Department of Economic History Julius Probst

Fall term 2015 900515-6857

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Foundations of Economic History

PART 1: Growth and stagnation in the pre-industrial society

Patrick Svensson
Economic growth and the lack thereof in pre-industrial Europe:

1. Introduction

Most economic historians would agree with the statement that exponential economic
growth is a rather recent phenomenon, given the relatively long history of mankind. In-
deed, only with the onset of the Industrial Revolution did many European nations start to
experience the long-lasting and irreversible increases in per capita income that are nowa-
days a common feature of the industrialized world. We take it now for granted that every
generation is materially better off than the previous generation, as rising living standards
have become the norm in Western societies. However, economic growth as we experience
it today was by large an unknown phenomenon in most pre-industrial economies. This
does not mean that societies before the Industrial Revolution did not experience any in-
creases in living standards at all, but periods in which economic progress occurred were
often followed by lengthy eras of stagnation. Moreover, major economic disruptions, such
as wars and famines, were extremely common, leading in many cases to very sudden and
pronounced reversals in the standard of living, thereby eliminating all the advances that
were made by previous generations within a short span of time.

In what follows I will focus primarily on the different types of economic growth that com-
monly occurred before the Industrial Revolution. The main interest here is to address the
question why economic growth in most pre-industrial societies was quickly running out of
steam before long-lasting and pronounced increases in per capita income started to mate-
rialize. I will also briefly elaborate on the set of factors that eventually allowed Western
economies to escape the pre-industrial growth regime. I will mostly restrict my attention to
European societies. Nevertheless, the occasional comparative analysis with other major
economies, most importantly China and Japan, helps to put some of the economic devel-
opments into context. For the sake of brevity, I focus exclusively on the time period
stretching from the Middle Ages to the onset of the Industrial Revolution.

2. Economic growth in pre-industrial societies

For the following discussion it is of crucial importance to define the concept of economic
growth. The term commonly refers to an economy displaying a long-run rise in the level of
per capita income, which usually exhibits a high degree of correlation with the standard of
living. That is, of course, because higher per capita incomes allow for an expansion of the
consumption bundle of the average individual, thus increasing his or her material wellbe-
ing.

Economic growth is obviously an extremely complex phenomenon because there are a

great many factors that can lead to increases in the average income per person. Accord-
ing to Mokyr (1990), one can in general distinguish between four different types of eco-
nomic growth that can occur within an economy: Solovian growth, Smithian growth, the
scale effect, and Schumpeterian growth.

Solovian growth, named after Nobel prize winner Robert Solow, simply refers to the accu-
mulation of capital. Holding all other factors of production constant (e.g. labor and land),
an increase in the capital stock raises the labor productivity and can thus lead to income
gains. However, additional units of capital are increasingly less productive as more and
more capital gets accumulated. This is the concept of diminishing returns. Accordingly,
Solovian growth must always be transitory in nature since the effect of an increase in the
investment rate eventually phases out (Mokyr, 1990).

Smithian growth is based on Adam Smiths well-known principle of the division of labor.
The basic idea is that individuals are more productive if they specialize into one single oc-
cupation instead of producing a variety of goods at the household level (home production).
A market-based economy allows individuals to trade their produce or service for money so
that they can in turn purchase all the goods and services they desire themselves. One
should note that these gains from trade can materialize at different scales. Specialization
can occur within smaller geographical units, e.g. cities or counties, but also between re-
gions or even countries (Smith, 1776).

The scale effect refers to externalities, such as productivity spillovers, which can arise from
increased agglomeration (Mokyr, 1990). Urbanization tends to be in general highly corre-
lated with income per capita. The direction of causality is obviously hard to interpret. How-
ever, most infrastructure investments, for example, only pass a cost-benefit analysis at a
certain population size because of high fixed costs that should be spread out over as
many individuals as possible. This economies of scale aspect of infrastructure invest-
ments means that the initial economic gains from increased urbanization are potentially
quite large.
Finally, Schumpeterian growth is based on the idea of creative destruction. The invention
of new technologies and innovations for the production process allows for increased effi-
ciency, i.e. producing the same amount of output with fewer inputs. Productivity increases
as new production units replace outdated ones. Economists mostly agree that this process
of technological progress is the only reliable source of long-run increases in per capita in-
come (Mokyr, 1990).

