CONTENTS

1. Cover
2. Dedication
3. Title Page
4. Copyright
5. Preface
6. 1 Why, When, and How Did the World Become Rich?
1. What Is Economic Growth?
2. Measuring the Past
3. What Will You Learn from This Book?
4. What This Book Does Not Do
7. Part I Theories of How the World Became Rich
1. 2 Did Some Societies Win the Geography Lottery?
1. Geography and Modern Development
2. Mountains, Coasts, and Climate
3. Geography and Transport Infrastructure
4. Geography and Industrialization
5. Chapter Summary
2. 3 Is It All Just Institutions?
1. What Are Institutions?
2. Property Rights
3. The Legal System
4. Political Institutions
5. More Equal Rights for All
6. Institutions and the Commercial Revolution
7. Between the State and the Market: Guilds
8. Parliaments and Limited Government
9. War and State Finances
10. Chapter Summary
3. 4 Did Culture Make Some Rich and Others Poor?
1. What Is Culture and Why Does It Matter?
2. Can Culture Explain the European Take-off?
3. Does Religion Affect Economic Growth?
4. The Protestant Work Ethic and the “Spirit” of Capitalism
5. If Not a Work Ethic, Why Did Protestant Countries Grow
Faster?
6. The Reformation and Religion as a Source of Political
Legitimacy
7. Is Islam the Cause of Middle Eastern Economic Stagnation?
8. The Long-Term Persistence of Culture
9. The North–South Italy Divide
10. The Persistence of Trust Norms
11. Gender Norms
12. Chapter Summary
4. 5 Fewer Babies?
1. Malthusian Pressures
2. The Black Death
3. Household Formation and the European Marriage Pattern
4. Did the EMP Spur Economic Growth?
5. Reasons for Skepticism
6. Demographic Change and the Transition to Modern
Economic Growth
7. Chapter Summary
5. 6 Was It Just a Matter of Colonization and Exploitation?
1. How Did the Colonizers Benefit?
2. The Slave Trades
3. The Resource Grab
4. Some Silver Linings of Colonialism?
5. Public Goods and Education
6. Missionaries
 7. Chapter Summary
8. Part II Why Some Parts of the World Became Rich First, Why Other
Parts Followed, and Why Some Are Not There Yet
1. 7 Why Did Northwestern Europe Become Rich First?
1. How Geography Shaped Institutional Development
2. Why Was There No Medieval European Take-off?
3. Divergence within Europe Just before the Take-off
4. Parliaments and the Rise of Limited, Representative
Government
5. Chapter Summary
2. 8 Britain’s Industrial Revolution
1. A Consumer Revolution
2. Capitalist Agriculture
3. Do Political Institutions Explain Britain’s Industrialization?
4. Mercantilism and Empire
5. Does the Transatlantic Slave Trade Explain Britain’s
Industrialization?
6. Was It Cotton?
7. Was It Market Size?
8. How About State Capacity?
9. Maybe It Was Skilled Mechanical Workers?
10. An Innovative Economy
11. High Wages and Induced Innovation
12. An Enlightened Economy
13. Chapter Summary
3. 9 The Rise of the Modern Economy
1. The Fruits of Industrialization
2. The Second Industrial Revolution
3. The Demographic Transition
4. The Uneven Diffusion of Modern Economic Growth
5. How the US Became Rich
 6. The Soviet Detour
7. Chapter Summary
4. 10 Industrialization and the World It Created
1. Delayed Catch-up: The Shadow of Colonization (and Other
Factors)
2. How Japan Became Rich
3. How the East Asian Tigers Became Rich
4. How China Is Becoming Rich
5. Chapter Summary
5. 11 The World Is Rich
9. References
10. Index
11. End User License Agreement
List of Tables

1. Chapter 4
1. Table 4.1 Most populous cities in Western Eurasia, 800 CE
2. Chapter 5
1. Table 5.1 Black Death mortality by country
3. Chapter 6
1. Table 6.1 English crop yields, 18th century
4. Chapter 7
1. Table 7.1 British borrowing and interest rates, 1693–1739
5. Chapter 8
1. Table 8.1 Most populous English cities excluding London (with
populations of at least 10,0…
6. Chapter 9
1. Table 9.1 Major inventions of the Second Industrial Revolution
List of Illustrations

1. Chapter 1
1. Figure 1.1 Countries that were richer in 2018 (annual per capita
income) than the US in 190…
2. Figure 1.2 Countries that were richer in 2018 (annual per capita
income) than Great Britain…
3. Figure 1.3 People living in extreme poverty, 1820–2015
4. Figure 1.4 Year that per capita GDP exceeded $10 per day (2018
USD)
5. Figure 1.5 Yearly per capita income for selected regions, 1 CE–
present
6. Figure 1.6 US GDP per capita, 1720–2018 (2018 USD)
7. Figure 1.7 Ruggedness and income in African and non-African
countries
8. Figure 1.8 The reversal of fortunes within formerly colonized
nations, 1500–1995
2. Chapter 2
1. Figure 2.1 Coastlines of African countries
2. Figure 2.2 Africa’s “malaria belt”
3. Figure 2.3 Verticality and horizontality of the continents
4. Figure 2.4 Technology adoption levels in 1500 (% of frontier
technologies adopted)
5. Figure 2.5 Temperature deviations across Europe, 1100–1800
6. Figure 2.6 The Roman road network
7. Figure 2.7 The increase in turnpikes in England and Wales: 1680–
1830
8. Figure 2.8 Changes in US market access, 1870–90
9. Figure 2.9 Location of cities in England and France in the Roman
and medieval periods
 10. Figure 2.10 The price of energy in the early 1700s
3. Chapter 3
1. Figure 3.1 Rule of law vs. per capita GDP
2. Figure 3.2 Night lights on the Korean Peninsula
3. Figure 3.3 Rule of law index, 2017
4. Figure 3.4 The first(?) formal legal system: the Code of
Hammurabi
5. Figure 3.5 Legal origins throughout the world
6. Figure 3.6 Polity score, 2017
7. Figure 3.7 Democracy score, 2017
8. Figure 3.8 Parliamentary activity in Europe, 1100–1800
9. Figure 3.9 Tax revenues per capita for six European powers,
1500–1900
10. Figure 3.10 Interest rates in city-states and territorial states, 1200–
1800
4. Chapter 4
1. Figure 4.1 Subcultures of the US
2. Figure 4.2 Percentage Protestant, Catholic, and Muslim vs. per
capita GDP
3. Figure 4.3 Percentage of Protestants vs. school enrollment rate in
early 19th-century Pruss…
4. Figure 4.4 Ruler duration in Western Europe and the Islamic
world
5. Figure 4.5 The north–south Italy divide: cousin marriage, trust,
and judicial efficiency
6. Figure 4.6 The relationship between trust and per capita GDP
7. Figure 4.7 Traditional plow use, female labor force participation,
and female firm ownershi…
5. Chapter 5
1. Figure 5.1 Life expectancy around the world, 2015
 2. Figure 5.2 The Malthusian model
3. Figure 5.3 The Malthusian model: illustrating the effects of
reducing the birth rate
4. Figure 5.4 Black Death mortality rates (%) in 1347–52
5. Figure 5.5 Population and wages in England, 1209–1750
6. Figure 5.6 Fertility and female age of marriage in England,
1590s–1830s
6. Chapter 6
1. Figure 6.1 Countries colonized by Great Britain, France, Spain,
Portugal, the Netherlands, …
2. Figure 6.2 Number of slaves in the transatlantic slave trade by
carrier
3. Figure 6.3 Number of slaves taken in the slave trades
4. Figure 6.4 The relationship between slaves exported and
economic indicators
5. Figure 6.5 Africa’s ethnic boundaries prior to colonization
6. Figure 6.6 Settler mortality, institutions, and long-run
development
7. Figure 6.7 Agricultural investment in India
8. Figure 6.8 Ethnic partitioning and the “scramble for Africa”
9. Figure 6.9 The Indian railroad network, 1930
10. Figure 6.10 Modern literacy and proximity to Jesuit missions in
Argentina, Brazil, and Parag…
7. Chapter 7
1. Figure 7.1 The steppe and state formation in China and Europe
2. Figure 7.2 Real per capita GDP, 1450–1700, select countries
8. Chapter 8
1. Figure 8.1 GDP, GDP per capita, and population in
England/Britain, 1270–1870 (1700 = 100)
2. Figure 8.2 England and its largest cities, 1520–1801
 3. Figure 8.3 The spinning jenny
4. Figure 8.4 Arkwright’s water frame
5. Figure 8.5 Crompton’s spinning mule
6. Figure 8.6 Schematic of the Newcomen steam engine
7. Figure 8.7 The Watt steam engine
8. Figure 8.8 Number of letters in Voltaire’s correspondence in the
Republic of Letters…
9. Chapter 9
1. Figure 9.1 GDP per capita and real wages in England/Great
Britain, 1270–1870 (1700 = 100)
2. Figure 9.2 Fertility and mortality in England, 1541–1839
3. Figure 9.3 Children born per woman in Western Europe and the
US, 1800–2000
4. Figure 9.4 Human capital and the demographic transition in
England, 1730–1890
5. Figure 9.5 Shares of world industrial output, 1750–1938
6. Figure 9.6 US population and immigrant share, 1850–2010
10. Chapter 10
1. Figure 10.1 Per capita GDP in select Asian countries, 1960–2019
2. Figure 10.2 Percentage of Indians living in extreme poverty,
1977–2011
3. Figure 10.3 Per capita GDP in England/Great Britain and Japan,
1280–1850
4. Figure 10.4 Per capita GDP in South Korea and Nigeria, 1960–
2019
5. Figure 10.5 Per capita GDP in various parts of the world, 1960–
2019
6. Figure 10.6 Chinese per capita GDP, 1960–2019
Dedication
Mark: For Desiree.
Jared: To my father, Thom, and the memory of my mother, Linda.
How the World Became Rich
The Historical Origins of Economic Growth
Mark Koyama
Jared Rubin

polity
Copyright © Mark Koyama and Jared Rubin 2022
The right of Mark Koyama and Jared Rubin to be identified as Author of this Work has been asserted
in accordance with the UK Copyright, Designs and Patents Act 1988.
First published in 2022 by Polity Press
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Preface
The world is rich, although it may not always seem like it. Poverty is still all
too prevalent. Approximately one billion people around the world barely
have enough to survive. The fate of millions of people living in poverty and
violence in places like Venezuela, Syria, Burundi, or the Democratic
Republic of Congo is deplorable. Even in the developed world, poverty is
far, far too common.
Yet, by historical standards, the world is very rich. Most people are much
better off than their ancestors were. In fact, most people living right now are
better off than almost every person who ever lived prior to two centuries ago
(save a very small fraction of elites who lived in luxury … or what was
considered luxury at the time). As the world has become richer in the 20th
and 21st centuries, more and more people have been lifted out of poverty.
And there is good reason to hope that, within our lifetimes, a significant
fraction of the remaining poverty around the world will be eliminated.
How did the world become rich? This is the question this book attempts to
answer. It is by no means easy to do so. In fact, there is almost certainly no
one correct answer! Yet, it remains perhaps the biggest question in the social
sciences. A proper understanding of why certain parts of the world have
become rich – and others have not (yet) – can help us tackle some of the
biggest problems facing us in the present. As you read this book, it will soon
become clear that there is no panacea to lift a country into riches. However,
there are many factors that historically tend to be present alongside sustained
economic growth. It is our goal to both highlight these factors and provide
insight into when they do and do not contribute to growth.
Throughout this book, we draw on an immense and fast-growing scholarship
in global economic history. The first half of our book is mostly meant to be
an overview of what we consider to be the leading theories for how the
world became rich. Our debts to this scholarship are evident throughout.
Naturally, as this book is addressed to a broad audience, we have not been
able to cite every piece of specialist research. We apologize in advance for
any omissions. We do, however, direct the reader towards the relevant
literature wherever possible.
Many people helped us along the way. We cannot possibly thank everyone
without this Preface taking up half the book. Sascha Becker, Desiree
Desierto, Anton Howes, Nathan Nunn, Tuan-Hwee Sng, Felipe Valencia
Caicedo, and John Wallis read parts (or all!) of the book. Their insightful
comments helped us significantly improve the manuscript. Our editor at
Polity, George Owers, gave excellent guidance at each step of the process.
Dan Bogart, Dave Donaldson, Erik Hornung, Noel Johnson, and Jonathan
Schulz shared their data files so that we could produce some of the figures in
this book. Mark thanks his many coauthors, from whom he has learned a
tremendous amount over the years. Jared will always be indebted to Avner
Greif, Timur Kuran, Larry Iannaccone, and Ran Abramitzky – the best
mentors, coauthors, and friends he could hope for.
Much of this book was written while we were quarantined on opposite coasts
of the US due to COVID-19. We would like to thank the people who helped
us get through that time – without them, this book would not be possible.
For Mark, these include his wife and frequent collaborator Desiree, his
parents Ninette and Noboru, and his brother Jonathan. For Jared, these
include his family – Thom, Debbie, and Tyler Rubin and Samantha and Ryan
Sully – and friends Rob Ainsley, Ted Chang, Doug Haney, Matt Menefee,
Travis Menefee, Scott Shumate, and JJ Singh. Most of all, Jared is indebted
to his amazing wife Tina and their two beautiful children, Nadia and Sasha.
1
Why, When, and How Did the World
Become Rich?
The world is rich. Certainly, some parts of the world are richer than others,
and many millions still live in poverty. But the world is richer than it has
ever been, and it continues to grow richer with each passing day.
Don’t believe us? Let’s compare income around the world today to some of
the wealthiest countries in the past. Figure 1.1 maps all of the countries with
greater per capita income in 2018 than the wealthiest country in the world in
1900: the United States. The average income in much of the world is now
greater than the average income in the world’s richest country just over a
century ago. The startling level of modern wealth comes into even clearer
focus when compared to the wealthiest country in 1800: Great Britain (see
Figure 1.2). Almost every nation in the world, with some exceptions, mostly
in sub-Saharan Africa, has a greater average income than the world’s leading
economy just two centuries ago.
Modern wealth of course extends well beyond average incomes. Even in
many of the poorest parts of the world, we have luxuries that our ancestors
could have only dreamed of. Forget about smartphones and flat-screen TVs
– even our richest ancestors would have been jealous of our indoor
plumbing, electricity, vaccinations, low child mortality, and long life
expectancy.
Figure 1.1 Countries that were richer in 2018 (annual per capita income)
than the US in 1900
Data source: Bolt and van Zanden (2020). Average income in the US in 1900 was $8,970 in
2011 USD.
Figure 1.2 Countries that were richer in 2018 (annual per capita income)
than Great Britain in 1800
Data source: Bolt and van Zanden (2020). Average income in Great Britain in 1800 was $3,731
in 2011 USD.

Think about it: would you trade your current life for the life of a wealthy
English baron in, say, 1200? Sure, you would have servants, and you’d have
the social and political benefits that come with being a member of the upper
crust. But you would also live in a drafty, uncomfortable castle, and you
would likely have multiple children die in infancy. And let’s hope you didn’t
get a bad bout of diarrhea (you probably wouldn’t survive). If you didn’t die
young on the battlefield, odds are you would die of some now-curable
disease such as dysentery (which killed English kings John [r. 1199–1216]
and Henry V [r. 1413–22]), smallpox (which killed French king Louis XV [r.
1715–74] and English queen Mary II [r. 1689–94]), or plague. Some of us
might trade our current lot for that of the baron, but many of us (including
the authors of this book) would not.
We are not heartless. There is still a tremendous amount of extreme poverty
in the world. We appreciate that the entire world is not actually “rich” by
current or historical standards. But the fact of the matter is that extreme
poverty is in rapid decline. This decline began two centuries ago and it has
accelerated in recent decades. The trends, summarized in Figure 1.3, are
striking. Just two centuries ago, 94% of the world lived on less than $2 a day
(in 2016 prices), and 84% lived on less than $1 a day. By 2015, less than
10% of the world lived on less than $1.90 a day, and that number continues
to decline. To be clear, 10% of the world is still a lot of people. But as the
world continues to become richer, that number will dwindle all the more.
It’s not just that there has been a reduction in absolute poverty as the world
has grown wealthier. More and more of the world has moved further from
the edge of subsistence in the last century. Take, for instance, the relatively
arbitrary milestone of $10 per day in 2018 USD. This is not much: $3,650
per year is hardly a king’s ransom. However, in most economies it is more
than enough to afford the basics of life (food, shelter, clothing, etc.). This is
even more true in relatively poor countries, where modest housing and food
can be had cheaply. Figure 1.4 shows when each country reached this
milestone. It represents a level of security unknown throughout most of
human history.
Figure 1.3 People living in extreme poverty, 1820–2015
Data source: Roser (2021c). For the sake of this figure, extreme poverty is defined as less than
$1.90 per day.

How did the world become rich? Why are some so rich and others so poor?
This book provides some answers to these questions. The answers are by no
means obvious, and they are the subject of much debate among economists,
historians, and other academics. This is reflective of just how important the
questions are. To alleviate poverty, we must understand wealth. We still do
not have all the answers, but enough strides have been made that we can
dedicate a book to answering the question: “What do we know about how
the world became rich?”
What Is Economic Growth?
Throughout most of world history, a vast majority of the world’s population
– well above 90% – was poor. Whether your ancestors are from China, India,
Africa, Europe, the Middle East, or elsewhere, the odds are very high that
most of them lived on little more than a few dollars a day. That is clearly no
longer the case. As shown in Figure 1.3, the proportion of the world’s
population living in extreme poverty has dropped precipitously in the last
two centuries. Most of the readers of this book likely live in some level of
comfort, and even our poorest readers would be the envy of their ancestors.
After all, they can read! How did the world get to this point?

Figure 1.4 Year that per capita GDP exceeded $10 per day (2018 USD)
Data source: Bolt and van Zanden (2020). Italy reached $10/day sporadically in the 15th
century.

