise in the demand for human capital in the second phase of industrialization, and its impact on the formation of human capital as well as on the onset of the demographic transition, brought about significant technological advancements along with a reduction in fertility rates and population growth, enabling economies to convert a larger share of the fruits of factor accumulation and technological progress into growth of income per capita, and paving the way for the emergence of sustained economic growth.

Variations in the timing of the transition from stagnation to growth and thus in economic performance across countries reflect initial differences in geographical factors and historical accidents and their manifestation in variations in institutional, social, cultural, and political factors. In particular, once a technologically driven demand for human capital emerged in the second phase of industrialization, the prevalence of human capital promoting institutions determined the extensiveness of human capital formation, the timing of the demographic transition, and the pace of the transition from stagnation to growth.

Introduction

This chapter examines the recent advance of a unified growth theory that is designed to capture the complexity of the process of growth and development over the entire course of human history.

The evolution of economies during the major portion of human history was marked by Malthusian Stagnation. Technological progress and population growth were miniscule by modern standards and the average growth rate of income per capita in various regions of the world was even slower due to the offsetting effect of population growth on the expansion of resources per capita. In the past two centuries, in contrast, the pace of technological progress increased significantly in association with the process of industrialization. Various regions of the world departed from the Malthusian trap and experienced initially a considerable rise in the growth rates of income per capita and population. Unlike episodes of technological progress in the pre-Industrial Revolution era that failed to generate sustained economic growth, the increasing role of human capital in the production process in the second phase of industrialization ultimately prompted a demographic transition, liberating the gains in productivity from the counterbalancing effects of population growth. The decline in the growth rate of population and the associated enhancement of technological progress and human capital formation paved the way for the emergence of the modern state of sustained economic growth.

The transitions from a Malthusian epoch to a state of sustained economic growth and the related phenomenon of the Great Divergence, as depicted in Figure 1, have significantly shaped the contemporary world economy.1 Nevertheless, the distinct qualitative aspects of the growth process during most of human history were virtually ignored in the shaping of growth models, resulting in a growth theory that is consistent with a small fragment of human history.

The inconsistency of exogenous and endogenous growth models with some of the most fundamental features of process of development, has led recently to a search for a unified theory that would unveil the underlying micro-foundations of the growth process in its entirety, capturing the epoch of Malthusian Stagnation that characterized most of human history, the contemporary era of modern economic growth, and the underlying driving forces that triggered the recent transition between these regimes and the associated phenomenon of the Great Divergence in income per capita across countries.

The preoccupation of growth theory with empirical regularities that have characterized the growth process of developed economies in the past century and of less developed economies in the last few decades, has become harder to justify from a scientific viewpoint in light of the existence of vast evidence about qualitatively different empirical regularities that characterized the growth process over most of human existence. It has become evident that in the absence of a unified growth theory that is consistent with the entire process of development, the understanding of the contemporary growth process would be limited and distorted. As stated eloquently by Copernicus: “It is as though an artist were to gather the hands, feet, head and other members for his images from diverse models, each part perfectly drawn, but not related to a single body, and since they in no way match each other, the result would be monster rather than man."3

The evolution of theories in older scientific disciplines suggests that theories that are founded on the basis of a subset of the existing observations and their driving forces, may be attractive in the short run, but non-robust and eventually non-durable in the long run.4 The attempts to develop unified theories in physics have been based on the conviction that all physical phenomena should be explainable by some underlying unity.5 Similarly, the entire process of development and its foundamental forces ought to be captured by a unified growth theory.

The transition from stagnation to growth and the associated phenomenon of the great divergence have been the subject of intensive research in the growth literature in recent years.6 It has been increasingly recognized that the understanding of the contemporary growth process would be fragile and incomplete unless growth theory could be based on proper micro-foundations that would reflect the various qualitative aspects of the growth process and their central driving forces. Moreover, it has become apparent that a comprehensive understanding of the hurdles faced by less developed economies in reaching a state of sustained economic growth would be futile unless the factors that prompted the transition of the currently developed economies into a state of sustained economic growth could be identified and their implications would be modified to account for the differences in the growth structure of less developed economies in an interdependent world.

Imposing the constraint that a single theory should account for the entire intricate process of development and its prime causes in the last thousands of years is a discipline that would enhance the viability of growth theory. A unified theory of economic growth would reveal the fundamental micro-foundations that are consistent with the process of economic development over the entire course of human history, rather that with the last century only, boosting the confidence in growth theory, its predictions and policy implications. Moreover, it would improve the understanding of the underlying factors that led to the transition from stagnation to growth of the currently developed countries, shedding light on the growth process of the less developed economies.

The establishment of a unified growth theory has been a great intellectual challenge, requiring major methodological innovations in the construction of dynamical systems that could capture the complexity which characterized the evolution of economies from a Malthusian epoch to a state of sustained economic growth. Historical evidence suggests that the transition from the Malthusian epoch to a state of sustained economic growth, rapid as it may appear, was a gradual process and thus could not plausibly be viewed as the outcome of a major exogenous shock that shifted economies from the basin of attraction of the Malthusian epoch into the basin of attraction of the Modern Growth Regime.7 The simplest methodology for the generation of a phase transition – a major shock in an environment characterized by multiple locally stable equilibria – was therefore not applicable for the generation of the observed transition from stagnation to growth.

