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Priorto 1800, living standardsin world econ- The pioneering macroeconomics textbook,
omies were roughly constantover the very long MertonH. Miller and CharlesW. Upton (1974),
run: per capita wage income, output, and con- models the preindustrialperiod as using a land-
sumptiondid not grow. Modem industrialecon- intensive technology, where land is a fixed fac-
omies, on the other hand, enjoy unprecedented tor and there are decreasing returns to labor.
and seemingly endless growth in living stan- The moder era, on the other hand, is modeled
dards. In this paper, we provide a model in as employing a constant-returns-to-scaletech-
which the transitionfrom constant to growing nology with labor and capital as inputs. A both-
living standards is inevitable given positive ersome featureof this classical approachis that
rates of total factor productivity growth and differenttechnologies are used for each period.
involves no change in the structureof the econ- In this paper,we unify these theories by having
omy (parametersdescribing preferences, tech- both productionfunctions available at all time
nology, and policy).' In particular,the transition periods in a standard general-equilibrium
from stagnant to growing living standardsoc- growth model (the model of Peter A. Diamond
curs when profit-maximizingfirms, in response [1965]). Both processes producethe same good,
to technological progress, begin employing a and total factor productivity grows exog-
less land-intensiveproductionprocess that, al- enously. We denote the land-intensivetechnol-
though available throughout history, was not ogy the Malthus technology, and the other, the
previouslyprofitableto operate.In addition,this Solow technology.
transitionappearsto be consistent with features We show that along the equilibriumgrowth
of developmentduringand following the indus- path, only the Malthustechnology is used in the
trial revolution. early stages of development when the stock of
usable knowledge is small. Operatingthe Solow
productionprocess given the prevailing factor
prices would necessarily earn negative profits.
* Hansen: Departmentof Economics, UCLA, Los An- The absence of sustainedgrowth in living stan-
geles, CA 90095; Prescott:Departmentof Economics, Uni- dards in this Malthusianera follows from our
versity of Minnesota,Minneapolis,MN 55455, and Federal
Reserve Bank of Minneapolis. We have benefited from assumption that the population growth rate is
excellent research assistance from Igor Livshits, Antoine increasingin per capita consumptionwhen liv-
Martin, and Daria Zakharova.We are grateful to Gregory ing standardsare low.2 Eventually, as usable
Clark for useful comments and for providing us with some knowledge grows, it becomes profitableto be-
of the data used in Section I, and to Michele Boldrin,
Jeremy Greenwood, Tim Kehoe, Steve Parente, Nancy
gin assigning some labor and capital to the
Stokey, and threeanonymousrefereesfor helpful discussion
Solow technology. At this point, since there is
and comments. We acknowledge supportfrom the UCLA no fixed factor in the Solow productionfunc-
Council on Research (Hansen) and the National Science tion, populationgrowthhas less influenceon the
Foundation(Prescott).The views expressedhereinare those
of the authors and not necessarily those of the Federal growth rate of per capita income and living
Reserve Bank of Minneapolis or the Federal Reserve Sys- standardsbegin to improve. In the limit, the
tem. economy behaves like a standardSolow growth
1 This
paper contributesto a recent literatureon model-
ing the transition from Malthusian stagnation to moder
2
growth in a single unified model. Notable examples include In our model, this leads to a constantrate of population
JasminaArifovic et al. (1997), CharlesI. Jones (1999), and growth priorto the adoptionof the Solow technology. This
Oded GalorandDavid N. Weil (2000). Ourapproachdiffers result is consistent with populationdata from Michael Kre-
from the existing literatureby focusing on the changingrole mer (1993), where the growth rate of populationfluctuates
of land in productionand, in particular,the decline in land's arounda small constant throughoutmost of the Malthusian
share following the industrialrevolution. period (from 4000 B.C. to A.D. 1650).