On the surface, the answer to this question is simple: the last two centuries
have seen more economic growth than the rest of human history combined.
Economic growth refers to a sustained increase in economic prosperity as
measured by the total goods and services produced in the economy
(commonly referred to as gross domestic product, or GDP). We care about
economic growth not because it is an end in itself, but because it is the key
to alleviating the type of poverty experienced by almost everyone who lived
prior to 1800, and that still plagues way too large of a share of the world’s
population today.
Our focus on economic growth does not mean that we don’t value other
aspects of human development. Leisure time, long life, good health, literacy,
education, female empowerment, and rights and protections for the
vulnerable are all central to having a happy and fair society. That said, we
hope to convince you by the end of this book that all of these features are
made possible by economic growth. It is no coincidence that the last 200
years have seen dramatic strides in those very aspects of human
development. Even though there is clearly a long way to go to achieve the
type of society that most of us want, economic growth will be a key part of
the solution.
Economic growth on its own is not necessarily a panacea. It can be
accompanied by environmental degradation, increased inequality, or
worsening health outcomes. For instance, air quality declined and life
expectancy fell during the British Industrial Revolution. Today, issues such
as climate change and social polarization are among the most important
challenges that policy-makers face. The point that deserves emphasis here is
that economic growth makes available the resources and the new
technologies needed to tackle these important challenges. Of course,
humanity actually needs to employ these resources to address these
challenges. But in the absence of economic growth, we may not have such
an opportunity.
It is a mistake to think that we necessarily have to choose between economic
growth and other values (such as preserving the environment). For example,
a more unstable climate poses potentially catastrophic risks to our society.
Yet, we’ve seen in recent years that measures to reduce carbon emissions can
be accompanied by economic growth. The UK, for example, saw carbon
emissions fall by 38% between 1990 and 2017, from 600 million tonnes to
367 million tonnes (Hausfather, 2019). Meanwhile, total GDP (adjusted for
inflation) increased by over 60% in the same period.
Nor do we necessarily have to choose between economic growth and a fairer
society. In fact, a lack of economic growth has serious moral downsides.
Historically, it is in stagnant or declining economies that one observes the
worst episodes of violence, intolerance, and political polarization. On the
other hand, social mobility and greater equality of opportunity are much
more likely in an economy that is growing. As Friedman (2005, p. 86) puts
it, stagnant economies “do not breed support for economic mobility, or for
openness of opportunity more generally.”
So, how has the world economy grown over time? Figure 1.5 gives some
rough estimates of per capita GDP in the world’s most populous regions
since the birth of Christ. While these numbers are admittedly speculative –
and likely more volatile prior to the 18th century than the figure suggests –
the pattern is clear (and uncontroversial). Prior to the 19th century, the
wealthiest region in the world never reached more than $4 a day average (in
2011 USD). Throughout most of world history, $2–3 a day was the norm.
Yes, there were fabulously wealthy people, and these societies produced
some of the greatest art, architecture, and literature the world has known
(pursuits not generally associated with people on the brink of starvation).
These artists and authors are the people from the past you may be the most
familiar with, since they are the ones who generally fill our history books.
But this was not the lot of almost the entirety of humanity prior to the 19th
century. The fact is that most people who ever lived – at least, prior to the
20th century – lived in conditions very similar to those of the very poorest in
the world today. The economic growth of the last two centuries has
alleviated a vast majority of this poverty, although the job is clearly not
finished.
Figure 1.5 Yearly per capita income for selected regions, 1 CE–present
Data source: Bolt, Inklaar, de Jong, and van Zanden (2018).

To be clear, there were spurts of economic improvement here and there in

the past. Goldstone (2002) calls these “growth efflorescences.” One such
period of economic improvement occurred in classical Greece, where there
was both population growth and an increase in living standards as measured
by the size and quality of homes (Morris, 2005). Other episodes were due to
political pacification, such as the “Pax Islamica” over large parts of the
Middle East, North Africa, and the Iberian Peninsula in the centuries
following the spread of Islam. The “Islamic Peace” permitted higher levels
of trade and the spread of agricultural techniques and crops (Watson, 1983).
The “Pax Mongolica,” which allowed parts of Asia to thrive in the wake of
the Mongol devastations, had similar effects.
Another cause of temporary economic improvement was widespread death
through disease. While plagues were undoubtedly awful for the people who
lived through them – in the 14th century, the Black Death killed between a
third and a half of Europe’s population and probably a similar amount in the
Middle East – they did mean that there were fewer mouths to feed. Per
capita income tended to rise for at least a few generations in the wake of
these events. The most important cause of economic improvement, however,
was technological change. New varieties of disease-resistant grains, new
agricultural techniques that improved soil quality or irrigation, and
improvements to the plow are all examples of new technologies that allowed
more people to be fed with less labor. Yet, prior to the 18th century, all spurts
of economic improvement were temporary.
What matters in the long run is whether growth is sustained. Sustained
economic growth refers to the continuous positive growth rates that have
been experienced by countries like the US and the UK since the middle of
the 19th century. What is unique about developed countries today is not that
they have experienced a rapid acceleration of economic growth (Hausmann,
Pritchett, and Rodrik, 2005). Many countries that are poor today have
experienced temporary growth accelerations in the past as well. What
distinguishes rich countries is that they have not experienced growth
reversals. For instance, US GDP has grown fairly constantly since 1870
(Figure 1.6). Even the Great Depression – the one shock that does register in
Figure 1.6 – only had a temporary impact on economic growth. The point is
that prior to the first few decades of the 19th century, the continuous
economic growth experienced by the UK, the US, and other developed
economies in the past two centuries was all but unheard of. What was more
common was periods of growth offset by periods of contraction, like that
experienced by Venezuela between 2011 and 2021. Broadberry and Wallis
(2017) call this “shrinkage”. From this perspective, the main difference
between rich and poor countries is not that rich countries grow fast during
their periods of growth. Rich countries are those that have experienced fewer
periods in which the economy has gotten smaller.
Figure 1.6 US GDP per capita, 1720–2018 (2018 USD)
Data source: Bolt and van Zanden (2020).

Sustained economic growth has been accompanied by a dramatic

reorganization of society and production. This is what we refer to as
economic development. By this we mean a fundamental and transformative
restructuring of the economy associated with urbanization and the growth of
non-agricultural sectors of the economy such as manufacturing and the
service sector. This process of development was also associated with the
emergence of new ways of organizing economic activity: factories,
corporations, and stock markets. In contrast, before 1800, the majority of the
population lived in the countryside and worked on the land. Sure, there was
some variation in urbanization and the prominence of manufacturing or
service sectors. In Italy between 0 and 200 CE, urbanization may have been
as high as 30% (Wilson, 2011). Iron production soared in Song China.
Commerce and long-distance trade were important parts of the economy of
late medieval Venice, Bruges, and Antwerp. Nonetheless, the structure of all
of these societies was vastly simpler than that of almost any modern
economy.
In the developed world, the structure of the economy is different.
Importantly, agriculture has shrunk both as a proportion of the total economy
and, even more dramatically, as a source of employment. Today, only 1.3%
of the labor force works on the farm in the US. In the UK, the number is
smaller still (just 1%). Alongside this structural shift, there has been a
transformation in organizational complexity. This is most notably seen in the
rise of long-lived organizations independent of the state such as
corporations. These are all hallmarks of a developed economy.
Measuring the Past
You might wonder: how do we know how poor people were in the past? No
country had an office of national statistics collecting information and
compiling GDP estimates until the mid-20th century. Instead, social
scientists and historians have had to reconstruct the past. The first exercise
of this kind was the pioneering work of Angus Maddison. He spent decades
creating high-quality estimates of per capita GDP back to 1820 (Maddison,
1983, 1991, 2001). Maddison also produced a set of highly influential
estimates for earlier periods, including estimates of per capita income at the
regional level for the Roman Empire (Maddison, 2007). But these estimates
were of much more questionable veracity. More recent work, including the
Maddison project (Bolt and van Zanden, 2020) and the work of numerous
scholars such as van Zanden and van Leeuwen (2012), Fouquet and
Broadberry (2015), Broadberry, Guan, and Li (2018), and Palma and Reis
(2019), has produced updated estimates of per capita GDP that are on a
much firmer footing.
But GDP estimates are far from the only source of information we have on
past economies. Since the 19th century, economic historians have been
collecting information on wages and prices in order to produce estimates of
how much an unskilled worker would have been able to purchase in the past.
Owing to the work of Robert Allen, Jean-Pascal Bassino, Greg Clark,
Charles Feinstein, Peter Lindert, Debin Ma, Jeffrey Williamson, and others,
there now exist comprehensive estimates of the purchasing power of workers
for a host of European and Asian cities. Allen’s method is based on the
construction of a consumption basket for a representative worker. These
baskets are constructed by consulting numerous diaries and the budgets of
poor houses and orphanages. A benefit of constructing consumption baskets
is that it allows us to compare living standards across time and space, while
remaining cognizant that people’s preferences were different in different
regions at different times. Whereas rice would have made up a large portion
of the East Asian diet, grains or bread would take its place in Western
Europe.
There are other measures we can use to assess living standards in the past.
One common measure is height. Economic historians such as Jorg Baten,
Robert Floud, Robert Fogel, and Richard Steckel have put together estimates
of heights for many countries across many centuries (for an overview, see
Steckel, 2009). Height is determined by several factors, including genetic
endowments. Height is also influenced by in vitro conditions and the
nutrition available to the mother during pregnancy and as a child. We
observe a strong positive relationship between gains in height and per capita
GDP in the past 200 years. People in the past were short. The mean height of
an 18 year old in the English army between 1763 and 1767 was 160.76 cm
(around 5’3”) (Floud, Fogel, Harris, and Hong, 2011, p. 27). The increase in
average height partly reflects the improvements in nutritional standards
achieved since the onset of modern economic growth.
A final measure of the standard of living is life expectancy. Modern
economic growth is associated with large increases in life expectancy
(Pritchett and Summers, 1996; Fogel, 2004; Acemoglu and Johnson, 2007).
This matters for two reasons. First, increased life expectancy represents a
significant component of the additional welfare brought about by economic
growth (Becker, Philipson, and Soares, 2005). Second, increased life
expectancy is a possible cause of economic development itself. An increase
in life expectancy increases the value of investment in human capital
(Cervellati and Sunde, 2005), the term economists use to encompass
education and other investments in an individual’s productive capacity.
The answer to the question “How did the world become rich?” must explain
where, when, and how human societies were able to achieve sustained
economic growth. The where and the when we know the answer to:
northwestern Europe and North America, in the early to mid-19th century.
All of the metrics we discussed above agree on this point. It is the third
question – how did the escape from stagnation happen – that is so vexing.
Understanding the origins of wealth is one of the most important pursuits of
the social sciences, and for this reason it has been the center of much debate.
The purpose of this book is to present and distill this debate. Ultimately, any
credible hypothesis must be able to account for a number of facts. First,
modern, sustained economic growth is the result of sustained technological
innovation. Britain in the late 18th century experienced such a spate of
innovations during the period known as the Industrial Revolution. Initially,
economic growth was slow to follow. But unlike earlier episodes of
economic growth, it did not peter out. By the mid-19th century, the rate of
both innovation and economic growth accelerated as industrialization and
structural economic change spread to other parts of the world. Why did this
process first take hold in Britain? Why in the 18th century? Why not in some
other part of the world? Second, Europe was an economic, technological,
and cultural backwater around 1000 CE. What changed in that continent that
allowed it to pull ahead of China, India, and the Middle East, all of which at
one point had societies well ahead of even the most advanced societies in
Western Europe?
What Will You Learn from This Book?
The goal of this book is to bring together the many social scientific theories
on the origins of modern, sustained economic growth. This is a big issue
with important implications, and unsurprisingly it has been the focus of
many great minds. Almost all of these theories focus on one aspect of the
origins of growth, such as geography, culture, institutions, colonialism, or
demography. By construction, these arguments tend to ignore each other. We
hardly fault the authors of the arguments for this. Building and substantiating
a theory can take hundreds of pages. Delving into other, far-removed causes
of long-run growth can make for a tough read. Most researchers understand
this, and they understand the limits of their explanations. Many a successful
career has been made by exploring just one aspect of the origins of modern
wealth.
Yet, the emphasis on specific theories of “how the world became rich” has
left two gaps in our knowledge. This book hopes to fill these. First, no
existing work summarizes all of the advances that have been made by social
scientists in the last few decades in a dispassionate, objective fashion. While
we do have opinions on what we view as the most convincing hypotheses
regarding the origins of sustained economic growth – we have both written
on this topic in our own academic work – the goal of this book is not to
privilege our preferred theories at the expense of others. The first half of this
book simply presents, as objectively as possible, the major hypotheses and
debates on the origins of sustained economic growth. If it were not for our
book, a reader who wants to get an idea of the current state of the literature
would have to read countless books and articles, each putting forth their own
hypotheses. This is still a useful exercise, as there is much nuance that we
will have to skip over. But presumably most of our readers have lives outside
of reading academic tracts. If you want to get an idea of where the debates
stand, we’ve done the time-consuming part for you.
The first half of the book classifies and surveys the major strands of
literature related to the origins of sustained economic growth: geography,
politics, institutions, markets and states, culture, human capital, demography,
and colonization. Many explanations fall into multiple categories. Likewise,
some are well suited for one time and place but not for others. For instance,
coal deposits likely played a role in Britain’s rise but not Japan’s, religion
may have played a role in the Middle East’s economic growth but not in
China’s, and so on. In some cases, factors that hamper economic growth
under some conditions favor it in others. Take, for instance, the ruggedness
of the African terrain. In general, ruggedness is bad for prosperity. Rugged
terrain is difficult to traverse (thus hampering trade) and difficult to farm.
However, in Africa, Nunn and Puga (2012) find that ruggedness had a
positive effect on income. This was because it mitigated the impact of the
slave trade: rugged terrain was more difficult for raiders to traverse and
easier for those pursued to hide within. Long-run economic growth, on
which the slave trade had such a large negative effect (a fact we will cover in
Chapter 6), was thus indirectly promoted (see Figure 1.7).
Most theories on the origins of economic growth are concerned with pushing
one side of the debate. As a result, less attention has been given to how the
various theories are connected. A phenomenon as important and widespread
as the origin of modern economic growth is almost certainly not
monocausal. For example, many theories attempt to account for the role that
institutions played in economic growth. Institutions are those legal, political,
and religious features of a society that determine the “rules of the game”
which dictate the costs and benefits of taking certain actions. Some
institutions are viewed as being good for economic growth, such as those
that protect property rights, encourage investment in public goods, and apply
laws equally to all people. Yet, where “good institutions” come from is a
difficult question to answer. Sometimes, they come from geographic
conditions. For instance, where geographic conditions were not suitable for
exploitation, colonial powers tended to invest in institutional development
that, perhaps for unintended reasons, had positive effects on long-run growth
(Acemoglu, Johnson, and Robinson, 2001, 2002). In fact, Acemoglu,
Johnson, and Robinson (2002) argue that this resulted in a “reversal of
fortunes”: those places that were flush with natural endowments at the end of
the medieval period were also the places that were most easily exploited. As
a result, those places tended to get worse (colonial) institutions, and are
largely poorer today. The reversal is seen in Figure 1.8, which plots
urbanization rates (an indicator of economic potential) against modern per
capita GDP. Past urbanization rates are negatively correlated with modern
income, while modern urbanization rates are positively correlated with
income. Geography alone cannot explain this pattern, although geography
may have worked through institutions to create the reversal of fortunes.
In other cases, institutions may operate through their impact on culture to
affect economic growth. For instance, in a study of the long-term
developments of trust, Nunn and Wantchekon (2011) find that places in
Africa that were more prone to slave raids in the past are less trusting in the
present day. It is understandable why people in the past who were subject to
slave raids would be mistrusting of others, even neighbors, who may have
wanted to enslave them. The fact that a culture of mistrust persists to the
present suggests that culture is “sticky,” and thus helps determine long-run
economic fortunes.
Throughout the book, we draw on the most up-to-date social scientific
research and data in the context of recent debates among economic
historians, development economists, political scientists, and historical
sociologists. One important development in the past twenty years is that
discussions of the origins of economic growth have gone global. It is no
longer sufficient to narrow one’s attention to Great Britain or Western
Europe. For instance, one of the biggest debates in the literature is on the
origins of the “Great Divergence” between Western Europe and China. The
term “Great Divergence” was made famous by Pomeranz (2000), who
argued that the divergence between China and the West happened relatively
late (after 1750) and was a result of the existence of coal reserves in England
and the opening up of the New World, which relieved population pressures
and provided new and abundant raw materials. This view has been subject to
much debate, with new data suggesting the divergence may have occurred
prior to industrialization (Allen, Bassino, Ma, Moll-Murata, and van Zanden,
2011; Brandt, Ma, and Rawski, 2014; Broadberry, Guan, and Li, 2018).
Figure 1.7 Ruggedness and income in African and non-African countries
Data sources: Nunn and Puga (2012) for ruggedness, Bolt and van Zanden (2020) for GDP per
capita.
Figure 1.8 The reversal of fortunes within formerly colonized nations,
1500–1995
Data sources: Acemoglu, Johnson, and Robinson (2002) for urbanization, Bolt and van Zanden
(2020) for GDP per capita.