An alternative methodology for the observed phase transition was rather difficult to establish since a unified growth theory in which economies take off gradually but swiftly from an epoch of a stable Malthusian stagnation would necessitate a gradual escape from an absorbing (stable) equilibrium – a contradiction to the essence of a stable equilibrium. Ultimately, however, it has become apparent that the observed rapid, continuous, phase transition would be captured by a single dynamical system, if the set of steady-state equilibria and their stability would be altered qualitatively in the process of development. As proposed in unified growth theory, first advanced by Galor and Weil (2000), during the Malthusian epoch the dynamical system would have to be characterized by a stable Malthusian equilibrium, but eventually, due to the evolution of latent state variables the dynamical system would change qualitatively, the Malthusian equilibrium would vanish endogenously, leaving the arena to the gravitational forces of the emerging Modern-Growth Regime, and permitting the economy to take off and to converge to a modern-growth steady-state equilibrium.

The observed role of the demographic transition in the shift from the Post-Malthusian Regime to the Sustained Growth Regime and the associated non-monotonic evolution of the relationship between income per capita and population growth added to the complexity of the desirable dynamical system. In order to capture this additional transition unified growth theory had to generate endogenously, in the midst of the process of industrialization, a reversal in the positive Malthusian effect of income on population, providing the reduction in fertility the observed role in the transition to a state of sustained economic growth.

As elaborated in this chapter, unified growth theory explores the fundamental factors that generated the remarkable escape from the Malthusian epoch and their significance for the understanding of the contemporary growth process of developed and less developed economies. It deciphers some of the most fundamental questions that have been shrouded in mystery: what accounts for the epoch of stagnation that characterized most of human history? what is the origin of the sudden spurt in growth rates of output per capita and population? why had episodes of technological progress in the pre-industrialization era failed to generate sustained economic growth? what was the source of the dramatic reversal in the positive relationship between income per capita and population that existed throughout most of human history? what triggered the demographic transition? would the transition to a state of sustained economic growth have been feasible without the demographic transition? and, what are the underlying behavioral and technological structures that could simultaneously account for these distinct phases of development and what are their implications for the contemporary growth process of developed and underdeveloped countries?

Moreover, unified growth theory sheds light on the perplexing phenomenon of the Great Divergence in income per capita across regions of the world in the past two centuries: what accounts for the sudden take-off from stagnation to growth in some countries in the world and the persistent stagnation in others? why has the positive link between income per capita and population growth reversed its course in some economies but not in others? why have the differences in income per capita across countries increased so markedly in the last two centuries? and has the transition to a state of sustained economic growth in advanced economies adversely affected the process of development in less-developed economies?

Unified growth theory suggests that the transition from stagnation to growth is an inevitable by-product of the process of development. The inherent Malthusian interaction between technology and population, accelerated the pace of technological progress, and ultimately brought about an industrial demand for human capital, stimulating human capital formation, and thus further technological progress, and triggering a demographic transition, that has enabled economies to convert a larger share of the fruits of factor accumulation and technological progress into growth of income per capita. Moreover, the theory suggests that differences in the timing of the take-off from stagnation to growth across countries contributed significantly to the Great Divergence and to the emergence of convergence clubs. Variations in the economic performance across countries and regions (e.g., earlier industrialization in England than in China) reflect initial differences in geographical factors and historical accidents and their manifestation in variations in institutional, demographic, and cultural factors, trade patterns, colonial status, and public policy.

Section snippets

Historical evidence

This section examines the historical evidence about the evolution of the relationship between income per capita, population growth, technological change and human capital formation during the course of three distinct regimes that have characterized the process of economic development: The Malthusian Epoch, The Post-Malthusian Regime, and the Sustained Growth Regime.

During the Malthusian Epoch that characterized most of human history, technological progress and population growth were

The fundamental challenges

The establishment of a unified theory of economic growth that can account for the intricate process of development over the course of the last thousands of years has been one of the most significant research challenges faced by researchers in the field of growth and development. A unified theory unveils the underlying micro-foundations that are consistent with the entire process of economic development, enhancing the confidence in the viability of growth theory, its predictions and policy

Unified growth theory

The inconsistency of exogenous and endogenous growth models with the process of development over most of human history, induced growth theorists to develop a unified theory of economic growth that would capture in a single framework the epoch of Malthusian stagnation, the contemporary era of modern economic growth, and the underlying driving forces that triggered the recent transition between these regimes and the associated phenomenon of the Great Divergence in income per capita across

Human evolution and economic development

This section explores the dynamic interaction between human evolution and the process of economic development. It focuses on a recent development of a unified evolutionary growth theory that, based on historical evidence, generates innovative hypotheses about the interplay between the process of development and human evolution, shedding new light on the origin of modern economic growth and the observed intricate evolution of health, life expectancy, human capital, and population growth since

Differential takeoffs and the great divergence

The last two centuries have witnessed dramatic changes in the distribution of income and population across the globe. The differential timing of the take-off from stagnation to growth across countries and the corresponding variations in the timing of the demographic transition have led to a great divergence in income, as depicted in Figure 32, and to significant changes in the distribution of population around the globe, as depicted in Figure 33. Some regions have excelled in the growth of

Concluding remarks

The transition from stagnation to growth and the associated phenomenon of the great divergence have been the subject of an intensive research in the growth literature in recent years. The discrepancy between the predictions of exogenous and endogenous growth models and the process of development over most of human history, induced growth theorists to advance an alternative theory that would capture in a single unified framework the contemporary era of sustained economic growth, the epoch of

Acknowledgements

The author wishes to thank Philippe Aghion, Graziella Bertocchi, Carl Johan Dalgaard, Matthias Doepke, Hagai Etkes, Moshe Hazan, Nils-Petter Lagerlof, Sebnem Kalemli-Ozcan, Daniel Mejia, Joel Mokyr, Omer Moav, Andrew Mountford, Nathan Sussman, and David Weil for valuable discussions and detailed comments, and Tamar Roth for excellent research assistance. This research is supported by a NSF Grant SES-0004304.

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