The world’s sudden growth spurt

Why do we experience economic growth? As our economies develop, why do we expect long-term living standards to rise? Such progress is not an immutable law of economic activity. On the contrary, economic growth (on a per capita basis) is a relatively recent phenomenon.

For most of human history, strong economic performance didn’t translate to sustained increases in material standards of living (for which we can use output per capita as a proxy). Rather, a strong economy gave rise to population growth: when times were good, families had more children. It was only during the eighteenth and nineteenth centuries (at least in the developed world) that this dynamic began to change. Why?

I’ve recently been reading Oded Galor’s latest book, The Journey of Humanity. In it, Galor explains in a simple and engaging style the history of how the world as we know it came to be. Central to this is a theoretical contribution that Galor has built over the past two decades or so: namely, Unified Growth Theory (UGT).

In the absence of a unified theory, economists have been left with two broad categories of growth models. Modern growth is described by the SolowSwan model, which says that long-term growth depends on an economy’s rate of technical progress (that is, efficiency gains that allow us to squeeze more output out of given inputs). To clarify: modern growth does not mean there are never recessions. This is a long-term trend over generations, separate from the short-term fluctuations that are the focus of much of the discourse around economic policy.

The historical cycle of economic development stems from Malthus’s observation that, left unchecked, population grows exponentially, while our ability to produce the resources needed to sustain life (for example, food) only increases linearly. This results in crises as output per person falls, which induces increases in mortality and reductions in fertility. Population growth falls, allowing production to catch up, raising output per person again, motivating reductions in mortality and increases in fertility.

Good times. Source: David Allen / WIkimedia Commons.

The dawn of the modern era

As the name suggests, the intention of UGT is to provide a complete model that explains the dynamics of economic development across the course of human history. Ambitious? Yes. But the underlying dynamics of UGT are compelling.

In broad brushstrokes: the combination of technical advances and population growth over time increase the potential returns to education. For much of history, education was only for the few — the gains not sufficient to outweigh the costs at the individual level. But as economies develop — becoming more complex, and demanding a broader suite of skills — a tipping point is reached, and households begin to invest in their childrens’ education.

Child-rearing is costly. The more children a household has, the more mouths there are to feed. Thus, historically, there was an incentive to get children out working the fields as soon as possible to help produce food and generate income for their families. But education too is costly — either directly due to the costs of tuition, or indirectly because children in school can’t simultaneously work. The switch from children as labour to children as pupils reduces households’ income. To offset this, as households begin to send children to school, they have fewer children. This phenomenon is commonly described as a quantity–quality tradeoff. That is, households choose at the margin between having more children and having better educated children.

The effect on economic development is profound. Population growth falls, but the average level of education rises. Moreover, as the level of education rises, this helps fuel the creation and application of new ideas and knowledge. These ideas and knowledge provide the technical advances that enable more output to be produced from existing inputs. Taken together, the relationship between population and prosperity is decoupled, with technical progress allowing output and income per capita to rise.

A beautiful model

In my view, UGT is one of the most significant contributions to macroeconomic theory in the past quarter century. The model’s appeal is based on two aspects: one, its mathematical design; two, its testability in empirical work.

My students have had the (mis)fortune of hearing me explain the mathematical mechanics in detail, but I will only dwell briefly on them here. UGT does not propose a fundamentally new model to explain long-term development. Its novel contribution is to successfully incorporate both the Malthusian view of the world and modern growth theory.

As the box below sketches out, UGT explains how the world shifted from one equilibrium state (the Malthusian era) to another (growth per capita, as we experience it today). It thus builds a bridge from Solow–Swan back to Malthus. Yes, technical progress matters for growth. But only to the extent that technical progress is driven by education. Where technical progress is driven solely by population size, then improved living standards simply motivate additional population growth.

From Malthus to modern growth: a story in three parts

The following three figures illustrate the transition from the Malthusian era to the modern growth era under the assumptions of UGT. The figures depict the relationship between education (e) and technical progress (g): both are functions of each other, with positive but diminishing marginal effects. Technical progress is additionally a function of population size (L). The more people there are, the more new ideas and knowledge are generated.

A phase diagram of the Malthusian era.

In the Malthusian era, technical progress is below the threshold level (ĝ) required to justify investment in education by the typical household. Technical progress thus only grows with population size: the red curve on the figure gradually moves upwards over time.

In a technical sense, there is one equilibrium (or “steady state”), denoted by the yellow dot. Even if education temporarily is above zero, it will fall back to zero over time.

A phase diagram of the first steps towards the Post-Malthusian transition.

As population grows, technical progress increases. Eventually, the red curve begins to cross the blue curve. This figure now depicts three possible equilibria (the yellow dots), where the first and third are the only stable points that result in convergence.

Were the existing level of education investment by a household to be greater than the second equilibrium (eu), then education investment would continue to rise towards the third point (eh). Below this point, education investment falls back to zero.

As the typical household will start with zero education (the first point), there will not yet be any change in education investment.

A phase diagram of the modern growth era.

Population continues to rise, and eventually the entirety of the red curve exceeds the threshold level of technical progress. We are now in the post-Malthusian era: the typical household begins to invest in education.

The previous zero-education equilibrium vanishes, and we begin to converge on the new high-education equilibrium. This is not an instantaneous process; households adjust investment decisions over time. As they do so, they begin to have fewer children. Population growth declines, as education investment increases: the quantity–quality tradeoff.

With diminishing population growth, the red curve no longer moves upwards at the same pace. Instead, as the principal interaction is between technical progress and education (the two axes of the figures), we move up along the curves. This illustrates that as education investment rises (horizontal axis), so too does the level of technical progress (vertical axis).

Source: Presentation by Galor (2014).

While this dynamic model is interesting at a theoretical level, the relevance of UGT is reinforced by its alignment with the observed course of human development. In recent years, many empirical researchers have tested the validity of UGT. Much of this work focuses on establishing the quanity–quality tradeoff: the extent to which rising education is associated with falling population growth. Selected examples include:

Other work considers aspects of UGT beyond the quantity–quality tradeoff. For example, Møller and Sharp (2014) find that England — the earliest country to industrialise — began to escape the Malthusian era as early as the sixteenth century. Klemp and Møller (2015) find evidence of the post-Malthusian transition in Scandinavia through 1800’s, with the modern growth era emerging at the end of that century. Jensen et al. (2022) date the start of the post-Malthusian transition in Denmark to the end of the eighteenth century.

The big picture

UGT offers one explanation for the role of education in long-term economic development. It also helps to explain why some countries began the process of industrialisation before others, and why even today some countries are rich and others are poor.

Nevertheless, like any theoretical model, there is much that UGT does not consider or explain. As one example, the introduction of compulsory schooling — replacing the household choice with a binding constraint — reflected an institutional change that UGT does not natively accommodate. But no model can (or should) include every possible factor. The point here is to understand a key dynamic.

In the context of my own research, UGT is noteworthy because it highlights the central role of human capital — the investment in skills and attributes that improve workers’ productivity. The key takeaway is not that education per definition improves economic outcomes. Rather, it is the interplay between education and technical progress that is essential to understanding the emergence of economic growth.

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