In the final chapters, we assess the relative strengths and weaknesses of the
major arguments and lay out the ones we find the most convincing. Our
focus shifts to Britain, the home of the Industrial Revolution, and ultimately
the first country to achieve modern, sustained economic growth. We ask,
“What were the preconditions that made sustained economic growth possible
in northwestern Europe?” We then address the flip-side of this question:
“Why did sustained economic growth not first happen elsewhere?” Next we
delve into the Industrial Revolution itself, as well as its connection to
sustained economic growth. We explore what we find to be the most
convincing explanations of its causes, linking these back to the broader
sources of sustained, long-run economic growth.
The first set of explanations that we prefer – both for the onset of
industrialization and for modern economic growth – emphasize the link
between economic and political development. Such explanations touch on
topics like institutional change, the growth of state capacity, and the rule of
law. In our reading of the literature and of history, we find it difficult to tell a
compelling story of long-run economic growth while ignoring the role that
political institutions played in encouraging or (more often than not)
dampening economic growth.
The second set of explanations that we find convincing are those that
highlight the role of culture. To be clear, we do not mean the type of
Eurocentric explanations popular in the early 20th century that made claims
regarding the supremacy of some aspect of European culture. We mean
culture in the way cultural anthropologists use the term: those heuristics
employed by people to interpret the complex world around them (Cavalli-
Sforza and Feldman, 1981; Boyd and Richerson, 1985; Henrich, 2015).
Recent scholarship demonstrates that culture is amenable to serious social
scientific study. Several insights can be gleaned from this line of research.
First, cultural values can be extremely persistent (Guiso, Sapienza, and
Zingales, 2006; Nunn, 2012). Second, cultural values interact with
institutional development (Greif, 1994, 2006; Alesina and Giuliano, 2015;
Bisin and Verdier, 2017).
In the penultimate chapter, we consider the “Great Convergence” between
the many parts of the rest of the world and the West. One of the great stories
of the last half-century is the billions of people pulled out of abject poverty.
China has been a huge source of this economic progress, but so have many
parts of South Asia, Southeast Asia, and Latin America. As we write this
book, another half a billion or so people in India seem on the brink of
escaping absolute poverty. In fact, the last twenty years have been
characterized by faster economic growth in poor countries than in rich
countries (Patel, Sandefur, and Subramanian, 2021). The time horizon might
be a little longer for sub-Saharan Africa and the poorest countries in Latin
America and Central Asia, but there is reason to be optimistic that we will
experience a further dramatic eradication of poverty in those regions in our
lifetime. All of this would be impossible without economic growth.
Just because we find some explanations for how the world became rich more
compelling than others does not mean that the other theories have little
merit. In fact, we believe there are important insights in all of the theories
outlined in this book. In the end, we need to remember that an issue as wide-
ranging as “how the world became rich” almost certainly has many causes.
Intelligent people can and will disagree on what weight to put on each of
these causes. What matters most is understanding the conditions under
which certain causes are important and the conditions under which they are
not. It is our hope that this book will provide a better understanding of these
conditions.
What This Book Does Not Do
For all we are attempting to accomplish with this book, we want to be clear
about a few things we will not do. First, our goal is to present all of the
major arguments on “how the world got rich” in a fair-minded fashion. This
means that, when initially presenting the theories, we will do our best to not
let our own biases creep in. We certainly have views on the various issues
presented in the book, and we do think that some views are more convincing
than others. The later chapters of the book lay out the reasons we believe
some of the proposed causes in the literature have greater explanatory power
than others. However, we aim to give each of the main explanations a fair
shake and present them, to the best of our ability, the way that the authors of
the theories would want them presented.
This book is thematic and conceptual. We elucidate the major themes
running through the academic literature and contextualize them in a
digestible manner. As such, we won’t present a comprehensive economic
history of specific countries. Such histories can be extremely valuable. In
some cases, they shed light on important aspects of the origins of economic
growth. We pay particular attention to developments in Great Britain in the
18th and 19th centuries. But this is simply due to the fact that we are seeking
to understand the origins of modern, sustained growth, and Great Britain was
the locus of the first modern economy. We also pay attention to places that
failed to be the center of the first modern economy – despite a head start
relative to Western Europe – such as China and the Middle East. We do not
provide a deep dive into the specifics of the economic histories of these
regions. Instead, we selectively choose various aspects of their histories to
help substantiate theories espoused in the literature.
Finally, we do not spend much time discussing the drawbacks to economic
growth such as pollution, climate change, and the capacity to create deadly
weapons. We are by no means denying the importance of these topics, but
these issues are simply outside the scope of this book. We have written a
book on the origins of modern economic growth. While we believe
economic growth in general to be a good thing, the focus here is on what
caused economic growth, not its consequences.
Part I
Theories of How the World Became
Rich
2
Did Some Societies Win the Geography
Lottery?
Does geography determine the fate of nations? Is the key to unlocking riches
preordained by factors like climate, natural resources, soil quality, and
access to the ocean? Geographic explanations have long been a favorite of
thinkers looking for reasons why their society pulled ahead. According to the
Muslim Andalusian thinker Abū al-Qāsim Sā’id (1068): “The exceeding
distance [of Northern Europeans] from the sun thickens the air making their
dispositions cold, their natures rude, their skin color white and their hair
straight. Thus … dullness and ignorance overpower them” (quoted in
Chaney, 2008, p. 2). On the other hand, in Book XIV of The Spirit of the
Laws, the French philosopher Montesquieu made a similar argument but
drew an opposite conclusion:
People are … more vigorous in cold climates…. The inhabitants of
warm countries are, like old men, timorous; the people in cold countries
are, like young men, brave. If we reflect on the late wars … we shall
find that the northern people, transplanted into southern regions, did not
perform such exploits as their countrymen who, fighting in their own
climate, possessed their full vigor and courage. (Montesquieu,
1748/1989, p. 317)
Modern scholars have also argued that geography and climate play a crucial
role in explaining patterns of economic development. Perhaps the most well-
known insights are those of Diamond (1997), who argues that factors like
the relative length of continental axis, the disease environment, proximity to
the equator, and access to coasts and rivers had a tremendous influence on
long-run economic prosperity. We discuss Diamond’s influential hypothesis
in depth in this chapter.
But is geography fate? Are locations with “good” characteristics destined to
be more developed? Davis and Weinstein’s (2002) seminal study of Japanese
urban development in the aftermath of World War II provides evidence for
the importance of geographic fundamentals. The authors examined what
happened to the distribution of urban centers after the destruction of
Hiroshima and Nagasaki by the atomic bomb. They show that after
experiencing complete destruction, both Hiroshima and Nagasaki returned to
the same relative positions in Japan’s distribution of cities within twenty
years. This suggests that a major shock to the distribution of population was
insufficient to overcome the intrinsic geographic advantages of these two
locations. Whether such findings are generalizable is something we will
discuss throughout the book.
What about the Industrial Revolution? Britain’s position as a large island off
the coast of Europe, endowed with a moderate climate, numerous rivers, and
a long coastline, helped shape the formation of its political institutions.
Abundant coal resources played an important role in its early
industrialization. It is worth asking: could this be why Britain industrialized
first?
Geography and Modern Development
Geography matters for economic development today, especially in the
poorest parts of the world. For instance, many countries in sub-Saharan
Africa are landlocked, and most others have only a small amount of coast
(see Figure 2.1). Without coastlines, they are unable to directly ship goods to
other countries. They also have to rely on expensive and hard-to-maintain
road and rail networks which can easily be blocked or cut off by their
neighbors.
Figure 2.1 Coastlines of African countries
Coast length data from: CIA (2019).
Figure 2.2 Africa’s “malaria belt”
Data source: Hay, Guerra, Gething, Patil, Tatem, Noor, et al. (2009).
Another important geographic factor is disease burden. Countries in the
“malaria belt” in sub-Saharan Africa continue to be underdeveloped (see
Figure 2.2). Malaria has probably killed more human beings over the course
of human history than any other disease. But the burden of malaria is also
economic. All else being equal, countries where a high proportion of the
population are infected with malaria had growth rates that were around 1.3%
lower than other countries (Sachs and Malaney, 2002). They also have
higher infant mortality and lower investment in physical and human capital.
Other diseases are also endemic in sub-Saharan Africa. One particularly
potent disease is sleeping sickness, which the tsetse fly transmits via
parasites. The effects of the tsetse fly are not limited to humans. The same
parasite causes nagnana, which is deadly to livestock. Livestock played a
crucial role in agricultural development in other parts of the world. People in
regions affected by the tsetse fly were historically much less likely to
domesticate livestock. Alsan (2015) documents how in these parts of sub-
Saharan Africa, intensive agriculture was less likely to develop, the plow
was less likely to be employed, and large domesticated animals were rarer.
These patterns of economic underdevelopment also had political
consequences, as they made it less likely for centralized states to develop.
These examples point to the attractions and limitations of arguments based
on geography. On the one hand, geography-based arguments are simple and
geography has the advantage of being largely exogenous. This means that it
is not affected by other variables of interest. As such, we don’t have to worry
about geography being the result of other factors that are also important for
economic growth, such as culture or institutions. Hence, geographic
explanations can potentially provide a straightforward explanation of
economic growth and poverty.
The big problem with geographic explanations, however, is that geography
is largely unchanging. Geography is not completely static, of course. For
instance, fisheries can be over-fished, and this encourages societies to adapt
accordingly (Ostrom, 1990; Dalgaard, Knudsen, and Selaya, 2020). And
natural resources are generally not just there for the taking – finding them
requires exploration and the capacity to extract (David and Wright, 1997).
But geography is much less malleable than other societal features such as
demography, institutions, or culture. This can be a problem for explanations
linking geography to long-run economic growth, because many of the
differences in incomes that we observe across the world today have changed
dramatically over time. In 1750, the richest country in the world (per capita)
was probably the Dutch Republic. Yet, it was only at most four times richer
than the poorest countries in the world. Today the richest countries in the
world are between one hundred and two hundred times richer in terms of
measured GDP per capita. More perplexing still, geography has a difficult
time explaining economic reversals. As it is mostly fixed, it cannot easily
explain why the Middle East was much more developed in 1000 than
Western Europe yet by 1800 Western Europe was far ahead of the Middle
East.
Guns, Germs, and Steel
In his Pulitzer Prize-winning book Guns, Germs, and Steel, Diamond (1997)
asked why it was that Europeans were able to conquer the New World so
easily. How was it that they had not only superior weapons and technology
but also more deadly germs than the native inhabitants of the Americas? His
answer was geography. To explain why Eurasian societies were more
technologically advanced, he drew on the work of Crosby (1986), who
argued that the relative height and length of the Eurasian, African, and
American continents had a deep impact on long-run development. Vertically
aligned continents contain numerous microclimates, which limit the spread
of crops, domesticated animals, and people. After all, crops suitable for rain
forests are unlikely to grow in the savannah or mountains. So, the
domesticated plants and animals of Mesoamerica did not spread to Peru or
the Amazon basin. Perhaps more importantly, technology and knowledge
spread more easily horizontally than vertically, since climatic characteristics
vary less. The “verticality” of the Americas and Africa south of the Sahara
(see Figure 2.3) may have therefore imposed huge hurdles to long-run
economic growth.
Figure 2.3 Verticality and horizontality of the continents
Reproduced using map in Diamond (1997). Gall-Peters map projection.

This, according to Diamond, was why the Near East was the birthplace of
human civilization. It was in the Near East that wheat, barley, and the pea
were first cultivated. The rich fertile plains between the Tigris and Euphrates
rivers were surrounded on several sides by so-called “hilly flanks.” Goats
and sheep were first domesticated 11,000 years ago in the hills of northern
Syria and northern Mesopotamia. Pigs and cattle followed soon afterwards
and spread throughout the Fertile Crescent. In total, thirty-three of the
world’s fifty-six heaviest wild grasses originated in either Europe, the Near
East, or North Africa. The majority of these crops were first domesticated in
the Fertile Crescent. Moderate climatic differences between Europe and the
Middle East ensured that agricultural techniques could spread between the
two.
Of the fourteen species of large domesticable animals, only one, and perhaps
the least useful – the llama – originated in the New World. Nine of the
world’s fourteen large domesticable herbivores originated in Eurasia. This
left inhabitants of the New World at a decided economic disadvantage.
Livestock are a tremendous source of both animal power and protein. But
domesticated animals are also a source of epidemic disease. The absence of
large domesticable animals left New Worlders particularly vulnerable to new
diseases. Because interactions between humans and animals are a major
source of epidemic disease, human populations which have a long history of
exposure to these diseases are more likely to acquire immunity. This is why
contact with Europeans was so deadly for Native Americans. Recent
estimates suggest there was a 95–98% drop in the Native American
population between its pre-1492 peak and 1900 (Mann, 2005).
Figure 2.4 Technology adoption levels in 1500 (% of frontier technologies
adopted)
Data source: Pavlik and Young (2019).

Diamond’s arguments about the diffusion of technologies across regions

have received empirical support. Pavlik and Young (2019) find that
technologies moved more easily between east–west neighbors than between
north–south neighbors. This is plainly seen in Figure 2.4, which maps how
close to the technological frontier different parts of the world were in 1500.
On the eve of the European discovery of the Americas, the technology of the
Eurasian east–west axis was clearly more advanced than that of the
American north–south axis or that of the sub-Saharan Africa north–south
axis. These differences would only become exacerbated with the onset of
colonization (see Chapter 6).
Mountains, Coasts, and Climate
Markets are unlikely to exist where it is difficult to transport goods and
people. Geography is thus an important determinant of market size today
(Redding and Venables, 2004). It mattered even more in the pre-industrial
period. Prior to the spread of the railroad in the mid-19th century, water
transport was by far the most cost-effective way to transport goods from one
place to another. It was often twenty times cheaper to transport a good by sea
than by land. So, it is reasonable to suspect that access to navigable
waterways was historically an important component of economic growth.
Venice and the Low Countries provide instructive examples. Both were
among the centers of commerce in late medieval Europe. Neither were ideal
places to set up cities. Both were established on marshlands that required
heroic feats of hydraulic engineering just to be viable (and, for this reason,
both are in danger if sea levels rise too much in the 21st century). Why did
people not only inhabit these regions but thrive while doing so? Access to
water is one clear answer. The Low Countries have numerous ports that
spilled out into the lucrative North Sea trade. Venice is on the Adriatic Sea,
giving it prime access to the Mediterranean. But access to water is likely not
the only reason people settled there. Montesquieu speculated that trade first
developed in marginal lands where the land was unproductive and where
individuals only settled because they were fleeing violence and predation.
Indeed, it is these factors that are often emphasized in tales of the founding
of Venice.
Another important geographic factor is ruggedness – how mountainous a
particular territory is. Rugged terrain impedes trade and communication.
This barrier was especially severe in pre-industrial times prior to the
invention of the automobile, steam engine, and airplane. Japan, for example,
is highly mountainous. Only a tiny fraction of the Japanese islands are
suitable for rice cultivation or are possible locations for cities. Mountain
ranges form a spine running through the country. This very well may have
held Japan back. Yet, as we discussed in Chapter 1, although rugged terrain
is usually seen as a major impediment to economic development, Nunn and
Puga (2012) highlight the blessing of bad geography in sub-Saharan Africa.
Historically, rugged territories were less likely to suffer the predation of
slavers. Hence areas with “bad” geography in sub-Saharan Africa are richer
rather than poorer today.
The quotes cited at the beginning of the chapter from Abū al-Qāsim Sā’id
and Montesquieu argued that one reason why geography mattered was
climate. Climate, unlike other geographic characteristics, is not fixed,
however. For example, the climate of the Mediterranean was both warmer
and wetter around 0 CE. Solar activity was high and stable. Evidence from
tree rings and ice cores suggests that the 1st century CE was warmer than
even the last century and a half (since 1850) (Manning, 2013). Consequently,
the land available for agriculture expanded. Ancient historians like Harper
(2017) link this Roman Climatic Optimum to the rise of the Roman Empire.
Wheat agriculture is highly sensitive to temperature. Warm growing-season
temperatures are especially critical. The downside to higher temperatures is
aridity and the risk of drought. The Roman warm period, however, was also
wetter. This environment made it possible for Romans to expand the
cultivation of Mediterranean crops inland into mountainous terrain.
According to Harper (2017, p. 53) this warmth “was the enabling
background of the Roman miracle…. If we only count the marginal land
rendered susceptible to arable farming in Italy by higher temperatures, on the
most conservative estimates, it could account for more than all of the growth
achieved between Augustus and Marcus Aurelius” (that is, between c. 0 and
c. 150 CE).
The passing of the Roman Climatic Optimum was associated with political
crises. Periods of lower rainfall, especially in the 3rd century CE, were
associated with military mutinies and imperial assassinations (Christian and
Elbourne, 2018). Similarly, colder and more volatile weather together with
the spread of epidemic disease helped to account for the failed attempts to
rebuild the Roman Empire. Volcanic eruptions possibly led to what is known
as the “Year without Sun” (536 CE). The century that followed has been
called the Late Antique Little Ice Age. Although historians no longer use the
term “the Dark Ages” to describe the early Middle Ages, the phrase does
capture something vivid about how possibilities narrowed after 550 CE
(Ward-Perkins, 2005).
Climatic change also played a role in the revival of the European economy
after 1000. Cultivated land expanded. Vineyards proliferated in England.
Iceland and Greenland were settled by Vikings. In Chapter 3, we discuss the
period of economic expansion – known as the Commercial Revolution – that
occurred between 1000 and 1300, during a period of unusually warm
weather (Lamb, 1982). Institutional innovations were critical. But the
climate was an important enabling condition. Similarly, populations and
cities expanded in Southeast Asia and in North America in this period before
collapsing in the late 13th and 14th centuries (Richter 2011, pp. 11—36;
Reid 2015, pp. 50–6).
In the late 13th century, the climate began to become more unstable and
cooler. The 15th century was especially cold due to low levels of solar
activity. Although there were warmer conditions in the 16th century, the
climate worsened again in the 17th century. Consequently, the entire period
is often labeled the Little Ice Age. Figure 2.5 plots estimates of temperature
deviations from 1100 to 1800. The Little Ice Age was both colder and more
volatile.
Figure 2.5 Temperature deviations across Europe, 1100–1800
Data source: Anderson, Johnson, and Koyama (2017).

The downturn in the climate that occurred in the late Middle Ages had real
economic consequences. For one, it impacted city growth rates (Waldinger,
2019). Worsening climatic conditions generated political instability across
Eurasia (Parker, 2014). The climate downturn also made minority
communities like Jews more vulnerable to persecution. As entrenched
antisemitic attitudes were common across Europe, Jews were frequently
scapegoated for economic ills and political crises. Unusually cold weather
increased the probability that a city would persecute its Jewish community
by as much as 50% (Anderson, Johnson, and Koyama, 2017).
Colder weather associated with the Little Ice Age affected war and conflict
more generally. Using geo-coded battle locations, Iyigun, Nunn, and Qian
(2017) find that colder weather was associated with more conflict between
1400 and 1900. These effects were stronger in areas with worse-quality soil
and regions that were already cold in 1400. Nevertheless, despite colder
weather, it was in these centuries that the seeds of modern economic growth
were sown. This raises the question: how can geographic and climatic
constraints be overcome?
Geography and Transport Infrastructure
Can investment in transport infrastructure overcome the curse of geography?
It seems possible. The Trans-Siberian Railway brought harsh terrain in
contact with markets and goods to a degree previously unimaginable. But
can transport infrastructure fully overcome the curse of bad geography or
just ameliorate it?
Infrastructure projects can be financed by private individuals or by the state.
But why do some institutional arrangements facilitate private investment in
infrastructure while others deter it? Why do some states invest and others do
not? When are states even capable of undertaking such projects in the first
place? These questions suggest that overcoming “bad” geography may
require institutions capable of diverting resources to infrastructure. Although
we will return to this issue in Chapter 7, we outline here some of the ways
that investments in transport infrastructure affected historical economic
development.
The Roman Empire invested in a road system. By the reign of the Emperor
Trajan (r. 97–117 CE), the road network comprised 80,000 km (see Figure
2.6). It was complemented by massive inland waterways that crisscrossed
the empire and connected landlocked cities with the Roman lake that was the
Mediterranean Sea. The Roman road system was built for military reasons.
But once established, it played a crucial role in knitting the empire together
economically and culturally. The suppression of Mediterranean piracy and
the establishment of safe sea-lanes was also critical in lowering transport
costs, which enabled inter-regional trade and specialization. Archaeological
evidence attests to the fact that manufactured goods such as amphorae
(pottery) were mass produced and transported over long distances.
Figure 2.6 The Roman road network
Map provided by Erik Hornung from Flückiger, Hornung, Larch, Ludwig, and Mees
(forthcoming). Grey lines symbolize roads, solid black lines navigable river sections, and
dashed lines coastal shipping routes.