During the longest part of human history technological progress seems to have been ex-
tremely slow-paced or even entirely absent so that advances in living standards were
stalling as well. In what follows, I will discuss how most of the increases in per capita in-
come in Western Europe before 1800 were based on the first three types of economic
growth just mentioned above. However, the common characteristic inherent to all of them
is that they face the binding constraint of diminishing returns. The positive effects of in-
creasing capital accumulation, greater specialization of labor, and higher urbanization
quickly die out once certain threshold values are attained. Furthermore, other dynamics,
such as rapid population increases, exert a strong countervailing force against these eco-
nomic growth factors. Productivity gains must at least attain population growth rates in or-
der to ensure a stable level of per capita income, a condition that was not always satisfied
before the 1800s. Indeed, North and Thomas (1973) note that real wages fell significantly
during the 13th century in Western Europe, for example, since a fixed supply of agricultural
land had to accommodate a quickly growing population. The lack of innovation in agricul-
ture, by far the largest sector of the economy back then, led to falling levels of output per
worker, thus explaining the general decline in wages. Moreover, other Malthusian
checks, such as wars, plagues, and famines, also were a constant threat to pre-industrial
societies. Entire regions or even countries were frequently exposed to such large-scale
exogenous shocks, which had the potential to disrupt the economic system for years or
even decades to come. Most parts of Europe, for example, suffered immensely from reoc-
curring outbreaks of the plague during the entire 14th century. Some estimates suggest
that the population in Western Europe fell from about 75 million in 1300 to only 45 million
in 1400, a decline of almost 40 percent. Interestingly enough, real wages actually rose dur-
ing that century because the wipeout of a significant part of the population led to a scarcity
of labor, which prevailed for more than a century (North and Thomas, 1973). Nevertheless,
rising labor compensations did not necessarily translate into an increase in living stand-
ards during such a time of social and economic turmoil. It is extremely plausible that the
negative effects stemming from the disruption in trade and economic activity in general as
a result of the massive population losses outweighed the positive effect from somewhat
higher wages. Moreover, that century was also characterized by frequent plundering and
warfare. It is thus hard to see how economic welfare could have actually increased during
a century in which Western Europe suffered a series of large-scale economic disruptions
(North and Thomas, 1973).

One should be aware that Europe did experience the occasional period of economic stabil-
ity, sometimes accompanied by measurable income gains for large parts of the population.
However, my subsequent discussion of the Middle Ages exemplifies how any such pro-
gress before the Industrial Revolution was usually short-lived. That is because economic
growth in pre-industrial societies primarily rested upon factors that would quickly run into
diminishing returns. Increasing specialization and the associated gains from trade, for ex-
ample, could definitely provide an upward push to the average level of income in society.
The long-term growth rate, on the other hand, would largely remain unchanged at a con-
stant rate barely higher than zero. The crucial ingredient missing in pre-industrial econo-
mies was the long-lasting stream of innovations and technological progress that industrial-
ized countries have grown accustomed to in the modern era. With the absence of Schum-
peterian creative destruction, societies managed to achieve the occasional leap forward,
only to get pushed back again once Malthusian constraints started to become binding.
Malthus himself obviously referred to the fixed supply of land and considered this to be the
factor of production that would eventually hold back economic progress in the long-run.
The subsequent era of modern economic growth characterized by rising living standards
despite rapidly growing populations obviously proved him wrong (Malthus, 1809).

