Lecture 4 – era of stagnation

Our model of a traditional economy has shown:

• Technological progress is an engine of growth
• Population growth doesn’t lead to growth – just leads to more densely populated

Now we will see that the model predicts:

• Population growth MUST systematically offset technological progress
• We can use this result to explain the GDP/capita in the era of stagnation

This shows that population growth has a negative effect and technological progress has a
positive effect

Limitations:
- N is treated as exogenous
- It is just a number and were not considering it could depend on the variable in the
model
- Likely to depend on GDP/capita – higher GDP means they have more
money/resources to look after the increase in population

We want to make n endogenous

Population Growth

What are the determinants?

- Fertility rate – how many kids people have
- Mortality rate – how quickly people die

The higher the fertility rate and lower the mortality, the faster the population growth

What variables in the model will fertility and mortality depend on?
- Will depend on y (GDP/capita)

A higher GDP/capita will lead to (in the pre-industrial era) :

• A lower mortality
- can afford better healthcare systems, can afford better food and a healthier
lifestyle – a more affluent society will have a lower mortality
 • A higher fertility
- more complex
- Looking at trends around the world currently, fertility is higher in poorer countries.
It’s possible in richer countries, people’s children go to school and accumulate a lot
of human capital. They want to have fewer children as they want to invest more
into each child compared to a set of poorer parents who don’t have the means to.
- In pre-industrial times, this trend was the opposite and richer couples had more
kids. This is because people with low incomes felt like they couldn’t afford children,
and if they did many of them died due to health reasons.

As we’re studying the pre-industrial era, we will follow this idea in more depth but its
important to understand that trend have changed in the modern era.

The simple verbal model of population growth

‘ The higher is y, the higher is n’ – the richer the country, the more population will grow

We can extend this basic verbal model, so it becomes more useful

Helps to use a mathematical model

Has to be an increasing function, where an increase in y leads to an increase in n

This is an example of an increasing function, with the blue line depicting the function n(y)

Properties of the function that we assume:

• As GDP/capita tends to infinity, population growth converges
- This makes sense as there is a finite number of kids that can be born, depending on
the number of women.
• If GDP/capita becomes low enough, population growth can become negative
- If a country becomes poor enough, people will die of starvation and there will be
negative growth

This is a reasonable mathematical model for population growth, and now we will combine
this with our previous one

Recognising that n is a function of y

This equation is a fundamental equation of growth of a traditional economy

- It’s a key equation we can use to learn about the determinants of growth in a
traditional economy

We can now use it to derive a result to why there was no economic growth till the 18 th
century

This equation gives an answer:

• There must not have been any growth if the population growth offset the technological
progress

which leads to g=0

By looking more closely at the equation g=g A – ßn(y) we can find out how these two came to
equal each other in the Era of Stagnation
 • Here we are assuming that human beings generated positive, constant technological
progress during the Era of Stagnation
• While this may not be completely accurate (as there were periods of rapid progress
followed by periods of decline) it is a reasonable assumption if we look at the long run

Now we have to question – why didn’t this constant, positive technological progress lead to
growth?

• Take any year during the era of stagnation – e.g. 1600

- Suppose gA > ßn(y) during that year, this means that technological progress grew
more than the population
- Plugging this into the g = gA – ßn(y) equation, we can see that g > 0

• Now take the year 1601:

- Because growth was positive (g > 0) in 1600, GDP/capita (y) in 1601 will be higher
than it was in the year before
- Since n is a function of y, population growth (n) will also be higher in 1601 than in
1600
- Thus ßn(y) as a whole will be higher

It is possible that ßn(y) increases so much that instead of it being <g A, it is now equal to it

If this is the case, we have shown that if gA > ßn(y) in any given year in the Era of
Stagnation, then ßn(y) must increase overtime until g A = ßn(y)

Now suppose this is not the case and ßn(y) doesn’t grow enough to equal gA
- This means that gA would still be > ßn(y) going into 1602

If this is the case in 1602:

- Due to the fact there was positive growth in 1601, GDP/capita (y) will continue to
increase in 1602
- Population growth will increase as a result (n)
- ßn(y) will increase until it is eventually equal to gA

Suppose this doesn’t happen and gA is still > ßn(y), this process will continue year after year
until eventually

Is reached
What happens when equality is reached?