1205
1206 THEAMERICANECONOMICREVIEW SEPTEMBER2002
model, which displays many of the secular fea- ern growth is a feature of the equilibrium
tures of modem industrial economies.3 growth path, although their approaches differ
We interpret the decline of land's share pre- from ours by incorporating endogenous techno-
dicted by our theory as occurring when goods logical progress and fertility choice.5 Living
produced in the industrial sector (capital) are standards are initially constant in these models
substituted for land in production. History indi- due to the presence of a fixed factor in produc-
cates that this was particularly important in the tion and because population growth is increas-
production of usable energy, a crucial interme- ing in living standards at this stage of
diate input in producing final output. For exam- development. In Galor and Weil (2000), grow-
ple, railroads and farm machinery were ing population, through its assumed effect on
substituted for horses, which required land for the growth rate of skill-biased technological
grazing. Machinery can run on fossil fuels, progress, causes the rate of return to human-
which requires less land to produce than grain. capital accumulation to increase. This ulti-
Another example is that better ships, produced mately leads to sustained growth in per capita
in the industrial sector, allowed whale oil to be income. In Jones (1999), increasing returns to
substituted for tallow (hard animal fat) as fuel accumulative factors (usable knowledge and la-
for lighting. Tallow, like animal power, is rela- bor) cause growth rates of population and tech-
tively land-intensive to produce. nological progress to accelerate over time, and
The existing theoretical literature on the tran- eventually, this permits an escape from Malthu-
sition from stagnation to growth has focused sian stagnation.
mostly on the role played by endogenous tech- The rest of this paper is organized as follows.
nological progress and/or human-capital accu- In the next section, we discuss some empirical
mulation rather than the role of land in facts concerning preindustrial and postindustrial
production.4 For example, human-capital accu- economies. In Section II, the model economy is
mulation and fertility choices play a central role described, and an equilibrium is defined and
in Lucas (1998), which builds on work by characterized. The development path implied by
Becker et al. (1990). Depending on the value our model is studied in Section III. We provide
of a parameter governing the private return to sufficient conditions guaranteeing that the So-
human-capital accumulation, Lucas's model
can exhibit either Malthusian or modern fea-
tures. Hence, a transition from an economy with 5
Another way of modeling the transitionfrom stagna-
stable to growing living standards requires an tion to growth is exploredby Arifovic et al. (1997). In their
exogenous change in the return to human- approach,if agents engage in adaptive learning, the econ-
capital accumulation. omy can eventually escape from a stagnant (low income)
As we do in this paper, Jones (1999) and steady state and transitionto a steady state with sustained
growth.
Galor and Weil (2000) study models where the 6
Relativeto the theorypresentedin these two papers,the
transition from Malthusian stagnation to mod- particularmechanism generating technological progress is
less importantin our approach.What is importantis that
total factorproductivityultimatelygrows to the criticallevel
that makes the Solow technology profitable.Since we study
3 John Laitner the consequences ratherthan the sources of technological
(2000) uses a similar model to explain
why savings rates tend to increase as an economy develops. progress, we treat technological advance as exogenous. Of
The two productionprocesses, however, produce different course, this assumptionimplies that our theoryis silent as to
goods in his model. As a result,the transitionaway from the why usable knowledge grows at all, let alone why techno-
land-intensive technology requires that living standards logical progressreachedthe critical thresholdin Englandin
grow prior to the transition.Hence, Laitner's model does the century surrounding1800. Similarly, because we ab-
not display Malthusian stagnation in the early stages of stract from fertility choice, we follow Kremer (1993) and
development. Nancy L. Stokey (2001) uses a multisector simply assume a hump-shapedrelationshipbetween popu-
model like Laitner'sto model the British industrialrevolu- lation growth and living standards.Hence, our model dis-
tion. plays a demographictransition by construction. Although
4 Examples include GaryS. Becker et al. (1990), Kremer the assumptionthat populationgrowth increases with living
(1993), Marvin Goodfriend and John McDermott (1995). standardsis key to our model exhibiting Malthusianstag-
Robert E. Lucas, Jr. (1998), Tamura(1998), Jones (1999), nation, the transitionto moderngrowth would occur in our
and Galor and Weil (2000). model even if there were no demographictransition.