Interestingly enough, some modern scholars argue that the most binding constraint to
economic growth is the availability of cheap and efficient energy sources. Wrigley (2010)
makes a strong case for coal being the most important factor leading to Europes econom-
ic take-off in the 19th century. He correctly points out that the organic economies of the
pre-industrial era, where all products are ultimately based on raw materials, could have
never reached the production of goods and services on a scale such as it exists in indus-
trialized economies today. According to this view, modern economic growth is reliant on
the use of efficient energy sources. Large-scale industrial production is simply impossible
without access to electricity, which is still generated for the most part by fossil fuels, e.g.
coal, oil and natural gas. Wrigley (2010) thus asserts that it is the intensive use of coal as
an energy source that made the British Industrial Revolution possible and thus eventually
cleared the path for the modern era of exponential economic growth.

3. The Middle Ages

The Middle Ages cover the extremely long period from the 5th to the 15th century. This
epoch is in general regarded as the Dark Ages since it was dominated by lengthy periods
of extreme political and economic turmoil. This view has been commonly accepted, but is
somewhat unjustified. Scholars often like to contrast the Middle Ages to the preceding
centuries, which were a period of relative stability in most of Europe thanks to the Roman
rule. This, however, neglects the fact that the Pax Romana (Roman Peace) was mostly
imposed by military force. In fact, Roman rulers resorted quite often to warfare to expand
their area of influence, often oppressing or enslaving the local populations in the newly
conquered areas. Prolonged military conflicts occurred rather frequently in certain parts of
Europe in the late Antiquity, mostly on the periphery of the Roman Empire.

Nevertheless, the eventual collapse of Rome brought along a lengthy era of economic and
political instability. The demise of the Roman Empire was ultimately caused by a combina-
tion of internal weaknesses as well as external pressures. The period from the 5th to the 8th
century was characterized by large-scale migration movements, also known as the Barbar-
ian Invasions (Vlkerwanderung), which caused major disruptions in large parts of Eu-
rope. Barbarian tribes from Northern Europe and Asia invaded Roman space, often laying
waste to the existing villages and towns, as a weakened Roman Empire was unable to
fight off the continuous stream of invasions that occurred over several centuries.

The large-scale migratory movements quickly ebbed away after 700, giving rise to a period
of economic expansion that lasted for several centuries. Western and Northern Europe
during the early Middle Ages (500-1000) was more or less an area that one can describe
as vast wilderness. The region was very sparsely populated. Feudalism was the dominant
political system that asserted itself with the collapse of the Roman Empire (North and
Thomas, 1973). A large part of the population consisted of villeins who were living in small
feudal villages, usually concentrated around a manor. The main function of the lord was to
provide the villeins with public goods, mostly military protection, as well as land in ex-
change for labor services. This economic system was thus quite primitive since it was
mostly reliant on barter exchanges. Trade between regions was quite limited, mainly a re-
sult of extremely low population density, so that feudal villages were for the most part au-
tonomous when it comes to the production of goods and services (North and Thomas,
1973).

North and Thomas (1973) describe the subsequent period, the High Middle Ages (1000-
1300), as an era of rapid economic expansion. They assert that Europes centre of eco-
nomic gravity started to shift North during that time. Northern Europe suddenly experi-
enced an increase in the population growth rate, partly because of migration inflows. As
diminishing returns and falling productivity in the agricultural sector started to kick in in the
more densely populated European core, labor had an incentive to escape this unfavorable
dynamic and exploit new arable land at the economic frontier.