• For example, if gA = ßn(y) is reached in 1625, then this condition will remain the same in
1626, 1627 …. etc. and forever after this
• Therefore, there is no growth once this condition is met

Same for the opposite effect:

• Suppose we started in a year where ßn(y) > gA, resulting in negative growth (g < 0)
• Negative growth will lead to GDP/Capita decreasing
• This will lead to ßn(y) decreasing until gA = ßn(y) is restored again

Overall result:

If there is positive growth in a traditional economy

- It will slow down overtime, eventually reaching 0

If there is negative growth in a traditional economy

- This will slow down (become less negative) overtime and eventually reaching 0

If there is no growth in a traditional economy

- This will persist indefinitely

In otherwords, a traditional economy must converge until

so that g = 0

Why is technological progress constantly offset by population growth?

• There are forces that shape the population growth and can’t make it equal to
technological progress
- If population growth is very low compared to technological progress, it will make
the country richer to the point where they start producing more kids until
population growth equals the technological progress
- If there is fast population growth, it will make the economy poorer, so people stop
having as many kids resulting in population growth reducing to the same level as the
technological progress

Using this model, we can identify the equilibrium level of GDP/capita

- In the modern day, we look at the GDP growth rate as we assume that it will grow in
a constant rate
- In the era of stagnation, a constant level of GDP was expected rather than a growth
rate (as there was no growth)
Constant GDP level:
- If we know the level of technological progress, then we know that the level of GDP
(y) is the amount that makes ßn(y) equal to g A

Therefore, this condition must be true, with y* still representing GDP/capita but the actual
specific amount such that equality holds

As we haven’t specified the value of n, we can devise a formula for y*

- This comes from bringing ß to the other side

On the graph:
equilibrium

This graph is showing that the y* value will be where the population growth function n(y)
level is the same as gA / ß

Does this mean that GDP/capita be the same across all countries in the traditional era?
- No it doesn’t as different countries will have different levels of technological
progress (gA)
- A higher gA will mean those countries are higher up on the y-axis and therefore their
equilibrium level with n(y) will result in a y* further along the x-axis and a higher
GDP/capita
It is also possible that different countries have different population growth functions
- This means that even if they had the same rate of technological progress, their
equilibrium levels would have resulted in different y* values

The model shows:

- Even if there was no economic growth throughout the world before the 18th
century, it doesn’t mean all countries were the same
- It means there was no sustained growth so no large differences in living standards
of time
- However, there still would’ve been some rich and some poor within each era, and it
is still possible that some eras were richer than others – there was just no sustained
improvement
- You could observe that in a certain year Italy was 2x as rich as England, with the
opposite being possible in a few years. However the notion that the USA is 25x
larger than other countries as it is today would not be the case

Will GDP/capita remain completely constant overtime?

- No, as y can fluctuate around its long term y* equilibrium level
- Human societies can go through shocks which lead to these fluctuations

Examples:
- A technological breakthrough that leads to a temporary rise in gA which would lead
to an increase in y. However, this gA > ßn(y) would eventually lead back to an
equilibrium as previously discussed.
- A sudden fall in L (labour) due to things like an epidemic may have an effect. If many
people die, population will decrease and ßn(y) value would decrease so this g A >
ßn(y). This however, would again lead to equality between the two as shown
previously
Three predictions

1. Countries with a higher level of A (technological progress) should not be richer in

equilibrium, only more populous. Knowing more about the world will not allow you to
become richer but only sustain a larger population

2. Countries with a higher n(y), growth function as shown in fig. 3, should be poorer

3. Take a Malthusian economy at its equilibrium, y=y*. A sudden fall in labour (L) will be
followed by an increase in y (as a smaller population means the GDP/capita of
remaining people increases). Overtime, higher incomes means more children will be
born and this boost in population growth will bring y back to y*. There is a long-run
value of GDP/capita the country will always converge around.