VOL.92 NO. 4 HANSENAND PRESCOTT:MALTHUSTO SOLOW 1207
300
250
200 -
150
100
50
0
1275 1350 1425 1500 1575 1650 1725 1800
low technology will eventually be adopted,but exogenous shock, the Black Death, which re-
we must use numericalsimulationsto study the duced the population significantly below trend
transitionto modem growth. Some concluding for an extended period of time. This dip in
comments are provided in Section IV. population,which bottomed out sometime dur-
ing the century surrounding1500, was accom-
panied by an increase in the real wage. Once
I. The EnglishEconomyFrom 1250 populationbegan to recover, the real wage fell.
to the Present This observation is in conformity with the
Malthusiantheory, which predictsthat a dropin
A. The Period 1275-1800 the populationdue to factors such as plague will
result in a high labor marginal product, and
The behavior of the English economy from therefore real wage, until the population
the second half of the 13th centuryuntil nearly recovers.
1800 is described well by the Malthusian Another prediction of Malthusian theory is
model. Real wages and, more generally, the that land rents rise and fall with population.
standardof living display little or no trend.This Figure 2 plots real land rents and populationfor
is illustratedin Figure 1, which shows the real Englandover the same 1275-1800 period as in
farm wage and populationfor the period 1275- Figure 1.8 Consistent with the theory, when
1800.7 During this period, there was a large population was falling in the first half of the
sample, land rents fell. When population in-
creased, land rents also increaseduntil near the
7
The English population series is from Gregory Clark
end of the sample when the industrialrevolution
(1998a) for 1265-1535 (data from parish records in 1405-
had alreadybegun.
1535 are unavailable,so we use Clark's estimate that pop-
ulation remained roughly constant during this period) and
from E. A. Wrigley et al. (1997) for 1545-1800. The nom-
inal farm wage series is from Clark (1998b), and the price
index used to constructthe real wage series is from Henry 8 The
English populationseries and the price index used
Phelps-Brown and Sheila V. Hopkins (1956). We have to construct the real land rent series are the same as in
chosen units for the population and real wage data so that Figure 1. The nominal land rent series is from Clark
two series can be shown on the same plot. (1998a).
1208 THEAMERICANECONOMICREVIEW SEPTEMBER2002
0 f I I T
TABLE2-U.S. FARMLAND
VALUERELATIVE
TOGNP Here, the subscriptM denotes the Malthus sec-
tor and S denotes the Solow sector. The vari-
Year Percentage ables Aj, Yj, Kj, Nj, and Lj (j = M, S) refer to
1870 88 total factor productivity,output produced,cap-
1900 78 ital, labor, and land employed in sector j. In
1929 37
1950 20 addition, {Ajt}t-to, j = M, S, are given se-
1990 9 quences of positive numbers.12
Land in this economy is in fixed supply: it
Notes: The 1870 value of land is obtained by taking 88 cannotbe producedand does not depreciate.We
percentof the value of land plus farm buildings, not includ- normalize the total quantityof land to be 1. In
ing residences. In 1900, the value of agricultureland was 88
percent of the value of farmlandplus structures.
addition,land has no alternativeuse aside from
Sources: U.S. Bureau of the Census (1975). Farmlandval- productionin the Malthussector, so LMt= 1 in
ues for 1990 are provided by Ken Erickson (online: equilibrium.
(erickson@mailbox.econ.ag.gov)). Implicit behind these aggregate production
functions are technologies for individual pro-
duction units where, given factor prices, the
United States since 1870, the first year the optimal unit size is small relative to the size of
needed census data are available. The value of the economy and both entry and exit are per-
farmlandrelativeto annualGNP has fallen from mitted. Total factor productivityis assumed to
88 percent in 1870 to less than 5 percent in be exogenous to these individualprofit centers.
1990.10 The Malthus productionunit is one that is rel-
atively land-intensive, like an old-fashioned
family farm, because it is dependent on land-
II. The Model Economy intensive sources of energy, such as animal
power. The Solow productionunit, on the other
A. Technology hand, is capital-intensive rather than land-
intensive and could correspond to a factory.