The increase in the population size led to the formation of towns and the process of urban-
ization brought along an expansion of trade between formerly more or less autonomous
regions. The economy started to shift towards a market system as individuals now favored
money-based exchanges over barter (North ad Thomas, 1973). This period was character-
ized by a modest increase in the standard of living for two reasons. First, the increase in
the population size and the resulting growth of towns allowed for a better division of labor.
The move away from barter is simply the logical follow-up from increased specialization. A
money-based system largely facilitates the exchange of goods and services and thus in-
creases efficiency. Second, the rapid expansion of trade allowed consumers to enjoy a
broader variety of goods than previously possible. North and Thomas (1973) note that
commerce between Northern and Southern Europe expanded despite significant barriers
to trade. Both the Baltic commodity trade (wood products, amber, fur, etc.) and the Italian
spice trade (and other exotic goods) with the Middle East were mostly executed by ship-
ping, the most efficient mode of transportation. Commercial exchanges between Northern
and Southern Europe, on the other hand, were mostly reliant on land routes, implying quite
significant transportation costs, especially for more bulky goods.

The expansion of economic activity in Europe during the High Middle Ages was thus most-
ly the consequence of a greater division of labor as well as an increase in commercial ex-
changes between regions and countries. The rising living standards were thus for the larg-
est part driven by Smithian gains of trade and agglomeration effects, which would eventu-
ally run into rapidly diminishing returns. This does not imply that technological change was
completely absent. Mokyr (1990), for example, notes that Northern Europe experienced a
widespread adoption of water- and windmills. Furthermore, the introduction of the three-
field system allowed for productivity gains in the agricultural sector because it decreased
the amount of fallow land thanks to a better crop rotation system. However, the pace of
technological change was extremely slow and uneven. Despite its obvious advantage, it
took more than a few centuries until the three-field system had spread throughout Europe
(North and Thomas, 1973). This example illustrates that not only the invention of new
technologies, but also the diffusion of already existing production techniques faced signifi-
cant barriers during that time period.

The Late Middle Ages (1300-1500) marked a severe break with the previous era of eco-
nomic expansion. This period was characterized by the aforementioned Malthusian
checks. The European population was exposed to wars, famines, and plagues on an un-
precedented scale, leading to a general decline in economic activity and the standard of
living. The effects were obviously not uniformly spread across the continent as certain
countries were more affected than others. There was a general decline in the wage level
during the 13th century because a rapidly rising population started to exert downward
pressure on productivity in the agricultural sector (North and Thomas, 1973). Absent tech-
nological change and given a fixed supply of arable land, an increase in the supply of labor
depresses output per person. This produces a ripple effect throughout the entire economy
because of the sheer size of the agricultural sector.

The decline in wages was mostly reversed during the 14th century. However, this was by
large the result of the plague as well as wars and famines, which eradicated a significant
portion of the European population within one century. Britains population, for example,
fell from about 3.75 million in 1348 to 2.1 million in 1400, a decline of about 44 percent
over a period of 150 years. Moreover, it took until 1600, another 200 years, until Britain
reached its previous level of about 3.8 million inhabitants again (North and Thomas, 1973).
The rapid decline of the British population during the 14th century led to a temporary surge
of real wages as labor became all of the sudden the increasingly scarce factor of produc-
tion. However, the negative welfare effects stemming from the general decline in economic
activity as a result of Malthusian checks certainly dominated the positive effect arising from
higher labor compensation. It is thus highly plausible that living standards actually stag-
nated or even declined during that period.

3. The Renaissance and Europes eventual economic take-off

The Renaissance (from the 15th to the 17th century) was a highly transformative epoch
characterized by rapid economic expansion. European populations recovered from the
tragedies of the Late Middle Ages and many scholars assert that Europe started to pull
ahead from the rest of the world during this particular time period. Mokyr (1990) notes that
there were a multitude of small innovations, so-called microinventions, which led to incre-
mental yet highly consequential changes for later economic development. The diffusion of
technical know-how reached unprecedented levels thanks to the invention of the printing
press and the ensuing mass production of books. There was significant progress in certain
skilled crafts and trades. The emergence of the clock-making industry was of particular
importance and contributed to spillover effects in the manufacturing sector.