Following the conquest of the Mediterranean region, the Roman economy

experienced a period of economic growth driven by market expansion.
Adam Smith (1776/1976) observed that the greater the extent of the market,
the greater the scope for specialization and the division of labor. This
suggests that an increase in market size can itself be a source of productivity
improvements and economic growth. This type of growth is often called
Smithian growth. Over time, Smithian growth encourages capital
investment. Individuals invest in longer and more complex production
processes. This investment, in turn, increases the productivity of labor and
the returns to trade, thereby setting in motion a virtuous cycle of economic
development. Favorable geography or improvements in infrastructure can be
a source of Smithian growth. Smithian growth can be derailed by war or
natural disasters that upend markets and disrupt patterns of specialization. It
runs into limits and ultimately into diminishing returns in the absence of
sustained innovation.
In the case of Rome, the process of Smithian growth was aided by the
benign climatic and geopolitical conditions discussed above. Investment in
transport infrastructure, nonetheless, played a critical proximate role in
Roman economic growth. Studying the distribution of terra sigillata, a red-
gloss tableware made out of clay, Flückiger, Hornung, Larch, Ludwig, and
Mees (forthcoming) find evidence that the intensity of Roman trade in this
product reflected transportation costs. Places with lower transportation costs
due to Roman infrastructure had greater inter-regional specialization, while
better-connected areas traded more. As the Roman Empire declined, the road
network remained in place. Until the 18th century, there was little new
transport infrastructure. Flückiger et al. find that the effects of the Roman
transportation network outlived the Roman Empire and were associated with
much greater trade intensity up to the invention of the steam engine.
Transport infrastructure also mattered for Chinese economic development.
Economic growth in the Middle Kingdom was greatly aided by the creation
of the Grand Canal by the Sui (581–618 CE) and Tang (618–907 CE)
dynasties and improved by their successors. The Grand Canal, said to be 40
meters wide, connected the Yangzi to the Yellow River. Its construction
needed thousands of laborers and the vast expenditures involved caused the
collapse of the Sui. The canal transported grain to the capital city, Luoyang,
and played a critical role in supplying the army guarding the northern
frontier. In the Tang dynasty, 130,000 tons of grain were transported north
each year (Ball, 2017, p. 120).
Though the primary purposes of the Grand Canal were political and military,
its creation brought economic benefits. According to Scheidel (2019, p.
263), between the Yangzi and Yellow Rivers, “the Grand Canal and multiple
smaller rivers and feeder canals created … a huge fertile crescent united by
cheap and safe transport…. No inland waterway system in world history
approaches this one as a device for integrating large and productive spaces.”
As we discuss in Chapter 3, market integration in China was comparable to
that in many parts of Europe until the latter part of the 18th century. One
reason for this was the massive investments made by several dynasties in the
Grand Canal.
A final example of the importance of transport infrastructure comes from
industrializing Britain. Before 1700, Britain (like other pre-industrial
economies) was afflicted by extremely high transport costs. By 1870, this
situation had been transformed. As Dan Bogart and his collaborators
document (Bogart, 2014; Bogart, Alvarez-Palau, Dunn, Satchell, and Taylor,
2017; Bogart, Satchell, Alvarez-Palau, You, and Taylor, 2017), this
transformation was partly due to steam power and the introduction of the
railways. It was also due to investment in the road and canal network
beginning in the 18th century.
The story of these investments in transport infrastructure is partly
technological and partly institutional. The institutional part of the story will
be discussed in Chapter 3. Here, we focus on the consequences of these
improvements. Stagecoach speeds increased from 1.96 journey miles per
hour in 1700 to 7.96 journey miles per hour in 1820. This was due to
improvements in the road network, stagecoach design, and the number of
way-stations. By 1840, Britain had twice the road density of France or
Spain. Figure 2.7 depicts the expansion of the road network in England and
Wales. The greatest improvement in land transportation came with the
railway: rail travel in 1870 was ten times faster than coach travel had been in
1700. Goods, ideas, and people could move across Britain in a way and at a
speed that had previously been impossible.
Another major area of improvement in industrializing Britain was the canal
network. Waterborne transport was much more cost-efficient than road
transport. Canals played an important role in linking together Britain’s
growing industrial heartland in the northwest with coal.
This transportation revolution had a dramatic impact on the British economy.
Bogart, Satchell, Alvarez-Palau, You, and Taylor (2017) find that
improvements in turnpike roads and inland waterways played a key role in
driving population growth and structural change. Locations further away
from turnpikes and canals grew more slowly. They also remained more
agricultural than those closer to the improving transport network.
Figure 2.7 The increase in turnpikes in England and Wales: 1680–1830
Map provided by Dan Bogart from Bogart, Satchell, Alvarez-Palau, You, and Taylor (2017).
Lines represent turnpike roads in 1680 (panel a) and 1830 (panel b).

One of the challenges in measuring the benefits of infrastructure investment

is that beyond the direct effects of lowering transport costs, there are
numerous (potentially important) but difficult to measure indirect effects.
We can think about these improvements through the concept of market
access, which summarizes all the ways both goods and factor markets – that
is, markets for labor, land, and capital – change in response to a change in
transport technology or infrastructure.
In an influential book, Fogel (1964) argued that the benefits of the railroad to
American growth were modest because in its absence other transportation
techniques such as waterways and canals would have been used. However,
Donaldson and Hornbeck (2016) show that once the improvements to market
access are taken into account, the railroad did have a more sizable impact on
economic growth, especially during the rapid period of railroad expansion in
the late 19th century. This was most pronounced in the Western states, which
became more closely connected with the larger markets on the Eastern
seaboard (see Figure 2.8). Donaldson and Hornbeck find that removing all
railroads in 1890 would have decreased the value of agricultural land by
60.2%, which translates to 3.22% of GNP.
Figure 2.8 Changes in US market access, 1870–90
Data source: Donaldson and Hornbeck (2016).

Moreover, Hornbeck and Rotemberg (2021) show that railroad access

greatly increased US manufacturing output. They estimate that US aggregate
productivity would have been 25% lower in 1890 in the absence of railroads.
In the context of Industrial Revolution Britain, Bogart, Alvarez-Palau, Dunn,
Satchell, and Taylor (2017, p. 23) find that improved market access had a
direct effect on population growth. Had there been no improvements in
transportation, there would have been 25 percentage points less urban
growth between 1680 and 1831 and 97 percentage points less growth from
1831 to 1851. These are enormous numbers. They indicate just how
important transport improvements were for the growth of the British and US
economies.
Donaldson (2018) employed a similar methodology to examine the building
of railroads in India under the British Raj. Transport investments made it
possible to transport bulky goods such as wheat and rice over land as much
as twenty times faster than had been possible with pre-industrial
technologies. The railroad network thus brought regions of India out of near
autarky, integrating them with the rest of the country and the world.
Infrastructure investments can help overcome the “curse of geography.” But
they can also have unforeseeable, counter-productive effects in the long run.
For instance, prior investments in transport can lock countries into particular,
and potentially inefficient, economic configurations. A fascinating example
of such lock-in comes from the western part of the Roman Empire. Michaels
and Rauch (2018) contrast England with France. In France, Roman city
locations remained settled throughout the early Middle Ages. Michaels and
Rauch show that while this may have benefited French economic growth in
the early medieval period, it harmed it in the long run. Because French cities
were placed with access to Roman roads in mind, they were inferior from the
point of view of subsequent economic development, where water travel
dominated. In England, however, the urban network was reset following the
collapse of the Roman Empire. This allowed medieval English cities to
relocate along coasts and rivers that were more beneficial for economic
activity in subsequent centuries (see Figure 2.9).
Geography and Industrialization
This chapter opened with the question: is geography fate? We have shown
that geography is not fate, but there are important instances where it
undoubtedly matters for economic outcomes. The final question we address
in this chapter is: can geography help explain why and where the Industrial
Revolution took place? Can the logic of Diamond’s argument in Guns,
Germs, and Steel be used within Eurasia to explain why industrialization
first took off in Western Europe and not China, the Middle East, or
elsewhere?
Within Eurasia, it has been suggested that Europe’s geographic position
made it more likely to discover the Americas and benefit from Atlantic trade
(Fernández-Armesto, 2006). Within Europe itself, however, access to the
Atlantic
Figure 2.9 Location of cities in England and France in the Roman and
medieval periods
Data source: Michaels and Rauch (2018).

was a mixed blessing. Acemoglu, Johnson, and Robinson (2005b) studied

the impact of Atlantic trade on European economic development. They
found that the discovery of the Americas and the development of new trade
routes had varying effects on economic growth, depending on the society’s
political institutions. In other words, geography played a role in determining
economic outcomes via its effect on institutions. Where long-distance
commerce was already controlled by the crown, access to the Atlantic
strengthened royal power. Two prominent examples of this are Charles V
and Phillip II, who ruled Spain for most of the 16th century. Access to the
Atlantic – and all of the wealth flowing from South American mines –
allowed them to dispense with representative institutions. Thus, while Spain
was initially enriched by the Americas, the long-run impact on economic
growth was negative, since it resulted in more extractive institutions. In
contrast, where monarchs lacked the ability to control or monopolize long-
distance trade (such as in England or the Dutch Republic), the discovery of
the Americas strengthened the merchant class and enabled them to constrain
royal power. We discuss this point in more detail in Chapter 7.
Perhaps the most direct impact of geography on economic growth is through
the availability of natural resources. Nef (1932) demonstrated that 16th-
century England faced an energy crisis as the charcoal supplied by local
forests could not meet the demands of a growing urban population. Coal
relaxed this constraint. Sure, English coal had been there long before the
16th and 17th centuries. But the demand for it was not. Once the steam
engine was vastly improved in the late 18th century, cheap coal from the
north of England (see Figure 2.10) allowed the British economy to harness
vastly more energy than had previously been possible (Allen, 2009a, 2011b).
Figure 2.10 The price of energy in the early 1700s
Data source: Allen (2011b). (BTUs = British Thermal Units.)

Building on this argument, Wrigley (1989, 2010) argues that without coal
there would have been no Industrial Revolution. Specifically, he
distinguishes between an organic economy (in which energy is extracted
from human or animal muscle or from wood) from a mineral economy (in
which energy stored up over millions of years becomes available for human
use). Productivity is always bound to be low in an organic economy. Coal
permitted Britain to escape from the constraints of an organic economy.
Wrigley acknowledges that the presence of coal alone did not guarantee that
it would be exploited. But without coal, industrialization would have been
impossible.
In his now famous contribution to the Great Divergence debate, Pomeranz
(2000) argued that British industrialization relied crucially on the proximity
of coal deposits to the new industrial centers and on resources from the
Americas. Traditional forms of energy such as timber were land-intensive. In
comparison, coal yielded more power per unit of land. New crops from the
Americas, notably the potato, increased the productivity of land in
northwestern Europe. Natural resources shifted Britain and northwestern
Europe from a labor-intensive path of economic development into an
energy-intensive and innovative development path. For Pomeranz, access to
the New World (and slavery)
offered what an expanding home market could not have: ways in which
manufactured goods created without much use of British labour could
be turned into ever-increasing amounts of land-intensive food and fiber
(and later timber) at reasonable and even falling prices. Precious metals
enabled Europeans to trade with Asia. Without silver it is difficult to
imagine another European good being exported as much.
This argument has been challenged. After all, China had abundant coal
deposits. So did the Ruhr Valley in Germany. The question of whether they
were located close to industrial centers is perhaps the wrong one to ask. In
Britain, industrial towns grew where coal was plentiful and energy cheap. It
was also possible to transport coal cheaply by sea from Newcastle to fuel
London’s demand for energy.
Mokyr (1990) argues that coal was unlikely to have been decisive, for a
variety of reasons. First, the Industrial Revolution was broader than steam
power, and even steam power did not absolutely require coal. Water power
was an important substitute. Had coal been more expensive, innovators
would have had an incentive to economize on it and develop alternative
energy sources. The supply of coal was highly elastic (Clark and Jacks,
2007). This implies that coal production expanded as demand for coal
increased with industrialization. By this account, the expansion of coal
output could have occurred in earlier decades had there been demand. In
other words, had Britain had no coal, this would not have prevented
industrialization. Coal would simply have been imported from Ireland,
France, or elsewhere in Northern Europe. This would have been costly, but
the additional costs were unlikely to have been decisive for Britain’s
industrialization. This speaks against Pomeranz’s claim that the supply of
coal was a binding constraint for industrialization to take place.
Chapter Summary
One can hardly deny the power of geography in explaining many patterns in
the pre-industrial world. Geographic characteristics were critical in the
emergence of agricultural and urban life in the Fertile Crescent. Geographic
features such as access to rivers and coasts and high-quality agricultural land
also help explain many patterns of comparative development prior to
industrialization.
But this does not mean that geography can provide a full answer for the
puzzle of comparative economic development. Before 1800, better-endowed
lands were not much richer in per capita terms than were less well-endowed
lands. They just tended to be more densely populated. Moreover, while
geographic characteristics can explain much of the variation in the location
of economic activity, they do not provide the full story. Firms benefit from
being near each other. So do workers. Economies of scale and the network
effects associated with close proximity (known in economics as
agglomeration effects), rather than geographic fundamentals, often explain
why certain cities outperform others. Most importantly, geography on its
own cannot account for the timing of the Industrial Revolution, the onset of
modern, sustained economic growth in the 19th century, or the various
reversals of fortune that we observe in the historical record.
Where does this leave us? Is there a role for geography in explaining why
the world became rich? Hopefully, this chapter has convinced you that
geography has played an important role in determining certain outcomes that
differ between societies, but that it cannot explain everything. If it could
explain everything, our fate would have been written thousands of years ago
with little room for human agency. In the remaining chapters, we will show
that human actions have played a significant role in determining the
economic trajectories of societies. These decisions range from the most
intimate (how many babies to have) to the type of legal and political systems
societies have. Yet, even though human actions have played a key role in
determining the world’s economic distribution, geography likely played
some role in these decisions. To some degree, geography has helped shape
societies’ institutions (the subject of Chapter 3), culture (the subject of
Chapter 4), demography (the subject of Chapter 5), and colonization (the
subject of Chapter 6). We will keep these interactions in mind as we proceed
through the first half of the book.
3
Is It All Just Institutions?
In Afghanistan, justice is mostly provided at the tribal level. Whether you
win your case or not depends in part on its merit. But it also depends on who
you are, which tribe you belong to, and who is overseeing your case
(Murtazashvili, 2016). In the Ottoman Empire, a well-functioning court
system existed. But it was biased: it favored men, Muslims, and elites,
regardless of the merits of their cases (Kuran and Rubin, 2018). These
systems of justice differ considerably from those found in the wealthier parts
of the contemporary world. True, the rich can buy better lawyers, and justice
is hardly color-blind, especially in the US. But the fact is that the
disadvantaged can, and frequently do, win cases when the facts are in their
favor. The relative impartiality of courts, in turn, encourages economic
activity. When people know they have legal recourse should their partner
cheat them, they are more likely to engage in exchange. Might these
differences in legal systems have played some role in determining which
parts of the world have become rich?
Differences across societies are hardly relegated to the legal sphere. At a
higher level, differences in political systems can play an important role in
economic decision-making. Where autocrats rule, violence often follows. In
North Korea, those on the wrong side of the regime tend not to last long. In
Stalin’s Soviet Union, anyone remotely expected of having anti-regime
sentiments ended up in a gulag or executed (as well as many who had no
such sentiments).
Political systems affect more than just violence. They affect whether you
have to pay bribes to do business, whether you have the right to sell and use
your property as you please, and whether you have the freedom to move
when the economic opportunity presents itself. The degree to which a
society enables – or restricts – people in this fashion is of first-order
importance in determining its economic potential.
These political, legal, religious, and economic organizations are a society’s
institutions. In this chapter, we examine the literature on institutions. We
begin by explaining what institutions are and why they impact economic
development. We then show why different institutions in different parts of
the world have placed societies on different economic trajectories.
What Are Institutions?
Until recently, textbook accounts of economic growth focused on investment
in physical capital and technological change as the key determinants of
growth. Such an approach is natural for economists interested in creating
mathematical models of economic growth. However, it is of limited value in
understanding the historical origins of economic growth. There are simply
too many examples of societies not investing in capital or technology to boil
it down to investment decisions. This is as true of the past as it is today.
Investment is relatively sparse in places like Afghanistan, Haiti, and Niger.
The marginal return to capital in these countries is likely very high. Why,
then, do individuals in these societies forgo what is more or less a free
lunch? What are the constraints people face in these societies? And how do
these constraints evolve over time?
These questions were posed by North and Thomas (1973). They argued that
the factors on which economists focused – investment in capital machinery,
factories, and schooling – were not independent causes of economic growth.
They were economic growth. To understand the causes of growth, one has to
study the incentives that led individuals in some societies to build factories
and invest, to go to school, and to acquire new skills. One must also study
why individuals in other societies were not incentivized to do these things.
North and his co-authors called the aspects of society that formed these
incentives institutions and they proposed reorienting the study of economic
growth around the study of them.
For North, institutions are the rules of the game. For example, in a game of
football (soccer), the rules determine the nature of the game and thus
structure the incentives facing the players. If we want to explain the different
behavior of players in football compared to a game of rugby, the best
explanation may reside not in differences in the individuals playing the two
games but in the different rules, and hence incentives, they face.
North’s thinking about institutions evolved over the course of his career.
Initially, North and Thomas (1973) supposed that institutions had a tendency
to evolve towards efficiency. Over time, inefficient institutions would be
weeded out and more efficient institutions would be promoted in the same
manner as market competition weeds out less efficient firms in favor of their
more efficient competitors.
Later, North (1981) came to the view that there is no process analogous to
the competitive market process to “select” the most efficient institutions.
The incentives in the political sphere differ from those in the marketplace.
Hence, inefficient institutions can persist for decades or even centuries. Such
inefficient institutions can be a source of lasting poverty. They may even be
a leading cause of why some countries are rich and others are poor.
Building on North’s insights, Greif (2006) developed an alternative
definition of institutions. His framework incorporates the critical role
cultural beliefs play in enforcing, and indeed constituting, institutions. For
Greif, institutions are not only the “rules of the game,” but also comprise the
beliefs and social norms that uphold these rules. Beliefs and social norms,
like institutions, can be hard to change. This is true even when there are clear
economic benefits from doing so. One of Greif’s key insights is that cultural
beliefs and institutions can reinforce each other. When one strengthens the
other, both are all the harder to change. Greif proposes this as a key reason
why some economies fail to grow while others prosper. We discuss these
insights further in Chapter 4.
One key component of institutions is the degree to which they permit
economic freedom. The more economic freedom a society has, the more
individuals are free to allocate their resources as they see fit. Economic
freedom is closely associated with the rule of law. When a society follows
the rule of law, laws are applied equally and all types of rights are protected.
This of course includes economic rights. Economic freedom is strongly
correlated with per capita income (Gwartney, Lawson, and Holcombe, 1999;
Gwartney, Lawson, Hall, and Murphy, 2019). Rodrik, Subramanian, and
Trebbi (2004) show that raising the degree to which a society follows the
rule of law one standard deviation – roughly corresponding to the difference
in institutions between Bolivia and South Korea – is associated with a 6.4-
fold difference in per capita income (see Figure 3.1). Incidentally, this is
about the income gap between Bolivia and South Korea. This finding should
not be taken as gospel, however. There are major challenges in estimating
the importance of institutions when relying solely on variation across
countries. This is because countries differ across so many dimensions it is
hard to isolate the specific effects of institutional quality.
Figure 3.1 Rule of law vs. per capita GDP
Data sources: World Justice Project (2020) for rule of law, Bolt and van Zanden (2020) for per
capita GDP.

