Unified Growth Theory Unified Growth Theory Oded Galor PRINCETON UNIVERSITY PRESS | PRINCETON & OXFORD © 2011 by Princeton University Press Published by Princeton University Press, 41 William Street, Princeton, New Jersey 08540 In the United Kingdom: Princeton University Press, Oxford Street, Woodstock, Oxfordshire OX20 1TW press.princeton.edu Jacket illustration: Time Goes By, 2007, GIMP-created image, © Manuel Lao All Rights Reserved Library of Congress Cataloging-in-Publication Data Galor, Oded, date Unified growth theory / Oded Galor p cm Includes bibliographical references and index ISBN 978-0-691-13002-6 (hardback : alk paper) Economic development Technological innovations—Economic aspects I Title HD75.G348 2011 338.9001—dc22 2010043076 British Library Cataloging-in-Publication Data is available This book was composed in Times New Roman and Bell Gothic using ZzTEX by Princeton Editorial Associates, Inc., Scottsdale, Arizona Printed on acid-free paper Printed in the United States of America 10 Dedicated to the members of two generations of my family who have profoundly affected my life—my sons Alon, Yuval, and Omri, and my parents Sarah and Joseph Contents Preface CHAPTER Introduction 1.1 Toward a Unified Theory of Economic Growth 1.2 Origins of Global Disparity in Living Standards 1.2.1 Catalysts for the Engine of Transition from Stagnation to Growth 1.2.2 Persistence of Prehistorical Biogeographical Conditions 1.2.3 Convergence Clubs CHAPTER From Stagnation to Growth 2.1 The Malthusian Epoch 2.1.1 Stagnation of Income per Capita in the Long Run 2.1.2 Population Dynamism 2.1.3 Fertility and Mortality 2.1.4 Fluctuations in Income and Population 2.1.5 Technological Progress 2.1.6 Main Characteristics of the Epoch 2.2 The Post-Malthusian Regime 2.2.1 Take-off in Income per Capita 2.2.2 Spike in Population Growth 2.2.3 Fertility and Mortality 2.2.4 Industrialization and Urbanization 2.2.5 Globalization and the Pace of Industrialization 2.2.6 Central Features of the Regime 2.3 Industrialization and Human Capital Formation 2.3.1 Industrial Demand for Education 2.3.2 Land Concentration and Human Capital Formation 2.3.3 Land Reforms and Education Reforms 2.3.4 Political and Education Reforms 2.3.5 Human Capital Formation in Less Developed Economies 2.3.6 Main Insights 2.4 The Demographic Transition 2.4.1 Decline in Population Growth 2.4.2 Fertility Decline 2.4.3 Mortality Decline 2.4.4 Life Expectancy 2.4.5 Central Characteristics 2.5 The Modern Growth Regime 2.5.1 Rapid Industrialization and Human Capital Formation 2.5.2 Sustained Growth of Income per Capita 2.5.3 Divergence in Income and Population across the Globe 2.5.4 Insights for Comparative Development 2.6 Concluding Remarks CHAPTER The Malthusian Theory 3.1 The Basic Structure of the Model 3.1.1 Production 3.1.2 Preferences and Budget Constraints 3.1.3 Optimization 3.2 The Evolution of the Economy 3.2.1 Population Dynamics 3.2.2 The Time Path of Income per Worker 3.3 Testable Predictions 3.4 Empirical Framework 3.4.1 Empirical Strategy 3.4.2 The Data 3.4.3 The Neolithic Revolution and Technological Advancement 3.4.4 Basic Regression Model 3.5 Cross-Country Evidence 3.5.1 Population Density in 1500 CE 3.5.2 Population Density in Earlier Historical Periods 3.5.3 Income per Capita versus Population Density 3.5.4 Effect of Technological Sophistication 3.5.5 Robustness to Technology Diffusion and Geographical Features 3.5.6 Rejection of Alternative Theories 3.6 Concluding Remarks 3.7 Appendix 3.7.1 First-Stage Regressions 3.7.2 Variable Definitions and Sources CHAPTER Theories of the Demographic Transition 4.1 The Rise in Income per Capita 4.1.1 The Theory and Its Testable Predictions 4.1.2 The Evidence 4.2 The Decline in Infant and Child Mortality 4.2.1 The Central Hypothesis 4.2.2 Evidence 4.3 The Rise in Demand for Human Capital 4.3.1 The Theory 4.3.2 Evidence: Education and the Demographic Transition 4.3.3 Quantity-Quality Trade-off in the Modern Era 4.4 The Rise in Demand for Human Capital: Reinforcing Mechanisms 4.4.1 The Decline in Child Labor 4.4.2 The Rise in Life Expectancy 4.4.3 