We study a one-good, two-sector version of Consistent with this interpretation,we assume
Diamond's (1965) overlapping-generations that 0 > 4. Land, at least when interpretedas a
model.11 In the first production sector, which fixed factor, does not enter the Solow technol-
we call the Malthus sector, capital, labor, and ogy at all.13
land are combined to produce output. In the
second sector, which we call the Solow sector,
just capital and labor are used to produce the 12
Although there are two production processes avail-
same good. The production functions for the able, there is only one aggregate production technology
two sectors are as follows: because this is a one-good economy. The aggregateproduc-
tion function is the maximal amount of output that can be
producedfrom a given quantityof inputs. That is,
(1) YMt= AmtK tN tLl - I-
F(K, N, L)
Output from either sector can be used for which we measureusing consumptionof a young
consumptionor investmentin capital.Capitalis household.In addition,we assumethatthis func-
assumed to depreciate fully at the end of each tion is defined on the interval [cMi, oo) and is
period.14Hence, the resource constraintfor the continuous,differentiable,and single-peaked,and
economy is given by thatg'(cMN) > 0. The preciseform of this func-
tion will be given in Section III.15
(3) Ct + Kt+ =YMt+ Yst. The initial old (periodto) in this economy are
endowed with Kto/Nto_, units of capital and
Since the production functions exhibit con- L = 1/Nto_, units of land. Old agents rent the
stantreturnsto scale, we assume, for analytical land and capital to firms and, at the end of the
convenience, that there is just one competitive period, sell their land to the young. Each young
firm operatingin each sector. Given a value for householdis endowedwithone unitof labor.Labor
Aj, a wage rate (w), a rental rate for capital income is used to finance consumptionand the
(rK), and a rental rate for land (rL), the firm in purchase of capital and land, the return from
sectorj solves the following problem: which will financeconsumptionwhen households
are old. Thatis, the young householdsmaximize
(4) max{Yj- wNj - rKKj- rLL} (5) subject to the following budget constraints:
subject to the productionfunctions (1) and (2). C2,t+ I = rK,t+ lkt+ 1 + (rL,t+ + qt+ )It+ I.
1. Given the sequence of prices, the firm allo- COROLLARY: Both the Malthus and Solow
cation solves the problemsspecified in equa- sectors will be operated in period t if and only
tion (4). if equation (8) is satisfied at the factor prices
2. Given the sequence of prices, the household obtained by evaluating equation (9) at the
allocation maximizes (5) subject to (7). period-t values of AM,As, K, and N.
3. Marketsclear:
KMt + Kst = Nt kt If both sectorsare operated,(9) is not the equi-
NMt + Nst = Nt
libriumfactorprices. Instead,resourcesare allo-
1
cated efficiently across the two sectors as
Nt-llt=
guaranteedby the FirstWelfareTheorem.Hence,
YMt+ YSt= Ntclt + Nt- 1C2t+ Ntkt+ i. totaloutputis uniquelydeterminedby the follow-
= g(c,,)Nt. ing well-behavedmaximizationproblem:16
4. Nt+
(10) Y(AM, As, K, N)
In characterizingan equilibrium, we make
use of the following results: = max {AM(K- Ks)-(N- N)"
O<KS_K
PROPOSITION1: For any wage rate w and O_Ns<N
L) -
- -) =(1 )AstKstNs t
M/(t - ~-')(1 -
IIM(W, rK) = A Mt b
A K
TrK, AMtKMt
rK, MOAstK?- m =
'NAt St 'N--St 0
rLt = (1 - - .)AMIKtNt
-
(8)
(8)
Ast>
rK*Ast
(r)0( w )1-0 (13) qt+ qt,rK,t+ rL,t+ .
(9)
t^ A^ t- N 16
Of course, factor allocations solve this maximization
rKt= lAMtKtN- N problem whether or not both sectors are operated.
1212 THEAMERICANECONOMICREVIEW SEPTEMBER2002
Given sequences {AMt, ASt}tn o, initial con- to y(l-'--) and the consumption of young
ditions Kt and Nt , and an initial price of land, individuals is constant, clt = C1M. Aggregate
qto, equations (6) and (11)-(14) determine an output, capital, total consumption, the price of
equilibriumsequence of prices and quantities, land, and the rental rate of land grow at the
same rate as population. The wage and capital
{Wt, rKt, rLt qt+ , Clt, Nt+ , Kt+ lt=to? rental rates are constant. This implies that the
expression on the right-hand side of equation
The value of qtois also determinedby the equi- (8) is also a constant,which we denote by A. In
librium conditions of the model, but cannot be this case, productivitygrowthtranslatesdirectly
solved for analytically. A numerical shooting into population growth, and there is no im-
algorithmcan be usedto computethisinitialprice. provement in household living standards.This
mimics the long-run growth path (abstracting
III. The Equilibrium Development Path from plagues and otherdisturbances)that actual
economies experiencedfor centuriespriorto the
We choose initial conditions (Kto and Nto) industrialrevolution.
