Economic Growth

The Gross Domestic Product (GDP) of an economy is a measure of total production. More precisely, it is the monetary value of all goods and services produced within a country or region in a specific time period. While the definition of GDP is straightforward, accurately measuring it is a surprisingly difficult undertaking. Moreover, any attempts to make comparisons over time and across borders are complicated by price, quality and currency differences. This article covers the basics of GDP data and highlights many of the pitfalls associated with intertemporal and spatial comparisons.

From the long-term perspective of social history, we know that economic prosperity and lasting economic growth is a very recent achievement for humanity. In this section we will look at this more recent time and will also study the inequality between different regions - both in respect to the unequal levels of prosperity today and the unequal economic starting points for leaving the poverty of the pre-growth past.

Economic prosperity is measured as via growth domestic product (GDP) per capita, the value of all goods and services produced by a country in one year divided by the country’s population. Economic growth is the measure of the change of GDP from one year to the next. This entry shows that the current experience of economic growth is an absolute exception in the very long-run perspective of social history.

I. Empirical View

I.1 From poverty to prosperity: The UK over the long run

The UK is particularly interesting as it was the first economy that achieved sustained economic growth and thereby previously unimaginable prosperity for the majority of the population.

Output per capita of the UK economy

The chart below shows the reconstructed GDP per capita in England and the UK over the last 7 centuries.

Economic history is a very simple story. It is a story that has only two parts:

The first part is the very long time in which the average person was very poor and human societies achieved no economic growth to change this.

Incomes remained almost unchanged over a period of several centuries when compared to the increase in incomes over the last 2 centuries. Life too changed remarkably little. What people used as shelter, food, clothing, energy supply, their light source stayed very similar for a very long time. Almost all that ordinary people used and consumed in the 17th century would have been very familiar to people living a thousand or even a couple of thousand years earlier. Average incomes (as measured by GDP per capita) in England between the year 1270 and 1650 were £1,051 when measured in today's prices.

The second part is much shorter, it encompasses only the last few generations and is radically different from the first part, it is a time in which the income of the average person grew immensely – from an average of £1051 incomes per person per year increased to over £30,000 a 29-fold increase in prosperity. This means an average person in the UK today has a higher income in two weeks than an average person in the past had in an entire year. Since the total sum of incomes is the total sum of production this also means that the production of the average person in two weeks today is equivalent to the production of the average person in an entire year in the past. There is just one truly important event in the economic history of the world, the onset of economic growth. This is the one transformation that changed everything.

As this chart of total GDP in the England over seven centuries shows, the increase of the total output of the UK economy grew by even larger extent, because not only average incomes increased since the onset of the Industrial Revolution, but the number of people in the country increased as well.

 LINEARSource: GDP in England (using BoE (2017))Note: Data refers to England until 1700 and the UK from then onwards.CC BY-SA

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I.2 The economy before economic growth: The Malthusian trap

The pre-growth economy was a zero-sum-game: Living standards were determined by the size of the population

In the previous chart we saw that it was only after 1650 that living standards in the UK did start to increase for a sustained period. Before the modern era of economic growth the economy worked very differently. Not technological progress, but the size of the population determined the standards of living.

If you go back to the chart of GDP per capita in the England you see that early in the 14th century there was a substantial spike in the level of incomes. Incomes increased by around a third in a period of just a few years. This is the effect that the plague – the Black Death – had on the incomes of the English. The plague killed almost half(!) of the English population. The population declined from 8 million to 4.3 million in the three years after 1348. We even see it in the chart for the world population.

But those that survived the epidemic were materially much better off afterwards. The economy was a brutal zero-sum game and the death of your neighbour was to the benefit for those that did survive.

This happened primarily because farmers now achieved an higher output. While farmers before the plague had to use agricultural land that was less suited for farming, after the population decline they could farm on the most productive areas of the island.

In the very long time in which humanity was trapped in the Malthusian economy it was births and deaths that determined incomes. More births, lower incomes. More deaths, higher incomes.

We see this coupling of income and population in the chart below that plots the size of the population (on the x-axis) against the total output of the English economy (top panel) and against the income per person (bottom panel). Looking at the bottom panel we see the spike of incomes that was associated with the killing of half of the population in the Black Death. After this the population and the income per person stagnate until around 1500. In the following period we see the economy growing – total GDP increases by more than 280% from 1500 to 1650 – but this increase in output is not associated with an increase in income per person, but only an increase of the total population of the UK.

It is only after 1650 that the English economy breaks out of the Malthusian Trap and that incomes are not determined by the size of the population anymore. For the period after 1650 we see that both the population and the income per person are growing. The economy is not a zero-sum game anymore; economic growth made it a positive-sum game.

When Malthus raised the concerns about population growth in 17981 he was wrong about his time and the future, but he was indeed right in his diagnosis of the dynamics of his past. The world before Malthus was Malthusian and population increases were associated with declining nutrition, declining health, and declining incomes. The world after Malthus became increasingly less Malthusian. What Malthus did not foresee was that the increasing output of the economy will decouple from the change of the population so that the output available for all will increase over a long period. This decoupling of income and population is shown in the chart.

Technological change in the pre-growth economy

Technological innovation that increases productivity is the key to increased prosperity. But there were technological breakthroughs before the 17th century. Windmills, irrigation technology, and also non-technical novelties especially the new crops from the New World. Why did these not lead to sustained economic growth?

What happened as a consequence of these innovations were indeed increases in productivity, and the output increases led to increased prosperity. But only for a short time. Improvements in technology had a different effect in the Malthusian pre-growth economy. They raised living standards only temporarily and instead raised the size of the population permanently. The economic historian Gregory Clark sums it up crisply: “In the preindustrial world, sporadic technological advance produced people, not wealth."2

Technological improvements lead to larger, but not richer populations. If this analysis of the pre-growth economy is true than we would expect to see a positive correlation between productivity and the density of the population.

Ashraf and Galor (2011)3 studied the Malthusian economy theoretically and empirically in a paper published in the American Economic Review. The chart below is taken from their publication and confirms the theoretical prediction for the pre-growth economies in the year 1500.

Incomes were not flat - History saw several episodes of growth which were not sustained

Throughout history there were several episodes in which certain economies achieved economic growth, but in contrast to the sustained growth since the Industrial Revolution these episodes were all short-lived. What is new about modern times is that the growth of incomes lasted for a very long time – until today – and that this growth did not only increase the incomes in one economy, but instead spread to other economies as well.

The origin of this transformation is North-Western Europe. It was in England (and Holland) in the early 17th century where it became first possible to grow incomes over a sustained period of time.

The chart shows this. In the long time before sustained economic growth incomes never exceeded $3.50 per day [3.50*365=1277.5] in prices of 1990.4 For the UK this changes in the 17th century, the fluctuation of incomes that we see in the four preceding centuries give way to a steady increase of average incomes. By 1800 incomes have doubled(?more than, almost?).

GDP per capita in European economies5