The Industrial Revolution and the Demographic Transition
Khan, Aubhik, Business Review (Federal Reserve Bank of Philadelphia)
In the 19th century, the United Kingdom began a period of economic transformation known as the Industrial Revolution. While the typical reader may think of Dickensian mills when hearing of the Industrial Revolution and of the end of a pastoral society, for most economists, the Industrial Revolution is associated with a change in the long-run or average rate of growth of per capita income. Also, in the 19th century, a steady rise in living standards began that has, in some sense, never ceased. As a result, people are now accustomed to economic growth. They expect it alongside the sometimes gradual, sometimes abrupt changes to the organization of industry and society associated with technological change.
Prior to the Industrial Revolution, the notion that there would be an improvement in people's standards of living almost every year would be unfamiliar not only to laypersons, whether common people or the nobility, but also to economists working in that period.
It is commonly believed that the Industrial Revolution began as new inventions improved the technologies used to produce goods and provide services. However, there is a difficulty with this account: We now know that such improvements affected only a few sectors that represented a small part of the economy. In the absence of widespread improvements in technology, output rose during the first stage of the Industrial Revolution because of capital accumulation--that is, because there was an increase in the quantity of machines and tools available to each worker.
Why did society suddenly choose to increase capital at an increasing rate? One answer may be that another revolution occurred in Britain around the same time: the demographic transition. This demographic transition saw the rate of population growth in the United Kingdom first rise, and then later fall. During this period, adult mortality fell, then child and infant mortality, then finally fertility.
After presenting some evidence on the Industrial Revolution and the demographic transition, I present two economic theories that link the two phenomena. The first explains the slowdown in population growth as a result of technological progress. It represents the conventional view that the Industrial Revolution drove the demographic transition. An influential summary of this theory is contained in the 2002 book written by Nobel laureate Robert E. Lucas. The second economic theory--which is part of my ongoing research with Michele Boldrin and Larry Jones--suggests that causality runs in the opposite direction. These different theories have different implications for how modern developing economies may improve their rate of growth. For example, to the extent that demographic transitions affect economic development, policy that reduces mortality and fertility may raise the level of economic development.
THE INDUSTRIAL REVOLUTION
Real Wages and Population Stagnated Until 1800. Between 1250 and 1800 there was little sustained improvement in the British economy. The economic history of Great Britain over this period is reasonably well captured by a model originally developed by Robert Malthus.
Malthus's theory suggested an inverse relation between the real wage (the wage paid to laborers measured in terms of the goods it can provide) and population. This inverse relation stems from the value of labor. For example, when population was lower than its average level, labor would be relatively scarce. This would drive up real wages as landowners bid for scarce laborers. Increases in real wages would allow laborers to purchase more goods and services, including better food and shelter. Their standard of living would rise. This rise in living standards would also increase the number of children born that would survive into adulthood. This would move population back to its average level and reduce the scarcity of labor. …