and the sequences {AMt,ASt} t0o so that the If {Ast}tto grows at some positive rate,
economy is initially using only the Malthus eventually Ast will exceed A. Proposition 2
technology [equation (8) is not satisfied] and guaranteesthat at this point capital and labor
then study how the economy develops over will be allocatedto the Solow technology. How-
time. We state sufficient conditions guaran- ever, whetheror not the economy will transition
teeing that the Solow technology will eventu- to a Solow economy with land being an unim-
ally be adopted,but withoutfurtherrestrictionson portantfactor of productionand, if so, how long
the parametersof the model, there may or may the transition will take are quantitativeques-
not be a transitionto the Solow economy with tions depending upon the parameters of the
land being of minor importancein production. model.
We use data from the Malthusianera and from
the last half of the 20th century to restrict the
values of the parametersand to compute the A. The QuantitativeExercise
equilibriumpath of the resulting economy.
The initial value Ntois set equal to 1, and the We have designed our quantitativeexercise
initial capital stock, Kto,is set so that it lies on so that the economy is initially in a Malthusian
the asymptotic growth path of a version of the steady state, and then we simulate the equilib-
model economy with only the Malthustechnol- rium path until essentially all the available cap-
ogy. To characterizethis growthpath, we make ital and labor are employed in the Solow
two additional assumptions about total factor sector.18We interpretone model periodto be 35
productivity and population growth. First, we years. To keep this exercise simple, we assume
assume that AMt grows at a constant rate: AMt = that for all t, Ast = yt, where Ys > 1.19The
7M, where yM > 1. Second, we assume that
g'(cl ) > 0, where clM is defined by g(clM) =
YMl(- .). This assumption guarantees that the
Malthus-only asymptotic growth path has the 18
Proposition 1 implies that some fraction of total re-
Malthusian feature that per capita income is sources will always be employed in the Malthus sector,
constant.17 although this fraction can (and does in our simulations)
Given our choice of initial conditions,as long converge to zero in the limit.
19This implies thattotal factorproductivityin the Solow
as the Solow technology has not yet been sector is growing at the same rate prior to the adoption of
adopted, the population growth factor is equal this technology as it is after.We do not take this assumption
literally, and it is not required for our results. Although
technological advancementclearly did not begin with the
industrialrevolution, once the Solow technology began to
17 ) is be used, the advantages of "learningby doing" and more
If yM(I
"-- largerthanthe maximumvalue of g(cl),
there will be sustainedgrowth in per capita consumptionin immediate economic payoff almost certainly increased the
periodswhen only the Malthustechnologyis employed. rate of technological growth.
VOL.92 NO. 4 HANSENAND PRESCOTT:MALTHUSTO SOLOW 1213
TABLE3-PARAMETER
VALUES
l.Z 10
1.0 . -
8- - Wage
0.8 - - - -
6- - Population ------ -
0.6 -- - ----- ----
4-
0.4 - - - FractionK in Malthus ---\
2---- -
0.2-- - FractionN in Malthus --
0 . . .. . .
0.0
-5 -4 -3 -2 -1 0 1 2 3 4 5 -5 -4 -3 -2 -1 0 1 2 3 4 5
Period Period
0.30
0.25 ? ---------------------
fractionof productiveinputs (capital and labor)
0.20 ?-------------------------- - -----------------------
employed in the Malthus sector each period.