For this reason, one of the most persuasive examples illustrating the
importance of institutions is the comparison between North and South Korea
(Acemoglu, Johnson, and Robinson, 2005a). For centuries, North and South
Korea were part of a single country, with the same language, culture, and
religious traditions. To the extent that there were major regional differences,
the north of the country was more industrialized and developed. Then, in
1948, the Communists took over the North. Ever since the war that followed,
the economic story between the two nations has been one of divergence. The
contrast between the prosperity of the South and the poverty of the North
reveals the importance of their different institutions: market-based in the
South versus Communist in the North. These differences are immediately
visible in Figure 3.2, which is a photograph taken from space of the two
countries at night. Night lights are a measure of economic prosperity because
they reveal economic activity and electrification. One can clearly see the
South Korean border and its many economic hubs. North Korea is almost
entirely pitch black.
We rarely have examples as clean-cut as North and South Korea, however.
In their absence, institutional arguments can be difficult to test. One critique
is that “good institutions” is simply a label for all things a particular author
approves of (Clark, 2007, pp. 145–65). The problem is that a label of
approbation has little explanatory value. It cannot be operationalized or used
to discriminate between points of view.
There are two ways around this problem. One is that pioneered by Greif and
his co-authors. Greif developed carefully specified theoretical models of
how specific economic institutions functioned. These models have two
virtues: the assumptions are transparent and they are capable of generating
novel predictions.
Figure 3.2 Night lights on the Korean Peninsula
Source: https://visibleearth.nasa.gov/view.php?id=83182.

Another approach relies on studying so-called “natural experiments.” The

comparison of North and South Korea made by Acemoglu, Johnson, and
Robinson (2005a) is one such natural experiment. In comparing the two
Koreas, factors like culture and history are held constant. Borders often
provide a nice way to test the effects of institutions. When borders change,
people are immediately subjected to a new institutional environment,
although nothing changes about their culture, history, or geography. Yet,
finding clean natural experiments is difficult, and there are many questions
we wish to answer for which no natural experiment exists.
Property Rights
One of the lessons from England’s political and economic rise is that well-
functioning property rights matter for economic success. Property rights are
perhaps the most basic institution studied by economists. Besley and Ghatak
(2010, p. 4526) define a property right as an owner’s right to use a good or
asset (for either consumption or production), to transfer it, or to contract on
the basis of it (for example, by mortgaging it). But why do property rights
matter? Why have they intrigued economists for so long? What do they have
to do with institutions?
Secure property rights ensure that individuals earn a return on their
investments. One widely used measure of property rights is the World Bank
Governance Indicators (WBGI). These measure a range of factors relating to
rule of law, government quality, and regulation. We briefly discussed the rule
of law earlier as being key to economic freedom. According to the WBGI,
the rule of law index reflects the “perceptions of the extent to which agents
have confidence in and abide by the rules of society, and in particular the
quality of contract enforcement, property rights, the police, and the courts, as
well as the likelihood of crime and violence” (Kaufmann, Kraay, and
Mastruzzi, 2011). Figure 3.3 shows the variations in rule of law throughout
the world in 2017. Another widely used measure for security of property is
expropriation risk. This is the risk that the state will deprive, expropriate,
nationalize, or confiscate the assets of private business, whether domestic or
foreign. Such confiscation can be disastrous for investment. Why would one
invest if doing so makes them a target for expropriation?
Restrictions on property rights were a dominant feature of pre-modern
European property law. Feudal property rights, in particular, were often
impediments to developing markets for land or encouraging investment in
infrastructure. In England, for example, the law of entails meant that land
had to be passed undivided to one male heir. The purpose of this law was to
preserve the land of the nobility, who were expected to possess enough land
to supply a mounted warrior to serve the king in times of war. The law
traded off military security for economic productivity. Land is more valuable
when users have the right to sell or divide it. Over the centuries, the military
justification for the law of entails diminished, as professional armies
replaced knightly hosts. Yet, the law remained the writ of land.
Figure 3.3 Rule of law index, 2017
Data source: Kaufmann, Kraay, and Mastruzzi (2011). Data available at
https://info.worldbank.org/governance/wgi/#home.

For property to be put to its most efficient use, there must also be a way of
rearranging property rights when it is productive to do so. Different systems
of property rights have different consequences for economic development. In
17th- and 18th-century England, property rights had to be reordered in order
to make the best use of new investment opportunities in areas such as mining
(Bogart and Richardson, 2011). For this to happen, there needs to be a way
that property rights can be renegotiated and reallocated if it is beneficial to
do so. This was made possible only when political institutions also changed.
As Cox (2016) points out, the crucial advantage that England had by the
18th century was that in Parliament it had a centralized forum where these
claims could be adjudicated. Local veto players could be, and often were,
overruled if the gains to reallocating property rights were large enough. The
problem facing rulers who were not constrained by institutions like
Parliament is that they could not credibly commit to not using these powers
to reallocate property rights in their favor. In France, the monarchy could not
be trusted to refrain from abusing this power. Landlords therefore insisted on
retaining local veto power on any adjustments in land use. All of this
suggests that property rights cannot be viewed in isolation from the legal
system as a whole.
Van Bavel, Buringh, and Dijkman (2018) present a fascinating case of weak
property rights discouraging investment. They study investments in the
major labor-saving capital goods of the late medieval period: water mills,
windmills, and cranes. These were expensive to build, but offered an
immense return on investment. Because of their cost, they were precisely the
type of capital goods that were only likely to be invested in when property
rights were secure. Van Bavel, Buringh, and Dijkman find that, over the
period 900–1600, their use increased over time in Western Europe but
diminished over time in the Middle East. The decline in Middle Eastern
capital investments coincided precisely with a decline in the security of
property rights.
It is not just the security of property rights that matters. How rights are
assigned is also crucial. In particular, overlapping property rights, in which
multiple parties are able to claim rights to the same good, generate holdup
problems and impede investment (Lamoreaux, 2011). A holdup problem
occurs when one party has an incentive to strategically delay or impede the
investment in order to extract a larger share of the resulting profits
(Williamson, 1985). For example, in France prior to the Revolution,
complex and rigid overlapping property rights prevented landowners from
investing in irrigation or in drainage projects (Rosenthal, 1992). If anything,
these property rights were “too secure.”
It is also possible for property rights to sow the seeds of an economy’s
demise. Van Bavel (2016) shows that the rise and fall of Abbasid Iraq (750–
1258), medieval northern Italy, and the early modern Dutch Republic all
followed a similar pattern. In each case, there was a feedback loop in which
secure property rights in factor markets allowed underutilized resources to
become more productively used. This led to specialization and division of
labor, which led to economic growth, which resulted in greater use of factor
markets, and so on. However, with factor market growth came political and
economic inequality. Those who owned the factors of production gained
more political power. They used it to dominate the markets for land, labor,
and capital, as well as financial markets, making these markets less free in
the process. These vested interests squeezed the little remaining productive
power out of the economy, leaving little for the rest of society.
The Legal System
The legal system is the meta-institution that spells out the formal rules of the
game and the manner in which they are enforced. Legal systems vary
tremendously across societies. Many small-scale societies rely on informal
and decentralized legal systems based around ostracism and feuding. These
legal systems differ considerably from those of large-scale agrarian states, let
alone highly commercialized, market-oriented societies.
Small-scale societies rely on repeated interactions and social sanctions to
enforce order. In small-scale, closely knit societies, these mechanisms are
powerful in enforcing cooperation. Individuals in these societies expect to
interact with each other again in the future. They thus have an incentive to
develop a reputation for fair dealing. It is the threat of missing out on future
rewards that induces them to refrain from violence or theft in the present
(Kandori, 1992; Dixit, 2004).
However, mechanisms dependent on the logic of repeated dealings may be
unable to support cooperation in large-scale societies, where people are
unlikely to interact consistently. As societies become more complex,
therefore, formal legal systems tend to emerge. A formal legal system
prescribes rules that outline licit and illicit behavior and specify punishments
for those who disobey the law. The first such legal system that we have a
record of is the Code of Hammurabi, dated to 1754 BCE (see Figure 3.4).
Legal systems structure the incentives that individuals face. For example, the
Code of Hammurabi prescribed numerous harsh punishments. A son who hit
his father was to have his hands chopped off, while lovers who conspired to
murder a husband were to be impaled. The Code of Hammurabi specified
harsher punishment for lower-status individuals and for crimes directed
against one’s social betters. For instance, “if a man knocks out the teeth of
his equal, his teeth shall be knocked out,” while knocking out the teeth of a
social inferior only resulted in a fine. The Code of Hammurabi thus
reinforced existing power structures and a hierarchical social system.
Figure 3.4 The first(?) formal legal system: the Code of Hammurabi
Source: https://upload.wikimedia.org/wikipedia/commons/0/06/Prologue_code_Lipit-
Ishtar_AO_5473.jpg.

In other words, the Code of Hammurabi was a set of laws based on identity
rules rather than impersonal rules (Johnson and Koyama, 2019). The kind of
punishment varied according to the social identity of the parties involved.
Such identity rules tend to entrench the power of existing elites. There are
many historical examples of identity rules. Medieval European Jews faced
their own set of laws, including what they could wear and where they could
live. Many medieval European cities had sumptuary laws, specifying which
clothes individuals could wear based on their social class (Desierto and
Koyama, 2020).
In contrast, a society structured around impersonal rules is committed to
treating individuals the same regardless of their social identity. Impersonal
rules are often more consistent with the protection of property than are
identity rules. They enable impersonal rather than personal exchange and
hence are more likely to promote investment and economic growth.
The distinction between identity rules and impersonal rules is one of the key
differences between rule by law and the rule of law. In a “rule by law”
society, laws exist but are not necessarily applied to everyone. The ruling
elites tend to be above the law. In these societies, the dictum “rules for thee
but not for me” applies. As we noted earlier in this chapter, moving away
from such a society to one in which rulers are constrained by the law was
key to economic growth (Greif and Rubin, 2021).
Societies that have a strong rule of law tend to be richer (see Figure 3.1).
What is it about the rule of law that leads to positive economic outcomes?
Fuller (1969) argued that the rule of law requires (1) a concept of legal
equality – that is, all individuals from the ruler downwards are equally
subject to the law; (2) that laws should be prospective, open, and clear; (3)
that laws should be stable over time; (4) that the making of laws should be
open and guided by impersonal rules; (5) that the judiciary should be
politically independent; (6) that legal institutions such as courts should be
accessible to all; and (7) that rules should be general and apply uniformly.
These are all conditions that decrease uncertainty, and hence increase
investment and incentivize exchange.
Importantly, the rule of law depends on a nexus of different institutions. It
depends on a political system that is bound by rules that constrain the power
of the executive. It also depends on a standardized legal system in which
individuals know what to expect and in which there are clearly defined
standards that cannot be subverted through corruption or patronage.
Many scholars have argued that the rule of law played a critical role in the
rise of Western Europe. It provided a check on the power of government,
guaranteed each individual their own private sphere of non-interference, and
offered a platform of institutional stability conducive to long-run economic
growth (Hayek, 1960; Cooter, 1997; Weingast, 1997). The idea is that rule of
law, rather than rule by men, provides the stability and certainty that enables
individuals to truck, barter, and exchange their way to prosperity (Dicey,
1908, pp. 198–9). The question is: how do societies develop impersonal
rules? Where does the rule of law come from?
In Law and Revolution, Harold Berman (1983) attributed particular
significance to the emergence of the Western legal tradition during the
Middle Ages. This legal tradition has its origins in ancient Rome. As the
Roman economy was commercialized and market-oriented, Roman legal
scholars developed a theory of contracts and property (Arruñada, 2016).
Roman law was largely lost in Western Europe following the collapse of the
Western Roman Empire. During this period, Germanic or customary legal
codes dominated. These laws were based on identity rules and better suited
to governing small-scale societies rather than providing a framework for
impersonal trade. Beginning in the 11th and 12th centuries, however, Roman
law was rediscovered and the principles underlying the Roman law of
contracts began to be studied by lawyers of canon law in universities like
that of Bologna (Fernández-Villaverde, 2022). While customary laws
remained in place for centuries, the principles of Roman law would
eventually form the basis for both the French and Germanic legal systems.
At roughly the same time, a different legal system was emerging when
Germanic and local legal systems were unified into common law during the
12th and 13th centuries. English common law was influenced by Roman
law, but only indirectly via canon law. Numerous scholars, including the
great legal scholars Pollack and Maitland (1895) and Dicey (1908), saw
English common law as it evolved in the Middle Ages as playing a critical
role in enshrining and protecting property rights. They reasoned that
common law provided a set of stable but adaptive principles that in later
centuries enabled more complex organizational forms to emerge.
Building on this tradition, La Porta, de Silanes, Shleifer, and Vishny (1998)
argued that the English common law tradition is associated with better
protection of property rights, less onerous regulations, and a more favorable
environment for markets than systems based on Roman Law (such as the
French or German legal systems). In particular, La Porta et al. argued that
protection for investors was systematically stronger in common law
countries. Common law countries tend to give both shareholders and
creditors the strongest rights, regardless of GDP. This is important for
financial development because it limits the extent to which corporate
insiders can expropriate investors. Other research has found that within a
country such as France, which had both civil and common law traditions
prior to the Revolution, there is little evidence that civil law was worse for
economic development (Le Bris, 2019). Particularly problematic for the
legal origins argument is the finding that financial development varies
greatly over time, and that in 1913 France’s stock market capitalization, as a
proportion of the economy, was almost twice that of the US (Rajan and
Zingales, 2003).
Nevertheless, the type of law that countries have is one of the important
relics of the colonial era. Countries that were colonized by Europeans –
which, as we will see in Chapter 6, was much of the world – tended to get
their legal institutions (see Figure 3.5). Some speculate that this is why
English colonies, steeped as they were in English common law, tended to do
better than other European colonies. Other scholarship suggests that what
matters is how different legal traditions were transplanted to the colonies
(Berkowitz, Pistor, and Richard, 2003). In particular, Oto-Peralías and
Romero-Ávila (2014) argue that whether or not the British introduced
common law to a colony hinged on initial levels of population density,
which determined how costly it would be to enforce a new legal code. We
leave the discussion of the long-run effects of colonization to Chapter 6.
Figure 3.5 Legal origins throughout the world
Data source: Shleifer, de Silanes, and Porta (2008).

What about other legal systems? Non-European systems of law dominated

much of the rest of the world in the pre-colonial period. How did they affect
economic growth? While there has been much less research undertaken in
the social sciences on this issue, Kuran (2011) has highlighted the role that
the rigidity of Islamic law played in Middle Eastern economies falling
behind those of Europe. We delve into this in more detail in Chapter 4, since
it is as much an issue of culture as it is of institutions.
Political Institutions
If institutions form the “rules of the game” that people play, one reason that
people around the world play by different rules is the political institutions of
their society. Political institutions shape how we act. For one, the state
generally has something close to a monopoly on violence. It can therefore
use force – or the threat of it – to incentivize people to act in certain ways.
The distribution of a society’s resources is also highly dependent on political
institutions. Resource distribution often reflects the desires of those with
political power as well as the desires of those who can keep them in power.
In a democracy, this might be “the people.” Elsewhere, this may be a select
group of warlords. Political institutions are also crucial for encouraging
economic activity. Institutions designed to protect rights, limit confiscation,
and encourage investment in public goods are more likely to incentivize
investment and economic exchange.
Political institutions vary widely. This variation is one of the leading causes
– and consequences – of differences in economic development. Social
scientists have come up with numerous ways to measure these institutions,
allowing us to compare them over space and time. One of the most widely
used metrics, the polity score index (Marshall and Elzinga-Marshall, 2017),
measures countries on a range from absolute autocracy to absolute
democracy (see Figure 3.6). These data track well with economic
development. Europe and North America have high scores and Africa and
the Middle East have low scores. This is also true of the democracy index
(see Figure 3.7). Of course, there are major outliers: India and Mongolia
score relatively well on these indices, despite not having close to the per
capita income of OECD countries. Moreover, these indices capture the
autocratic and democratic leanings of a society’s institutions. This is just one
aspect of how “good” or “bad” political institutions are.
Figure 3.6 Polity score, 2017
Data source: Marshall and Elzinga-Marshall (2017). Note: polity scores range from -10
(strongly autocratic) to 10 (strongly democratic).
Figure 3.7 Democracy score, 2017
Data source: Marshall and Elzinga-Marshall (2017). Note: democracy scores range from 0 to
10, with higher scores indicating more competitiveness in executive recruitment, more
openness of executive recruitment, more constraint on the chief executive, and more
competitiveness of political participation.