Evolution of Preferences for Offspring Quality 4.5 The Decline in the Gender Gap 4.5.1 The Theory and Its Testable Predictions 4.5.2 The Evidence 4.6 The Old-Age Security Hypothesis 4.7 Concluding Remarks 4.8 Appendix 4.8.1 Optimal Investment in Child Quality 4.8.2 Optimal Investment in Child Quantity CHAPTER Unified Growth Theory 5.1 The Fundamental Challenge 5.2 Incompatibility of Non-Unified Growth Theories 5.2.1 The Malthusian Theory 5.2.2 Theories of Modern Economic Growth 5.3 Central Building Blocks 5.3.1 The Malthusian Elements 5.3.2 Engines of Technological Progress 5.3.3 The Origin of Human Capital Formation 5.3.4 The Trigger of the Demographic Transition 5.4 The Basic Structure of the Model 5.4.1 Production of Final Output 5.4.2 Preferences and Budget Constraints 5.4.3 Production of Human Capital 5.4.4 Optimization 5.5 Evolution of Technology, Population, and Effective Resources 5.5.1 Technological Progress 5.5.2 Population 5.5.3 Effective Resources 5.6 The Dynamical System 5.6.1 The Dynamics of Technology and Education 5.6.2 Global Dynamics 5.7 From Malthusian Stagnation to Sustained Growth 5.8 Main Hypotheses 5.9 Complementary Mechanisms 5.9.1 Sources of Human Capital Formation 5.9.2 Triggers of the Demographic Transition 5.9.3 Engines of Technological Progress 5.9.4 The Transition from an Agricultural to an Industrial Economy 5.10 Calibrations of Unified Growth Theory 5.11 Concluding Remarks 5.12 Appendix: Optimal Investment in Child Quality CHAPTER Unified Growth Theory and Comparative Development 6.1 Country-Specific Characteristics and the Growth Process 6.1.1 Factors Contributing to Technological Progress 6.1.2 Reinforcing Elements in Human Capital Formation 6.1.3 The Dynamics of Technology and Education 6.2 Variation in Technological Progress and Comparative Development 6.3 Variation in Human Capital and Comparative Development 6.3.1 The Emergence of Human Capital–Promoting Institutions 6.3.2 Globalization and Divergence 6.4 Persistence of Deeply Rooted Biogeographical Factors 6.4.1 The Neolithic Revolution and Comparative Development 6.4.2 The Out-of-Africa Hypothesis and Comparative Development 6.5 Multiple Growth Regimes and Convergence Clubs 6.6 Concluding Remarks CHAPTER Human Evolution and the Process of Development 7.1 Natural Selection and the Origins of Economic Growth 7.2 Primary Ingredients 7.2.1 The Darwinian Elements 7.2.2 The Malthusian Components 7.2.3 Determinants of Technological Progress and Human Capital Formation 7.2.4 The Trigger of the Demographic Transition 7.3 The Basic Structure of the Model 7.3.1 Production of Final Output 7.3.2 Preferences and Budget Constraints 7.3.3 Production of Human Capital 7.3.4 Optimization 7.3.5 Distribution of Types and Human Capital Formation 7.3.6 Time Path of the Macroeconomic Variables 7.4 The Dynamical System 7.4.1 Conditional Dynamics of Technology and Education 7.4.2 Conditional Dynamics of Technology and Effective Resources 7.4.3 Conditional Steady-State Equilibria 7.4.4 Human Evolution and the Transition from Stagnation to Growth 7.5 Failed Take-off Attempts 7.6 Main Hypotheses and Their Empirical Assessment 7.7 Complementary Mechanisms 7.7.1 Evolution of Entrepreneurial Spirit and Economic Growth 7.7.2 Evolution of Life Expectancy and Economic Growth 7.8 Concluding Remarks 7.9 Appendix 7.9.1 Conditional Dynamics of Technology and Education 7.9.2 Conditional Dynamics of Technology and Effective Resources CHAPTER Concluding Remarks References Name Index Subject Index ... Quantity CHAPTER Unified Growth Theory 5.1 The Fundamental Challenge 5.2 Incompatibility of Non -Unified Growth Theories 5.2.1 The Malthusian Theory 5.2.2 Theories of Modern Economic Growth 5.3 Central... by Brian Snowdon (2008), “Towards a Unified Theory of Economic Growth. ” The theory was the subject of the author’s Kuznets Lecture titled Unified Growth Theory and Comparative Economic Development”... living standards have led to the development of a unified theory of economic growth that captures the growth process in its entirety Unified Growth Theory explores the fundamental factors that have