-------------------------- ----------------------
The transition takes three generations (105 0.15
years) from the point at which the Solow tech- 0.10 ----------------------------- ----------------------
nology is first used until over 99 percent of the 0.05 ----------------------------- -----------
permanentgrowth in living standards.This pa- lier in China, where the stock of usable knowl-
per contributesto a recent literaturedescribing edge may have actually been higher, is perhaps
unified growth models that can account for the due to the institutions and policies in place in
basic growth facts of both eras, as well as the these two countries.
transition between the two. In particular,our In our theory, the transition from a land-
theory predicts that land's share in production intensive to a modem industrial economy re-
should fall endogenouslyover time, as observed quires that the rate of total factor productivity
historically, and that there will be an escape growth in the Solow sector be positive in peri-
from Malthusianstagnationand a transitionto ods priorto the adoptionof this technology. The
modem growth in the sense of Solow. technology must improve sufficiently so that it
Some caveats are in order. Although it has ultimatelybecomes profitableto shift resources
become popular in the growth literature to into this previously unused sector. Consistent
model the accumulationof nonrivalrousknowl- with this idea, Joel Mokyr (1990 p. 6), who
edge as an endogenous feature of the model documentstechnological progress over the past
economy studied, we have chosen to abstract 25 centuries, notes "much growth ... is derived
from this and assume exogenous technological from the deployment of previously available
progress. We made this choice both because it informationratherthan the generation of alto-
simplifies our analysis and because we do not gether new knowledge." Of course, some tech-
believe that there yet exists a theory of knowl- nological advancements,the wheelbarrow, for
edge accumulation with the same level of ac- example, increased total factor productivityin
ceptance that is accordedto the standardtheory both sectors, yet was employed long before
of capital accumulation. For those who dis- the industrial revolution. Another invention,
agree, we believe that endogenous growth the steam engine, perhaps the quintessential
features can be easily incorporated into our invention of the industrial revolution, de-
theory in a way that does not alter our main pended heavily on developments that oc-
findings.23 curred well within the Malthusian era (see
In addition,we have not exploredhow policy Mokyr, 1990 p. 84). A cost-effective method
and institutions,by discouraging or preventing for converting thermal energy into kinetic
the invention and adoptionof new ideas, might energy appears to have been a crucial pre-
play an importantrole in determiningwhen the condition for the Solow technology to be
Solow technology is first used and how quickly profitable.
the transition from Malthus to Solow is com- Finally, in contrast to some of the recent
pleted. Jones (1999), for example, emphasizes papers modeling the transitionfrom stagnation
the role that policy and institutions,by affecting to sustained growth, our theory is silent as to
the rate of compensationfor inventive activity, why population growth rates are increasing in
might play in determining the timing of the living standardsin the early stages of develop-
industrial revolution. In addition, Stephen L. ment and then become decreasingin living stan-
Parente and Prescott (1997) have studied how dardsat more advancedstages (the demographic
policy can affect the level of the total factor transition). Some economists (e.g., Galor and
productivity parameterin the Solow technol- Weil, 2000), following Becker (1960), have ar-
ogy. By keeping this parametersmall, policy gued that this may be related to a quantity-
can affect when equation (8) is satisfied and, quality trade-off between the number of
hence, when (if ever) the industrialrevolution childrena family producesversus the amountof
begins. The fact that the industrial revolution human capital invested in each child. Other
happened first in England in the early 19th possibilities, perhapsmore relevant in our con-
century ratherthan contemporaneouslyor ear- text, include that the shift from the Malthus to
the Solow technology involves households
23
As discussed in the Introduction,Jones (1999) and choosing to leave a home production sector,
Galor and Weil (2000) provide theories where there is where children are economic assets, in orderto
endogenous accumulationof knowledge thateventuallyper- enter a market sector, where they are not
mits escape from Malthusianstagnation. (see e.g., Mark S. Rosenzweig and Robert E.
1216 THEAMERICANECONOMICREVIEW SEPTEMBER2002
Evenson, 1977; Karine S. Moe, 1998).24 We ciety: The French countryside, 1450-1815.
leave it to futurework to incorporatethese ideas Princeton, NJ: Princeton University Press,
into the theory studied in this paper. 1996.
Jones, CharlesI. "Wasthe IndustrialRevolution
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Phelps-Brown,Henry and Hopkins, Sheila V.
"Seven Centuries of the Prices of Consum-
24 A related
possibility, that the reduction in fertility ables, Compared With Builders' Wage-
comes about because of an increase in the relative wage of
women as capitalper workerincreases, is exploredin Galor Rates." Economica, November 1956, (23),
and Weil (1996). pp. 296-315.
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