But does the type of government one lives under matter for economic
growth? If so, why does it matter? What can governments do – or not do – to
facilitate growth?
Institutional economists argue that political institutions matter for growth
because they ultimately shape the incentives that exist in society. In an
unconstrained autocracy, the rule of law cannot function because it does not
apply to the ruler, who can use the legal system to favor his cronies and
harm his opponents. Autocratic regimes are often more corrupt than non-
autocratic regimes. Liberal democracies – those which secure basic rights
and liberties for their citizens – tend to have less corruption. Yet, the
evidence for whether (liberal) democracy promotes economic growth, or is
itself a product of economic growth, is mixed. There are examples of
democracies outperforming autocracies and vice versa. As we discuss in
more depth in Chapter 10, China has outperformed India since the 1980s
despite similar initial levels of development. The Chinese government is
autocratic while India is the world’s largest democracy.
Whether a country is democratic or not is not all that matters for economic
growth. Whether or not state power is limited is likely more important, as we
shall discuss below. Moreover, among nondemocratic states it matters how
broad the ruling coalition is and whether it represents the interests of
merchants and owners of capital. In what follows, we discuss some of the
additional factors that connect political institutions to economic
development.
More Equal Rights for All
Which are more important for a society’s long-run growth: economic
institutions or political institutions? Political institutions determine who has
power in society. However, political institutions tend to depend on economic
resources and hence past economic institutions. Those who control political
institutions can use them to increase their control of economic resources,
thereby increasing their political power (Acemoglu and Robinson, 2006).
This is one reason why institutions can be a source of lasting poverty. In
societies where the political system is in the hands of a narrow elite, this
elite can use their power to construct economic institutions that benefit
themselves but impoverish the rest of society.
There is therefore a feedback between economic institutions and political
institutions. The economic institutions of a society are a function of its
political institutions, while political institutions help dictate the economic
incentives people face. But in what ways do they do so? Are some political
institutions “good” for growth and others “bad”?
Acemoglu and Robinson (2012b) argue that whether political institutions are
good or bad for growth hinges on whether they are inclusive or extractive.
Inclusive institutions create broad-based economic incentives and
opportunities. They tend to be characterized by a broad distribution of
political power. They bring people from varying socio-economic classes,
ethnicities, and cultures to the political bargaining table. This makes it tough
for one group to transgress the rights of another. Democratic institutions are
often seen as relatively inclusive. In a well-functioning democracy, office
holders can be challenged, anyone that meets certain qualifications (age,
citizenship) can run, and unpopular officials can be voted out.
On the other end of the spectrum are extractive economic and political
institutions. These institutions do not create broad-based incentives. Instead,
power is held by a small group of powerful elites who are subject to few
constraints from the rest of society. When power is held narrowly or the state
is too weak to be effective, the conditions are ripe for some individuals or
groups to extract from each other. Long-lasting economic development is
rarely achieved in such an environment. One need look no further than
modern-day autocracies for examples of extractive political institutions. In
North Korea, Eritrea, and Turkmenistan, the political elite live in luxury
while much of the population barely gets by. Funds that could be used for
the public good line the pockets of the elite. There is little incentive for
either domestic or foreign investment, since the proceeds of such investment
are insecure. These economies tend to stagnate over time.
But what institutions count as “inclusive” as opposed to “extractive”? One
problem with this taxonomy is that institutions that are inclusive for some
can also be extractive for others. The Athenian democracy was a very
inclusive system for adult male Athenians (Ober, 2018). Yet it behaved in a
highly extractive manner to its large slave population – many of whom
labored in the silver mines of Laurion in horrific conditions – and to the
members of its alliance or empire who had to pay tribute in order to maintain
the fleet. Was the Athenian democracy more inclusive and less extractive
than later societies that did not practice democracy but also did not have
slaves or an empire? A similar insight applies to Republican Florence, which
granted its citizens civil and political rights but imposed extractive
institutions on neighboring towns and cities (Epstein, 2000). To take a more
recent example, since the 17th century, political institutions in North
America have been more open and equal – for white males – than in almost
any other part of the world. At the same time, even after the abolition of the
slavery, the US suppressed the voting (and many other) rights of African-
Americans until the 1960s.
Acemoglu and Robinson (2019) introduced the concept of a “narrow
corridor to liberty” to resolve this apparent paradox. They acknowledge that
political development is a process. Inclusive institutions are made possible
by a functioning state – one able to repress powerful interest groups or
corrupt elites. But inclusive institutions will also be upended by an overly
powerful state. Civil society needs to develop alongside the growth of state
power because it is civil society that is capable of limiting state power. When
the state becomes too powerful relative to society, a society can be knocked
out of the corridor, resulting in despotic rule and extractive institutions. But
the state cannot be too weak, either. This is when we get anarchism,
tribalism, and weak public good provision. For Acemoglu and Robinson, the
former situation describes societies like China, while the latter situation
explains the poverty and stagnation of much of sub-Saharan Africa.
A related concept is the distinction between what North, Wallis, and
Weingast (2009) call the “natural state” and the “open-access order.” In the
natural state, which was the only form of political organization more or less
anywhere prior to the 18th century, personal relationships form the basis of
social organization. People are treated differently based on whom they know
and where they stand in the social and economic hierarchy. The law, where it
is applied at all, applies differently depending on one’s standing. Although
growth can happen in the natural state, it is limited. The elite can extract
from the non-elite, and there is little investment in any goods that do not
directly benefit the elite. Nearly every society in history was structured this
way, as are many contemporary societies. Feudal Europe, Shogunate Japan,
and practically every European colony had natural state political institutions.
Today, many states in Africa, the Middle East, and Central Asia are in the
“natural state.”
Key to this argument is the concept of rents. Economic rents are returns
above opportunity cost. Rents can be generated by government policies and
restrictions on economic activity that limit entry. The insight of Tullock
(1967) was that the cost of rents includes all the resources economic actors
expend in pursuit of them. These costs can be very large. The concept of
rent-seeking can be used to explain many institutions that were prevalent in
the past, including restrictions on interest rates (Ekelund, Hebert, Tollison,
Anderson, and Davidson, 1996; Koyama, 2010a), the sale of monopolies
(Ekelund and Tollison, 1997), and government offices. What North, Wallis,
and Weingast (2009) mean when they argue that rents hold a natural state
together is that they bind together individuals with the capacity to use
violence. Rents make it in their interest to adhere to the existing political
order rather than challenge it by resorting to force.
According to North, Wallis, and Weingast (2009), long-run economic
development requires a society to transition to the open-access order. This is
a type of political system similar to what Acemoglu and Robinson (2012b)
call “inclusive.” But the emphasis for North, Wallis, and Weingast is on the
ability of individuals and groups to form long-lasting organizations that are
independent of the state. What matters for sustained economic growth is less
whether or not a country is a formal democracy, but rather how easy it is to
set up a rival political party or establish a large business without getting
favors from political insiders. By this measure, North, Wallis, and Weingast
argue that only a small number of countries today are truly open-access
orders.
The question is: how do societies transition to an open-access order or
inclusive institutions? How do they enter what Acemoglu and Robinson
(2019) call the “narrow corridor”? This is the key question from a
development standpoint. Noting which institutions are necessary is one
thing. Figuring out how we get there is another. For Acemoglu and Robinson
(2012b), there are “critical junctures” in a society’s past that allow it to make
the leap (or not). For North, Wallis, and Weingast (2009), there are a set of
“doorstep conditions” a natural state society needs to achieve in order to be
able to make the leap. But even then the leap is not assured.
In short, there is no general answer to how a society achieves “good”
political institutions. Some societies have done it and others have not. Yet,
this does not mean this literature teaches us nothing. Understanding how the
societies that took off did so is important for teaching us what can work.
Institutions and the Commercial Revolution
Between 1000 and 1300, Europe experienced a period of sustained economic
growth. The population grew, per capita income increased, urbanization rates
increased dramatically, and the volume of trade expanded many times over.
This was not modern economic growth, as we described in Chapter 1,
because it eventually petered out. But it was growth nonetheless. For some
economic historians, it was this growth that set the stage for what was to
come. Southern (1970, p. 34) went so far as to suggest that “that moment of
self-generating expansion, for which economists now look so anxiously in
underdeveloped countries, came to Western Europe in the late eleventh
century.” Cipolla (1976, p. 139) described the rise of cities in Europe in the
10th through 12th centuries as one of the “turning point[s] in the history of
the West – and, for that matter, of the whole world.” These statements may
be exaggerations. But there is no doubt that this was a period of remarkable
economic growth.
The Commercial Revolution was characterized by the revival of long-
distance trade. This trade spanned political borders and jurisdictions. Yet,
there were no political authorities capable of enforcing contracts between
merchants operating in different cities. So how did trade occur? How could a
merchant punish someone who cheated him?
Medieval merchants selling in different jurisdictions faced the following
problem. Say an English merchant has wool valued at £5 in England. He
decides to take the wool to Flanders, where it is valued more. He meets a
Flemish merchant who can sell it for £8. If goods and money can be
exchanged there and then, the trade can take place at a price between £5 and
£8 and both merchants will gain. Trade is mutually beneficial.
But now suppose that there is some delay between either the goods or
payment arriving. Let’s say the Flemish merchant has to pay on credit since
hard specie is in short supply. This delay between purchase and payment
gives the Flemish merchant an opportunity to renege on his promise. The
English merchant cannot therefore know whether the Flemish merchant will
actually deliver the payment. Once the Flemish merchant has the wool, he
has the choice of transferring the money to England or not. But why should
he? The shadow cast by the future will not be sufficiently strong to enforce
cooperation if the two merchants are not expected to regularly trade with
each other in the future. Knowing this, the English merchant will never agree
to trade unless he can be paid up front and immediately. The potential gains
from trade are never realized.
Greif (2000) called this the fundamental problem of exchange. Trade is
limited to cases where either a spot exchange can take place or merchants
trust each other enough to trade on credit. This insight is generalizable: in
the absence of this trust, trade is extremely costly. A lack of information
about the quality of goods could generate similar problems. Manufactured
goods might have suffered from defects that were hard to detect on purchase
but only became apparent later on. Purchasers alone bore the consequences
of defective purchases, because people who purchased defective
merchandise had few remedies (Richardson, 2008). Merchants had an
incentive to pass on defective goods to traders they met anonymously and to
retain quality products for personal exchange.
Greif used game theory to explain how merchant communities in the Middle
Ages attempted to resolve this fundamental problem of exchange. First, he
considered the Maghribi traders – Jewish traders in Muslim North Africa –
who were prominent in Mediterranean trade during the 10th and 11th
centuries (Greif, 1989, 1993, 2006). Conducting long-distance trade in the
absence of a reliable and centralized legal system, these traders faced a
version of the problem of exchange. To conduct their business in different
parts of the Mediterranean, they needed to hire agents. But what guarantee
did a merchant have that the agent would not cheat him?
The key to the Maghribi traders’ success was their ability to utilize a
multilateral punishment strategy. This is a situation in which multiple parties
agree to punish anyone who cheats any individual in the group. The
effectiveness of this punishment hinged upon the nature of their close-knit
community. Greif provides evidence that the Maghribi traders were able to
disseminate information about the behavior of commercial agents among a
coalition of merchants.
In the 11th and 12th centuries, the Maghribi traders were displaced from
Mediterranean trade by Italian merchants. Greif (2002, 2006) documents that
community responsibility enabled these merchants to overcome the problem
of exchange. Community responsibility meant that individual merchants
were made responsible for the behavior of their peers. The goods of a
merchant could be seized simply because another merchant from his town
had refused to repay a loan or had cheated another merchant. Under this
system, the cost of an individual merchant cheating was borne by the
community. This meant that internal community enforcement could be used
to deter domestic merchants from cheating foreigners. The court of the
Flemish merchant had an incentive to uphold complaints from the court of
the English merchant, which in turn only championed genuine complaints.
This allowed borrowers to credibly commit to repaying lenders even though
they might never trade again in future.
Greif’s models help to explain how trade worked without widespread rule of
law. Although these institutions differed over time and place, they had one
common element: they incentivized people to follow through with their
promises. They thus allowed trade to flourish long before states were
capable of providing the rule of law over the entirety of their domains.
Between the State and the Market: Guilds
Not all institutions are formal ones emanating from the state. The rules of the
game come from many facets of life. One important set of institutions that
played a role in the Commercial Revolution were guilds. Various craft and
merchant guilds regulated large swaths of the European economy from the
late Middle Ages to the Industrial Revolution. Indeed, the story of the
medieval economic efflorescence is impossible to tell without some mention
of guild activity.
Craft guilds dominated urban life for much of the period between the 12th
and 16th centuries. To participate in a trade, one generally had to be a
member of a guild. This was true for smiths, tanners, butchers, bakers,
brewers, clerks, and entertainers, among many others. Guild membership
was restricted, and one had to serve a lengthy apprenticeship before
becoming a master. Craft guilds performed a range of different functions,
including regulating goods and labor markets. They also aided local political
authorities in tax collection. They kept their privileges by allying with local
political authorities (Ogilvie, 2019).
Craft guilds have been the subject of considerable controversy. Were guilds
rent-seeking institutions that imposed costs on the wider economy? Or did
they serve an important economic function? In theory, both are possible.
Guilds did restrict entry and hence generate higher profits for members than
they would have otherwise obtained. At the same time, it is possible that
guilds could have helped to resolve coordination problems, protect
merchants from state predation, and resolve market failures.
Richardson (2008) argued that craft guilds helped resolve problems of
asymmetric information such as verifying product quality. Guilds had an
incentive to keep product quality high since they had a “name brand” which
allowed them to sell goods well outside of the city. This is why some goods
are still associated with cities. London’s guild of pewterers made a
particularly high-quality pewter (which we still call London pewter). The
wine-makers of Burgundy made a particularly rich and sought-after red
wine. The cheese-makers of Parma made a very nice cheese.
Craft guilds served other purposes as well. Epstein (1998) argued that the
craft guilds and the apprentice system played a critical role in incentivizing
investment in industry-specific human capital. The work done by master
guild members required extremely high skill, taking years to learn. Epstein
argues that restricting labor via the apprenticeship system was the only way
for masters to recoup the costs of transferring skills. Teaching these skills
entailed upfront costs with little immediate payoff. Masters needed to recoup
costs later to make it worth it. The rents available via the guild system
provided these incentives. They could also have incentivized innovation.
Monopoly rents largely went to inventors, since not just anyone could pick
up a trade. As a result, there were numerous minor improvements made to
techniques and capital in the late medieval period. De la Croix, Doepke, and
Mokyr (2017) show that these novel techniques slowly spread throughout
Europe via journeymen. These master guildsmen would go from town to
town and employ the tacit knowledge of “how to do things” gained in their
previous employment. In this light, guilds may have encouraged innovation
and the diffusion of best-practice techniques.
In contrast, Ogilvie (2019) argues that craft guilds were rent-seeking
organizations that did best by their members but often imposed costs on the
rest of society. Drawing on two databases of guild activities, she provides
evidence that guilds routinely restricted the economic activity of non-guild
members, lobbied governments for privileges, and used a combination of
fines, fees, confiscations, and occasionally violence to enforce these
privileges. They opposed innovations when they threatened guild profits. In
this view, the late medieval economy was held back by guild activity. It is of
course possible that the truth lies somewhere in between these opposing
views.
Merchant guilds, on the other hand, dominated trade throughout most of the
late Middle Ages, especially in the free towns of Northern Europe (Ogilvie,
2011). The most famous of these guilds was the German Hansa. Members of
the Hansa traded with other members in cities throughout modern-day
Germany, Poland, Denmark, Netherlands, Belgium, England, and beyond.
Travel to foreign lands can be dangerous, especially for merchants carrying
valuable cargo. Beyond the physical dangers imposed by outlaws, local
rulers have an incentive to confiscate the wares of foreign merchants. What’s
to stop them? To whom could merchants appeal? According to Greif,
Milgrom, and Weingast (1994), one purpose of the merchant guild was to
serve as a collective voice against rulers who wished to transgress upon their
rights. If a merchant had his rights transgressed, the guild would boycott the
city. This dried up the tax revenue that rulers received from trade, providing
a huge disincentive to transgress merchants’ rights. The guild could do this
while an individual could not because boycotts require collective action.
Any merchant caught trading with a city under boycott – a “scab” in modern
parlance – could be kicked out of the guild, forgoing a lifetime of healthy
earnings.
Once states became larger and able to protect the rights of more of their
citizens, merchant guilds became unnecessary. They imposed a cost on
society through their monopoly privileges (Ogilvie, 2011). In the medieval
context, where state and legal capacity was limited, this cost was worth it,
since it allowed some degree of trade to occur. But how did states gain the
legal capacity to make institutions such as merchant guilds obsolete? It is to
this issue that we turn next.
Parliaments and Limited Government
Among the most important changes in European political institutions in the
build-up to the Industrial Revolution was the rise of limited government. As
the name implies, in a limited government, the powers of the ruling elite are
constrained. There are checks on authority in each part of government. Such
checks help economies grow. They limit the ability of any one group to
extract too much. There are no inclusive political institutions or open-access
orders without some limits on government.
But how do societies get limited government? Throughout history, most
governments were not limited. Small groups of ruling elites held most
power, and the rest of society had relatively little capacity to push back. This
began to change in Europe during the Commercial Revolution. In the 11th
and 12th centuries, self-governing or independent cities emerged in northern
Italy, the Low Countries, and then later in the Rhineland and across
Germany. The absence of a single strong ruler enabled merchants to rise to
political prominence. They implemented reforms that favored their own
interests but were also largely favorable to the overall expansion of trade.
For this reason, independent city-states were pioneers of the revival of trade
during the Commercial Revolution.
The late Middle Ages also saw the rise of parliaments. The term
“parliament” refers to political assemblies that had the ability to limit the
power of the sovereign. They were generally comprised of three types of
elites: churchmen, landed nobles, and the urban bourgeoisie. The first
medieval parliaments, or cortes, emerged in medieval Spain, in León and
Castile, before spreading across Europe in the 12th and 13th centuries (van
Zanden, Buringh, and Bosker, 2012). Parliaments were important because, at
least in theory, they allowed the interests of the broader population to be
represented in a single body. In the ancient world, democracy always meant
direct democracy. In classical Athens, the entire citizen body meeting in the
assembly was sovereign. The limitation to this mode of government was that
it scaled poorly. Individuals who did not reside in Athens could not attend
the assembly. The development of representative institutions like
parliaments made it possible for individuals living in much more extensive
polities to participate, albeit indirectly, in the governing process.
Parliaments emerged out of the councils medieval kings called among their
nobility. In England, the Magna Carta, signed by King John (r. 1199–1216)
and his barons in 1215, played a crucial role in the formation of medieval
parliaments. The Magna Carta arose in response to the abuses of King John
following his defeat by (and the loss of his Norman territories to) the King of
France (Koyama, 2016). To understand why this led to the rise of
representative institutions, one has to understand the feudal system that John
presided over. One way to do this is through the lens of the natural state
framework introduced by North, Wallis, and Weingast (2009).
In their framework, discussed earlier in this chapter, political elites restrict
entry in areas of the economy in order to generate monopoly rents. These
rents are distributed to those with enough coercive power to disrupt the
existing power structure. In medieval England, these were the great barons,
who had purview over significant territory. In such a setting, states cannot
provide rule of law to all precisely because they rely on treating individuals
differently in order to maintain political order. Instead of impersonal rules,
natural states rely on personal enforcement and on identity rules to govern.
This reliance on identity rules meant that individuals received different
treatment depending on their religion, social class, place of birth, or
residency.
In England circa 1200, the authority of the king stemmed from two sources.
First, he was the largest landowner. This was crucial, as most royal revenue
came from land. Second, the king was at the top of the feudal system. All
other lords in the country swore him fealty. He could apportion estates in the
absence of a direct male heir and was endowed with a range of prerogatives,
which included the right to hold court and enforce justice. But these
prerogatives did not include the right to freely impose taxes on his subjects
during times of peace. In theory, he was expected to “live on his own” from
the proceeds of the royal demesne.
To meet the costs of war with France, John exploited all of the revenue
sources available to a feudal ruler. He sold wardships – the right to take
control of the land of minors until they came of age – and sold the right to
marry rich heiresses. Feudal rights such as these were traditionally employed
to cement alliances among the nobility. But John exploited them for
immediate profit. His position as feudal overlord enabled him to exploit his
control over the royal courts to sell justice. And he mercilessly taxed
England’s Jewish community (Koyama, 2010b).
Through these abuses, John alienated the powerful lords who made up the
ruling coalition of 13th-century England. These lords had the military power
to defeat the king if they could coordinate their resistance. In forcing him to
agree to the Magna Carta, they got him to acknowledge certain limits to
royal authority – particularly the right to levy taxes without consent. They
succeeded: the Magna Carta forcefully articulated the position that the king
was subject to the law.
During the reign of John’s successor, Henry III (r. 1216–72), the term
“parliament” emerged to describe meetings between the king and the leading
barons. The initial role of Parliament was judicial. It was employed to hear a
variety of legal cases, and it soon became important in fiscal matters as well.
In the reign of Edward I (r. 1272–1307), Parliament became crucial in
granting the king the right to collect taxes. Importantly, Edward I regularly
called Parliaments in which representatives of the urban bourgeoisie
attended, in addition to the nobility and members of the clergy. For the rest
of the Middle Ages, English kings relied on Parliament to grant them the
taxes they needed, particularly in wartime.
During the Middle Ages, representative institutions flourished across
Europe. However, they did not all become national institutions like the
English Parliament. For example, the parlement of Paris was in origin a
similar body to the English Parliament and it covered the entirety of the
kingdom of France. However, during and after the Hundred Years’ War, the
French king devolved authority to regional parlements such as the those of
Toulouse, Rouen, Guyenne and Gascony, Burgundy, and Provence. These
parlements came to represent local rather than national interests. They
therefore precluded the development of an institution strong enough to
constrain the French monarch. Similarly, the cortes of León and Aragon,
although they remained active, were only able to provide local resistance
against the Spanish monarchies after the unification of the crowns of Aragon
and Castile in 1469.
Unlike today, parliaments were only in session when they were called by the
monarch. And monarchs were only likely to call parliaments when they
needed something – mainly taxes. In return, parliaments could expect to
receive some favorable laws, policies, or rights. Hence, the frequency with
which parliaments were called reflects their power to constrain the crown,
and it can thus be used as an indicator of the degree of limited governance
(van Zanden, Buringh, and Bosker, 2012). Figure 3.8 depicts the frequency
of parliamentary activity in several Western European states. One feature is
immediately clear: parliaments in Southern Europe became less active over
time while parliamentary activity in northwestern Europe rose rapidly in the
16th and 17th centuries. This was just prior to the economic rise of
northwestern Europe.
Is this just a coincidence? The timing suggests not. The parliaments of
northwestern Europe, especially in England and the Netherlands, became
strong around the time when economic growth accelerated. This is precisely
what we would expect to see if limited government played a role in forging
the modern economy. Although it could be a coincidence, the literature
described above suggests that the connection is causal. For this reason, the
rise of limited governance is among the most important issues we will return
to in Chapter 7, when we discuss the preconditions for the rise of the modern
economy.
War and State Finances
How does a society get institutions that provide equal rights for individuals,
enforce property rights, and allow for flourishing factor markets? One
important factor dictating the path of institutional development has been
warfare.