Pomeranz (2009) emphasizes that various technologies that spread throughout Europe
during the Renaissance period were already known in other cultures well before they be-
came widely adopted in Western societies. The Chinese, for example, invented printing
and gunpowder centuries before these technologies were first introduced in Europe. They
also produced elaborate clocks and other complex mechanical toys that were comparable
in quality to the finest Western products. Chinas Great Armada of the 15th century was
much larger in size and also technologically superior to its European counterparts during
that era. The country could have easily monopolized commercial activities in South-East
Asia had emperors in the following century not taken the decision to cease naval explora-
tory activities altogether and prohibit merchants to engage in foreign trade. The decision to
move to an extremely inward-looking foreign policy in the 16th century allowed European
nations to dominate commerce in South-East Asia and to expand their colonial activities
within that region.

A comparative analysis reveals that the two largest Asian economies, China and Japan,
had standards of living that were comparable to the most advanced European nations dur-
ing the greater part of the 18th century. The Chinese population was at least as well-
nourished and enjoyed levels of calorie intake and per capita meat consumption similar to
what one could observe in Western societies. Some Chinese regions had access to coal
deposits, which were exploited on a relatively large scale. Pomeranz (2009) asserts that
Chinese per capita energy consumption, agricultural productivity and even average wages
were roughly equal to Britains on the eve of the Industrial Revolution. A similar story can
be told for Japan where life expectancy was higher and urbanization was more pro-
nounced than in 18th-century continental Europe.

The Europe of the Renaissance epoch thus had not reached its status of economic and
political superiority it would eventually attain by the end of the Industrial Revolution. In-
deed, European living standards, as measured by various economic indicators, did not
significantly exceed those of China and Japan by the end of the 18th century. While Eu-
rope experienced some far-reaching technological breakthroughs in certain sectors, espe-
cially in clock-making and weaponry, Southeast Asia actually did not considerably lag be-
hind Western societies in terms of technological know-how, broadly speaking (Pomeranz,
2009).

North and Thomas (1973), however, emphasize that certain parts of Europe already en-
joyed a significant institutional advantage during the Renaissance period. The Netherlands
of the 17th century saw the emergence of modern capital markets, which naturally devel-
oped as a consequence of the rise of large commercial centers. The Dutch economy ex-
perienced the formation of deposit banking, insurance markets, and joint stock enterprises.
Financiers were thus already involved in the business of trading IOUs and discounting bills
of exchange centuries ago. North and Thomas (1973) assert that financial innovation led
to more risk-spreading in society. This was a crucial development that facilitated and ena-
bled the organization of large-scale enterprises, such as long-distance trade, which are
commonly way too risky for individual merchants who face more severe capital constraints.

Pomeranz (2009), on the other hand, argues that Europes eventual economic take-off
was essentially based on a combination of skill in a few crucial activities as well as sheer
luck. More specifically, European nation states enjoyed a comparative advantage in armed
trade, military conflict and coercion. Europe forcefully pushed for colonization in a veritable
race to the top while China showed little interest in expanding its sphere of influence in
Southeast Asia. A large part of later European riches would be derived, either directly or
indirectly, from the exploitation of indigenous populations and the extraction of natural re-
sources from European colonies in various parts of the world. The infamous Triangular
trade of the North Atlantic was of particular importance. European merchants shipped
slaves from Africa to the Americas where they were mostly utilized on large-scale planta-
tions (sugar, tobacco, etc.). These commodities, in turn, where then shipped across the
Atlantic to be consumed by Europes growing consumer society. Pomeranz (2009) argues
that it is the colonization of the land-abundant colonies in the Americas, which gave Euro-
pean nations a sizeable advantage. More specifically, both China and Western Europe
faced severe ecological bottlenecks by the end of the Renaissance period. Growing popu-
lations had led to severe deforestation in both regions and Europe in particular faced a se-
vere timber shortage. Higher population densities also increased the pressure on the agri-
cultural sector. A more intensive use of agricultural land led to declines in soil quality,
which ultimately translated into lower yields. However, Europe was able to overcome its
supply-side problems thanks to the colonization of the Americas and other parts of the
world. The land-abundant colonies in the New World were in a sense complementary to an
increasingly industrial and densely populated European continent (Pomeranz, 2009). In-
dustrial goods were shipped to America in exchange for primary products so desperately
needed in Europe where they were in relatively short supply. Europeans also exploited
their colonies by extracting precious metals on a large-scale, creating huge windfall gains
for the colonizing nations. The export of precious metals to South East Asia paid for vari-
ous exotic products and luxury items, which also were in high demand in Western con-
sumer societies. Pomeranz (2009) thus argues that Europes advantage was based on its
colonial activities as well as its favorable geographic location in the North Atlantic. Euro-
pean economies could rely on their colonies to free themselves from the severe ecological
bottlenecks they were facing while no such opportunity was available to the Chinese or
Japanese.