The first economist to propose this model: Thomas Malthus

• This model is known as the Malthusian model

• Traditional economies known as Malthusian economies
• Era of Stagnation as the Malthusian era

The fact that no sustained economic growth was possible in the Era of Stagnation is also
known as the Malthusian trap

Data to look at predictions:

We can verify:

Method 1: By comparing two societies with different levels of technological progress (A) in
the same year t and we expect it has the same level of GDP/capita

Method 2: Or we can look at two societies in different years, t and t+N, when you know that
there was technological progress (gA > 0) during this era and the GDP/capita was still roughly
the same
In both cases, verify that their GDP/capita (y) was not very different

1. Example to support method 1: Tahitians vs English

• In 1767, the first British ship landed in Tahiti
• Even though they were thousands of years behind in technological development,
the living standards were not that different
• Only difference is that the English can sustain a more densely populated country
compared to Tahitians – this is because technological progress was offset by
population growth during this era

2. Example to support method 2:

Societies in different periods of time had comparable levels of GDP/capita

Example: China was poorer than Western Europe in the 18th century
Before the industrial revolution, there was a gap in living standards between USA and China.
- if this was a Malthusian trap, why was there any difference?

Suggested by Clark (2007, pp89-90):

• 18th century China had a higher fertility rate and a lower mortality rate than England –
meaning they had a high n(y)

This is consistent with our prediction, as a high n(y) lead to a low y*

NOTE THE PARADOX: Higher fertility/low mortality can be both a good and bad thing in a
Malthusian world
- Usually, we would associate lower mortality and higher fertility as a sign of better
healthcare and a better country to live in
- In a Malthusian world, it is also bad because the country will be poorer as a result as
they must share their resources amongst more people

Blue line represents China and Green line represents England

The graph reflects the difference in n(y) and therefore shows why y* is lower in countries
with a higher n(y)
Suppose we are in 1348: The Black Death
- Came from the far East and reached the black Sea in 1346
- Traders spread it through Europe and quickly wiped out half the English population

Long run effects on the population and living standards:

Grey line: population Black line: real wages

As the population decreased, the real wages increased

- Those who lived through the epidemic lived a much better living standard

After the living standards increased, population increased again

- This meant living standards decreased again

In a Malthusian world, there are cycles that societies go through.

- We can see that a large event, such as the black plague, can cause a cycle which
continues centuries into the future.
In this world, something ‘bad’, such as half the population dying, can have positive impacts,
such as improving the quality of life of those that survived.

In a Malthusian world:
- Higher GDP/capita means higher fertility and lower mortality in the model in pre-
industrial times

In the graph:
- Grey line is the death rate (mortality) and the black line is fertility rate
- From the previous figure, we can see living standards were high in the 15th/early
16th century and fell off during the 17th century
- In this figure, fertility was high, and mortality was low in the 15th/16th century –
prosperous period of English history where people had more kids
- In the 17th century, which was less prosperous economically, there was a lower
fertility rate and a higher mortality rate
- As growth started to pick up and increase living standards in the 18th/19th century,
there was an increase in fertility and reduced mortality
- Therefore, this data supports the assumptions in our model that a higher level of
GDP/capita leads to higher levels of fertility and lower levels of mortality
Conclusions:

• The Malthusian model has provided the theoretical framework to understand growth in
a traditional economy
• The predictions we can make are supported by historical evidence

The reason why humans did not grow in a sustained way before the 18 th century was that
the positive effects of their technological progress was entirely absorbed by population
growth

In our next lectures, we will focus on explaining how Britain (and later some other Western
countries) managed to escape the Malthusian trap in the late 18th century