Figure 3.8 Parliamentary activity in Europe, 1100–1800

Data source: van Zanden, Buringh, and Bosker (2012). The values for Spain are the average of
the number of parliaments in León and Castile, Catalonia, Aragon, Valencia, and Navarre.
In ancient Athens, the granting of the franchise to all adult male citizens was
partly a response to the crucial role ordinary citizens played in maintaining
the Athenian navy (Stasavage, 2020). But this was not the norm in European
history. Why not? After all, prior to the 19th century, Europeans were almost
constantly at war with each other. How did this shape institutional
development in Europe? One set of arguments focuses on the simple fact
that wars require money. And acquiring money generally requires the
capacity to tax. Economists and political scientists call this a state’s “fiscal
capacity.”
How do states acquire fiscal capacity? Raising enough revenue to support a
state is a difficult problem to solve. People generally don’t like paying taxes
unless they feel like they are getting something in return. Even then, a major
free-rider problem exists if it is difficult to enforce punishment for tax
evasion. Solving this problem requires institutions that align the incentives
of the relevant players: rulers, those who collect the taxes, and those who
pay the taxes. Once this problem is solved, however, the state generally has
to provide something besides just war in order to convince people to pay
taxes. These include public goods such as transport networks, education, and
infrastructure.
Perhaps more importantly, fiscal capacity does not arise in a vacuum. It is
generally associated with other aspects of what scholars call state capacity.
This is the state’s ability to implement policy, render justice, protect its
citizens, and so on. These are some of the key things a state can provide to
promote economic growth. States that solve these problems tend to have
better long-run economic prospects. State capacity is different from the size
of the state. An expansive state with a large but inefficient public
bureaucracy may attempt but fail to achieve many goals. On the other hand,
a smaller state may actually achieve its more modest ends.
Over the long run, one way European states built fiscal capacity was by
solving the credible commitment problem they faced. Rulers who aspire to
absolute power or are unconstrained by either the law or other representative
bodies like Parliament cannot make credible promises. Medieval and early
modern kings often broke promises to their subjects. For instance, they
might raise money for a crusade but use the revenues for their own private
purposes. When they broke their promise, it was difficult to hold them to
account. After all, they were the king! King Philip II of Spain (r. 1556–98)
was so renowned for defaulting on his debts that Drelichman and Voth
(2016) call him “the borrower from hell.” As we discuss in more detail in
Chapter 7, in England it was only once this commitment problem was solved
that tax revenues began to seriously increase. This was done by making
Parliament a permanent institution (as opposed to something that could be
called and dismissed by the monarch).
Another problem for pre-industrial states is that they tended to be fiscally
fragmented. As a result, they suffered from local tax free-riding. Why should
one region send money to the central government when it believed the other
regions would send in enough to cover expenses? Fiscal centralization
helped states overcome this free-rider problem. In doing so, it enabled states
to increase revenues and often complemented the expansion of markets and
the division of labor. This made it easier for responsible governments to
follow sound fiscal policies and thus lowered credit risk. However, there was
always the chance that rulers would waste the new funds on reckless wars.
Thus, it was only the conjunction of limitations on the discretionary
authority of government with centralized fiscal systems that enabled states to
borrow at low cost (Dincecco, 2009). This allowed a massive take-off in
European government revenues between the 16th and 19th centuries (see
Figure 3.9).
Why and how did some states in some places and at some times invest in
fiscal capacity? In early modern Europe, parliaments played a key role in
authorizing and legitimating tax collection. Because states were fiscally
fragmented, rulers needed buy-in from other elites in order to collect
revenue. Parliaments were the means through which they received this buy-
in. Thus far, we have only focused on how parliaments limited the arbitrary
power of rulers. But by constraining the arbitrary power of the monarch,
parliaments also strengthened rulers by giving them the ability to make
credible commitments. This enabled rulers to collect more money and fight
longer and more expensive wars. For instance, after throwing off Habsburg
rule in 1568, the Dutch Republic embarked upon an eighty-year war with the
Spanish Empire followed by a conflict with France that would last, on and
off, for over forty years. For England, the Glorious Revolution of 1688
marked the start of a “Second Hundred Years’ War” with France. But how
and why did states form in a manner that they could conduct such long and
expensive wars?
Figure 3.9 Tax revenues per capita for six European powers, 1500–1900
Data source: Karaman and Pamuk (2013).

This question was asked by Tilly (1975, 1990). His statement “war made the
state, and the state made war” succinctly summarizes the matter. War was
the main preoccupation of medieval and early modern European states.
Before 1800, states spent most of their revenue on warfare or on paying
interest on debts occurred in previous wars. Nonetheless, though almost all
pre-modern states were preoccupied with war, Tilly (1990) discerned three
paths of state formation: a “coercive-intensive” path, a “capital-intensive”
path, and a mix between the two.
The coercive-intensive path was taken by Prussia and Russia. These states
were built from and for war. The Prussians and Russians did not just tax
their populations. They directly mobilized labor and other resources through
conscription. In the 17th century, Russia was involved in a war on its
western frontier one year out of every two. On its southern and eastern
frontiers, war was essentially continuous (Pipes, 1974). As war machines
became stronger, they were able to exert force over a greater expanse of
people and demand tax revenue from them. This, however, did not lead to
positive long-run economic outcomes. There was little incentive for
individuals to invest in capital in such a regime.
On the other extreme were states on the “capital-intensive” path. This was
taken by many of the city-states of northern Italy, Central Europe, and the
Low Countries. These states expanded as their wealth expanded. Capital-
intensive states were also often involved in warfare. They generally
protected the rights of their citizens, especially those engaged in commerce.
They were thus able to collect tax revenue from the economic elite in return
for protection. These city-states were able to borrow at relatively low rates
precisely because they were run by merchants for merchants (Stasavage,
2011). Merchants had an interest in maintaining the credit-worthiness of the
state, and thus the risk of default was low. This is important: access to credit
is a necessary feature of the modern state. Absent natural resource windfalls,
it is impossible to think of a modern state functioning well without the
capacity to borrow. Yet, as Stasavage (2014) points out, when certain groups
dominate the political scene for too long, vested interests eventually
undermine further growth.
The late medieval Italian city-states provided a particularly important
example of the institutional innovations associated with warfare. Almost
continuously at war, Venice and Florence pioneered institutional innovations
which enabled them to compete with much larger states and raise ever larger
revenues to pay for their mercenary armies. The annual revenue of Florence
in the 14th century varied between 250,000 and 350,000 florins, but
historians estimate the direct cost of the three-year war between Florence
and the Papacy in 1375–8 exceeded 2.5 million florins (Caferro, 2008, p.
177). To meet this shortfall, Italian city-states developed impersonal systems
of public debt and permanent systems of taxation (Epstein, 2000). In these
cities, the holders of capital were represented in government, ensuring that
the promise to repay was credible. Thus, their political institutions allowed
city-states to pay lower interest on their debts than territorial monarchies did
(see Figure 3.10).
Yet, Tilly (1990) argues that the path to the modern economy did not lie in
the purely capital-intensive political institutions of the city-states. Instead, it
lay in those states that employed some hybrid model that combined both
coercion and capital. England is a prototypical example. These states were
able to encourage capital accumulation while also acquiring the capacity to
tax large swaths of their population. And those with capital were willing to
provide taxes in return for protection of their property rights.
Hoffman (2015) presents a modified version of this thesis. Like Tilly, he
focuses on incessant European warfare as a prime mover of European
economic success. But instead of emphasizing its role in state formation, he
stresses the role that warfare played in encouraging innovation in military
technology. These technological advances, especially when combined with
gunpowder, gave Europe the upper hand in colonizing the rest of the world.
But why were European patterns of warfare different? Hoffman argues that a
cultural proclivity to warfare made European military competition more
intense than elsewhere.
Yet another impact of warfare was its effect on the location of economic
activity. Rosenthal and Wong (2011) argue that European warfare
disproportionately affected the countryside because cities tended to be better
fortified. This contrasted with China, where less frequent warfare meant that
urban and rural locations were equally affected by war. The result was that
trade and manufacturing were pushed to urban areas in Europe but not in
China. This in turn meant higher urban wages in Europe, which encouraged
investment in labor-saving technologies. As we will see in Chapter 8, these
were precisely the types of technologies that were key to Europe’s
industrialization.
Figure 3.10 Interest rates in city-states and territorial states, 1200–1800
Data source: Stasavage (2016).

In highlighting the role played by warfare in Europe’s institutional

development, we do not mean to suggest that war was “good” for the
economy. Naïve historical accounts that sometimes suggest this are usually
mistaken. Warfare is destructive. The direct costs include the destruction
caused by war and the opportunity costs of investment in defense, walls,
weapons, and armies. There are also harder to ascertain indirect costs that
include the effect of warfare on institutional quality or culture.
In any case, warfare was hardly unique to Europe. For instance, conflict was
endemic to the Indian sub-continent. Nath (2018, p. 245, quoted in
Dincecco, Fenske, Menon, and Mukherjee, 2019) notes that “the Mughals
fought their enemies ceaselessly … war was a constant preoccupation of the
Mughal Empire.” The Mughal state was also almost entirely devoted to
military activity. In Southeast Asia, the Toungoo Empire in Burma warred
more or less continuously with Pagan, Ava, and Siam. As we discussed in
Chapter 2, there was also frequent warfare on China’s northern frontier
between China and various nomadic groups and confederacies. The critical
point, however, is that these types of warfare were fundamentally different
from interstate warfare between European states.
Warfare in Europe from the late medieval period onwards took place
between similarly sized states. As Scheidel (2019, pp. 338–9) observes:
The fall of Rome ultimately gave rise to multiple states that did not
dramatically differ in terms of capabilities (smaller but more cohesive
polities balanced less-well-organized larger ones), mobilization
intensity (Roman-style levels of conscription did not return until the
French Revolution), mode of production (most Europeans were farmers
and lived far from the steppe frontier), and religion (Christianity
steadily spread into the northern and eastern reaches of the continent
while Islam failed to make much headway).
The symmetric nature of European interstate conflict accounts for why
warfare was ongoing, with no permanent hegemonic empire emerging. This
symmetry was rooted in European geography and in political economy
factors that stemmed from this geography, as discussed in Chapter 2.
Other authors push back against this bellicose hypothesis. One
counterargument is that frequent warfare did not promote urbanization,
economic development, or the rise of more inclusive institutions in other
parts of the world (Centeno, 1997). Another criticism is that when
population density is low, warfare may promote slave raiding rather than
state-building (Herbst, 2000). We discuss this latter point in the African
context in Chapter 6.
Even in Europe, not all states invested as much in fiscal capacity as England
did after 1688. To account for why some European states built much more
fiscal capacity than others, Gennaioli and Voth (2015) laid out a model in
which the incentive to build capacity depended on the chances a state had of
defeating its rivals. In this account, interstate competition provided
incentives for some states – those for whom the relative payoff to such
investments wass high – to standardize their fiscal systems and invest in
more capital-intensive forms of war. But other states, which faced higher
initial costs of centralizing because they were more heterogeneous, might
not find this worthwhile. Nations that did not have a robust military tended
to be gobbled up by their rivals, as was Poland-Lithuania.
Chapter Summary
In this chapter, we assessed the role of institutions in economic development.
Institutions form the “rules of the game” that people play in their day-to-day
lives. They come in many forms: political, economic, legal, social, and
religious. They form the incentives which shape how people act. Institutions
differ across societies and throughout history. They can therefore help
explain why different societies have had varying degrees of economic
success.
Among the most important institutions a society can have to facilitate
growth are those that uphold the rule of law and protect property rights.
Whether a society has such institutions is a result of some nexus of their
political and legal institutions. Understanding why some societies have had
institutions at (or near) this nexus and others have not is an inherently
historical question. This chapter has provided insight into why some
societies have achieved this and others have not.
Yet, unresolved questions remain. Most importantly, why do institutions
work differently in different parts of the world? Democracy is a prime
example. Democratic institutions have broadly succeeded in some countries,
especially in Europe, in facilitating open exchanges of ideas, empowering a
broader set of citizens, and addressing broad-based economic needs. But
democratic institutions have failed in other settings, such as many post-
Soviet transition states or the post-Arab Spring Middle East. Why do similar
institutions work in some settings but not in others? Does culture play some
role in the efficacy of institutions? More generally, is a society’s culture an
important independent determinant of a society’s economic success? We turn
to these issues in the next chapter.
4
Did Culture Make Some Rich and
Others Poor?
What Is Culture and Why Does It Matter?
Henrich (2015) defines culture as a set of learned rules of behavior. These
rules are the short-cuts we apply to make sense of a complex world. Our
brain power is limited. It is impossible to think through the implications of
every action we take. How do we interact with strangers? When do we move
forward at a stop sign? What type of food is healthy to eat? The answers to
these questions are embedded in a society’s culture, and different cultures
have come to different conclusions regarding the best ways to answer them.
The mental shortcuts provided by one’s culture are learned through both
imitation (of successful people) and direct transmission. This insight goes
back to the work of Hayek, among others. For Hayek (1982, p. 157), the
“mind is embedded in a traditional impersonal structure of learnt rules.”
Human beings are dependent on learned rules because our “capacity to order
experience is an acquired replica of cultural patterns which every individual
mind finds given.” Culture shapes the way we view the world. From this
perspective, cultural learning is key to explaining the success of humans as a
species. Indeed, some cultural anthropologists contend that cultural
evolution allows humans to leapfrog genetic evolution (Boyd and Richerson,
1985; Henrich, 2015). Through culture, we are able to pass down to future
generations what works and what does not. As Richerson and Boyd (2010, p.
109) describe it: “[T]he wheels of cultural evolution roll on the time scale of
millennia, even though, when we look closely at any one society over short
periods of time, change is often readily perceptible.”
Different societies have different cultural norms. This statement should be
obvious to anyone who has traveled even a bit outside of their home town.
Not only does culture evolve differently across countries and continents, but
even within countries cultural norms can diverge immensely. Within the US,
Woodard (2011) identified eleven regional cultures, which range on issues
regarding individual liberty, the role of the state, views on education, and
religion (see Figure 4.1). Within the states of California and Texas, a number
of widely different subcultures exist, covering all degrees of the political
spectrum and a wide range of ethnic backgrounds and religiosity.
Figure 4.1 Subcultures of the US
Data source: Woodard (2011).