Even though the Renaissance was a transformative period characterized by rapid eco-
nomic change, modern economic growth as we know it was still absent. That is because
most of the gains were again Smithian and thus transitory in nature. The development of
modern financial markets allowed for a more efficient organization of the economy, facili-
tating the exchange of goods and services. Colonization of the Americas led to a massive
expansion of trade and increased the supply and the variety of goods available to Europe-
an consumers. However, both these effects would eventually face rapidly diminishing re-
turns. Modern economic growth eventually took off once industrialized countries started to
exploit more efficient energy sources (fossil fuels) on a larger scale. The increased use of
coal during the Industrial Revolution coincided with the emergence of macroinventions,
innovations that affect the structure of the entire economy in a profound way (Mokyr,
1990). The steam engine, the railway and other technologies from that era set in motion
the continuous and cumulative process of creative destruction. Pre-industrial societies did
not achieve sizeable income gains over prolonged periods because they lacked such a
continuous stream of macro- and microinnovations, which is a necessary condition for the
mechanism of modern economic growth (Mokyr, 1990).

4. Conclusion

This essay has elaborated on economic growth, or rather the lack thereof, in pre-industrial
societies with a particular focus on Europe. Any reasonable guesstimate shows that living
standards in 17th century Britain were not significantly higher than those in Ancient Rome.
This, of course, implies that yearly economic growth only averaged about a few hundredth
of a percentage point for more than 2000 years compared to modern economic growth of
about 2 percent in todays industrialized economies, an increase by a factor of a hundred.
Pre-industrial societies mainly relied on economic growth factors that would eventually
face rapidly diminishing returns, such as gains from trade or increased specialization of
labor. Technological change was extremely slow-paced and Malthusian checks frequently
reversed previous income gains. The Industrial Revolution was the transformative era,
which allowed a large subset of the world economy to break free from economic stagna-
tion and eventually cleared the path for modern economic growth. The use of more effi-
cient energy sources (fossil fuels), the emergence of highly transformative macroinven-
tions (the steam engine and railways), and the continuous stream of innovations thanks to
the Schumpeterian process of creative destruction have allowed industrialized economies
to achieve sizeable income gains for their populations decade after decade. The process
of modern economic growth implies that every generation is materially better off than the
previous generation, a phenomenon that was largely unknown in pre-industrial societies.

5. References

- Malthus, Thomas Robert. An essay on the principle of population, as it affects the future
improvement of society. Vol. 2. 1809.
- Mokyr, Joel. The lever of riches: Technological creativity and economic progress. Ox-
ford University Press, 1990.

- North, Douglass C., and Robert Paul Thomas. The rise of the western world: A new
economic history. Cambridge University Press, 1973.

- Pomeranz, Kenneth. The Great Divergence: China, Europe, and the Making of the
Modern World Economy. Princeton University Press, 2009.

- Smith, Adam. The wealth of nations. 1776.

- Wrigley, Edward Anthony. Energy and the English industrial revolution. Cambridge Uni-
versity Press, 2010.