Why might culture help explain how the world became rich? The answer to
this question is often addressed by considering its converse: what aspects of
culture have inhibited economic development? Because the learned norms
and beliefs we acquire through cultural evolution develop slowly – often
more slowly than economic and technological change – cultural beliefs can
become maladapted to their economic environment. In other words, cultural
beliefs that benefited economic growth under one set of circumstances may
hamper it in another. And because cultural norms are slow to change,
societies may not be in a position to take advantage of the new opportunities
afforded to them.
Culture also matters because cultural beliefs can affect how institutions
function. Recall that this was a key insight of Greif’s discussion of
institutions in Chapter 3. From this perspective, cultural beliefs matter
because they explain why people do what they do and therefore why
institutions encourage certain patterns of behavior in some contexts but not
in others. This may explain, for instance, why democracy has had such a
tough time taking hold in the Middle East, even in the wake of the Arab
Spring. If democratic norms of accountability and abiding by the outcomes
of elections are not well established, democratic institutions are unlikely to
function as they are supposed to.
Before we proceed, we want to be clear that, with respect to the effect of
culture on “why the world became rich,” we are not speaking of (and
certainly not endorsing) a “Eurocentric” view of history. This view, common
among historians of the early 20th century, attributes some aspect of Western
culture – such as being hard-working, innovative, or willing to take risks –
as being superior and the cause of much that is good in the modern world.
Not only are many of the views of this ilk offensive, but they are
unsatisfying as social science. Even if we are to believe that such cultural
traits differ between societies, why did such differences arise in the first
place?
Most of the supposed cultural differences pointed to in the early 20th century
may have reflected as much about the cultural norms of Western observers
as about their subjects. For example, in the late 19th century, Westerners in
Japan commented on the indolence and laziness of Japanese workers. Chang
(2008) notes that “in his 1903 book, Evolution of the Japanese, the
American missionary Sidney Gulick observed that many Japanese ‘give an
impression … of being lazy and utterly indifferent to the passage of time.’”
Gulick was no casual observer. He lived in Japan for twenty-five years
(1888–1913), fully mastered the Japanese language, and taught at a Japanese
university. After his return to the US, he campaigned for racial equality on
behalf of Asian-Americans. Nevertheless, he saw ample confirmation of the
cultural stereotype of the Japanese as an “easygoing” and “emotional”
people who possessed qualities like “lightness of heart, freedom from all
anxiety for the future, living chiefly for the present.” But by the late 20th
century, similar observers claimed that the discipline, industriousness, and
punctuality of the Japanese reflected a deep-rooted Confucian culture.
An aversion to such cultural stereotyping understandably led economists of
the late 20th century to dismiss culture as a cause of economic differences
between societies. Yet, going too far in the opposite direction may have been
a mistake. Research over the past twenty-five years has demonstrated the
insights that studying culture offers. In this chapter, we focus on recent
scholarship that has presented a more nuanced view of how and why certain
cultural traits differ across societies and what this means for economic
development. Such cultural traits include those related to trust, family
structure, individualism, and (perhaps most importantly) religion. In none of
these cases are one set of cultural traits “superior” to others, although some
do affect economic growth differently than others.
Can Culture Explain the European Take-off?
Was there something about European culture that allowed it to become
wealthy before the rest of the world? This is a thorny issue. On the one hand,
it invites ethnocentric or racist theorizing: that is, that Europeans have
something about them that is just “better”. These arguments tend to be
flawed upon even casual inspection, and we will not consider them in this
book. On the other hand, this should not dissuade us from asking whether
there are cultural attributes that may have helped propel the European take-
off in the 18th and 19th centuries. Recent research suggests that culture can
play an enormous role in all sorts of economic outcomes. We should not rule
out the possibility that culture played a role in Europe’s rise.
The answer to the question posed in the title of this section depends on one’s
assessment of how and why modern economic growth took place. To the
extent that one views the onset of sustained economic growth as a pan-
European phenomenon, then the cultural factors that we should study will be
ones common to all of Europe, or at least Western Europe. But to the extent
that one views modern economic growth as beginning in northwestern
Europe, specifically in the British Isles, then one should be most interested
in cultural traits that permeated Britain but not the rest of Europe.
Just how important are values to a society’s economic potential? Could a
society take off economically in the absence of values praising hard work,
risk taking, and wealth accumulation? McCloskey (2006, 2010, 2016) argues
that such values were essential for northwestern Europe’s take-off in the
17th and 18th centuries. According to her, one of the primary impediments
to growth in history was the way people thought and talked about work and
profit. For the ancient Greeks and Romans, for example, work of any type
was among the lowest-valued pursuits. Wealth was valued because it brought
freedom and permitted leisure (Finley, 1973). The middling classes – the
bourgeois – had little prestige in ancient society. If you were at all
successful, you were supposed to strive to own a landed estate and live off of
its returns. Indolence was what a Roman social climber strove towards.
A society with such cultural values is unlikely to have sustained economic
growth. As we will see, technological innovation is essential for growth to
persist in the long run. But innovation requires detailed knowledge of
production processes and what can make production more efficient. Any
society that frowns upon hard work will be unlikely to have a robust class of
innovators. Any society that disparages finance will be unlikely to have a
thriving entrepreneurial class or significant investment in capital. Although
the Roman Empire had a sophisticated market economy and, as we saw in
Chapter 2, a developed road network, it did not experience sustained
economic growth.
Cultural values that disparaged hard work persisted through the medieval
period, especially among the European elite. To the extent that the elite were
supposed to get their hands dirty, it was through warfare, not work. Those
lucky few from the lower classes who were able to rise up the economic
ladder were supposed to use their wealth to gain social status, perhaps by
acquiring a noble title. Once acquired, nobles were supposed to live off the
fruits of their land, leaving behind the professions that gave them their
wealth. McCloskey claims these cultural values changed in northwestern
Europe in the 17th and 18th centuries. In the Netherlands, and later in
England, the bourgeois pursuit of profit became lauded, not demonized. The
rhetoric concerning the bourgeois elevated financiers, innovators, and
merchants to a place where people aspired to these professions. Rising up
the economic ladder also placed one higher on the social ladder – it was not
simply a means to social prestige. These cultural changes, in turn,
encouraged the best and brightest to engage in productive pursuits. A class
of well-to-do merchants, financiers, and manufacturers emerged and entered
into the British elite – individuals like Sir Robert Peel (1750–1830), who
made his fortune in the textile industry before entering Parliament and
becoming a baronet, or Joseph Chamberlain (1836–1914), who was a shoe
manufacturer before becoming a politician.
On the flip side is China. For most of the last two millennia, China was the
world’s leader in technology and science. But by 1850 it had unquestionably
fallen behind Europe in technology, science, and engineering. This gave rise
to the famous Needham puzzle, named after the great British chemist and
historian Joseph Needham (1995). How did China go from being the world’s
scientific leader in ancient and medieval times to a technological laggard by
the 19th century?
One prominent answer to this question is culture. Landes (2006, p. 7)
summarized this line of thinking when he noted that China failed to “realize
the economic potential of its scientific expertise involved the larger values of
society.” While Landes does point to institutional factors such as the absence
of political competition, the power of the state, and the lack of institutions
that allowed for free debate, he dwells on cultural differences between China
and Europe. He argues that China lacked “this peculiarly European joy in
discovery…. This pleasure in the new and better…. This cultivation of
invention” (Landes, 2006, p. 9).
Does this explanation hold water? It is hard to square a Chinese cultural
disinclination for invention with the facts. For one, it does not explain the
Needham puzzle. China was the world’s innovation leader for much of the
last two millennia! In any case, the evidence in support of Landes’s assertion
is thin. The primary piece of evidence he brings to bear is the mission of
George Macartney to the Qing Empire in 1793. Qing China restricted trade
with the West and Macartney’s mission was to persuade the Qianlong
emperor of the benefits of more extensive trade with Britain. When
Macartney presented the latest manufactured goods in order to impress the
emperor, Qianlong was notoriously underwhelmed, replying: “Strange and
costly objects do not interest me…. We possess all things. I set no value on
objects strange or ingenious, and have no use for your country’s
manufactures.” As Platt (2018, p. 97) relates, however, this statement need
not represent a negative cultural attitude towards science and innovation:
Privately, … Qianlong was deeply fascinated by Western inventions.
[He] had a cherished collection of seventy intricate English clocks
gathered over the years, and had written poetry on the loveliness of
foreign glass as well as several poems about telescopes. He periodically
addressed edicts to the customs commissioner in Canton asking him to
send European goods or artisans to the capital. He was a patron of the
Catholic missionaries he employed at court as astronomers and
cartographers, and though he allowed them little freedom, he valued the
skills they brought. When James Dinwiddie was assembling the
scientific equipment that Qianlong would so publicly dismiss, he did so
without knowing that the emperor had actually ordered the missionaries
to watch closely what Dinwiddie was doing so they could replicate his
work after he was gone.
The problem with Landes’s argument is not that there is no evidence of a
cultural disinclination towards innovation or new ideas in 18th-century
China. Rather, Landes does not provide a systematic explanation for the
differential incentives facing rulers and intellectuals in China versus Europe.
No European ruler in the 18th century would have acted as the Qianlong
emperor did. But this may be better explained by geopolitics than by culture.
In the late 18th century, China still did not have to fear any serious military
competition. Qianlong’s focus was on maintaining order within his empire.
As a Manchu outsider, it was more important for him to pose as a guarantor
of traditional Confucian culture than it was to acquire technologies from a
foreign power.
Does Religion Affect Economic Growth?
Another cultural feature that can impact economic growth is religion. While
social scientists have largely eschewed simplistic theories stating that certain
religions are the reason some (Protestant) societies are ahead or other
(Muslim) societies are behind, recent research suggests there are more subtle
ways that religion can affect economic growth. These include incentivizing
education, affecting family formation through marriage regulations, and
impacting political development. This section examines the leading theories
tying religion to economic growth.
The Protestant Work Ethic and the “Spirit” of
Capitalism
Perhaps the most famous argument that “culture matters” was made by
Weber (1905/1930) in The Protestant Ethic and the “Spirit” of Capitalism.
According to Weber’s hypothesis, the Calvinist doctrine of predestination –
which stated that one’s eternal fate was decided regardless of one’s actions
on earth – encouraged people to work harder and save more. This is how
they would show that they were one of the “elect” who would enter heaven.
This ideal became secularized in places with Calvinist influence (the US, the
Netherlands) and was the root of a “capitalist spirit” that permeated these
societies. For Weber, people like Benjamin Franklin were the ideal type
exhibiting the capitalist spirit. They were hard-working, organized, frugal,
and always engaged in productive pursuits (never mind that Franklin often
indulged in the luxuries of life).
The inspiration for Weber’s hypothesis came from his home in Germany,
where Protestants seemed to do much better than Catholics. This correlation
extended beyond Germany, though. Since the 16th century, the world’s
leading economy has been Protestant: the Dutch Republic from the late 16th
through early 18th centuries, Great Britain from the 18th through early 20th
centuries, and the US since. More generally, Protestantism is strongly and
positively correlated with modern per capita GDP, while the correlation is
weaker for Catholicism and negative for Islam (see Figure 4.2). But is
Weber’s causal argument correct? Did Protestantism (and specifically
Calvinism) cause economic growth via some capitalist work ethic, or is this
just a case of “correlation does not equal causation”?
Figure 4.2 Percentage Protestant, Catholic, and Muslim vs. per capita GDP
Data sources: Rubin (2017) for religion shares, Bolt and van Zanden (2020) for GDP per
capita. Every country is listed three times, once for each of the religions.

There are two issues with Weber’s hypothesis. First, it needs to be

established that a “work ethic” can indeed be responsible for economic
growth. On this front, there is some evidence in favor. In his book A
Farewell to Alms, Clark (2007) argued that a taste for hard work became
more prominent in England during the late medieval and early modern
periods. This happened in England because the hard-working bourgeois had
more surviving children, to whom they passed their cultural values. Doepke
and Zilibotti (2008) formalized Clark’s account. They derive a model in
which some people are thrifty and thus accumulate capital (which takes time
to see returns). Ultimately, these people become the economically dominant
group in society. However, increased thrift alone is unlikely to have been the
driving factor in the economic divergence between northwestern Europe and
the rest of the world. One problem is that individuals work harder in
response to incentives. Therefore, a lax work ethic – such as the one the
Westerner observed of 19th-century Japan – is likely to be a response to low
wages and opportunities for work as much as a reflection of intrinsic
preferences towards work.
The second, and larger, issue with Weber’s hypothesis is sorting out
causation from simple correlation. The first prominent critic of Weber’s
thesis, Tawney (1936), pointed to an obvious flaw in the argument: the
“capitalist spirit” existed in certain places long before John Calvin came on
the scene. In the late medieval period, the Italian city-states, the independent
cites of Germany, and the cities of Flanders were hotbeds of capitalist
activity. Akçomak, Webbink, and ter Weel (2016) present similar evidence
from the Netherlands, which suggests that it was well on the path to modern
capitalism prior to the Reformation. They cite pre-Reformation religious
innovation (the Brethren of the Common Life), responsible for improved
literacy, as a key factor. Likewise, Andersen, Bentzen, Dalgaard, and Sharp
(2017) trace the roots of the work ethic, which Weber ascribed to Calvinism,
to the pre-Reformation spread of Cistercian monasteries. Cistercians were
the prototypical hard workers. Where they went, productivity improved and
populations grew.
Cross-country studies connecting Protestantism to economic growth have
produced more mixed results. McCleary and Barro (2006, 2019) find that
religious beliefs are correlated with economic growth across countries. But
cross-country analyses reveal little about the relevant mechanisms through
which these cultural or religious values affect economic outcomes.
Protestant countries may be richer than non-Protestant countries, but how do
we know that it is Protestantism that is responsible for these differences? A
more disaggregated approach is required.
If Not a Work Ethic, Why Did Protestant
Countries Grow Faster?
If a unique “Protestant work ethic” seems like a stretch as an explanation of
long-run economic differences across the world, are there alternative
channels connecting Protestantism and economic growth? One channel
proposed by Becker and Woessmann (2009) is literacy. Martin Luther
stressed the importance of reading the Bible. Indeed, he produced the first
widely used translation of the Bible in the German vernacular. However,
literacy (and education more generally) has benefits far beyond being able to
read the Bible. Might Protestant economic success have been an unintended
consequence of Luther’s desire to spread the Word of God?
Becker and Woessmann test this connection in the context of 19th-century
Prussia – precisely the setting that inspired Weber’s initial observations.
They find a strongly positive relationship between Protestantism and
education. This relationship is readily apparent in Figure 4.3, which shows
the relationship between the proportion of Protestants and school enrollment
rates for each Prussian county in the early 19th century. The question is
whether this connection enabled greater economic output in Protestant
regions. The evidence suggests that it did. Becker and Woessmann find there
was a strong positive relationship between Protestantism and income and
industrial employment. Likewise, Becker, Hornung, and Woessmann (2011)
find that Protestant regions had an advantage in adopting industrial
technologies. The Protestant educational advantage had additional
consequences. Becker and Woessmann (2008) find that the incentives for
Protestants to learn to read translated into a smaller gender gap in literacy
rates and school enrollment in Protestant areas. Dittmar and Meisenzahl
(2020) find that Protestant cities that also implemented compulsory
schooling laws tended to be hubs for people with elite levels of human
capital to congregate.
Figure 4.3 Percentage of Protestants vs. school enrollment rate in early
19th-century Prussia
Data source: Becker, Hornung, and Woessmann (2011).

had an advantage in adopting industrial technologies. The Protestant

educational advantage had additional consequences. Becker and Woessmann
(2008) find that the incentives for Protestants to learn to read translated into
a smaller gender gap in literacy rates and school enrollment in Protestant
areas. Dittmar and Meisenzahl (2020) find that Protestant cities that also
implemented compulsory schooling laws tended to be hubs for people with
elite levels of human capital to congregate.
These findings raise the question: was industrial growth due to Protestantism
or was it a result of something else? The answer appears to be the latter.
These studies find that the Protestant advantage is completely explained by
higher Protestant education levels. In other words, once the Protestant edge
in education is accounted for, there is no additional special edge that
Protestant regions have. It is thus unlikely that the Protestant economic
advantage has anything to do with a unique “work ethic,” but may have been
the result, in part, of a tradition that values education. Such values are not
unique to Protestants. Botticini and Eckstein (2012) find that Jews
historically had high levels of human capital due to religious reforms
following the destruction of the Temple at Jerusalem in 70 CE.
The Reformation and Religion as a Source of
Political Legitimacy
Another channel through which Protestantism may have affected economic
growth is through politics. The Reformation upended the political status quo.
States and cities that adopted the Reformation tended to kick out the
prevailing Church establishment and confiscate its wealth. Henry VIII (r.
1509–47) initiated what was probably the most famous confiscation when he
dissolved the English monasteries. The resulting wealth transfer into royal
coffers was the second greatest in English history, following only that of
1066, when William conquered the whole of England. But what did the
removal of the Church mean for politics? And why should we expect this to
have affected economic growth?
Rubin (2017) argues that the Reformation undermined the capacity of
Protestant rulers to gain legitimacy via the Church. In the medieval period,
the Church played an important role in providing kings and queens with
legitimacy. A ruler in bad standing with the Church was not likely to last
long. The Church’s ultimate punishment – excommunication – could be a
death knell to an insecure ruler. Although the power of religious legitimation
had weakened by the end of the 15th century, the Reformation was the
proverbial straw that broke the camel’s back. Protestant rulers could no
longer turn to an independent, established Church to prop up their regime.
Sure, religion remained important in the minds of the people. But Protestant
religious elites tended to be under the thumb of the Crown. England’s newly
formed Anglican Church was a case in point. As such, religious authorities
lost much of their power to legitimate rule, at least in the Protestant lands.
If Protestant rulers had limited capacity to legitimate their rule via religion,
how could they stay in power? Rubin (2017) argues that they turned to
parliaments. We already saw in Chapter 3 that the rise of parliaments in the
16th and 17th centuries played a key role in the economic rise of
northwestern Europe. It is no coincidence that these places also happened to
be Protestant. Parliaments tended to be comprised of powerful people:
nobility, churchmen, lawyers, and merchants. The more that rulers needed
parliaments to stay in power, the more these powerful people had a say in
governance. This is why the secularization of politics affected economic
growth. Parliaments tended to represent the interests of the economic elite,
who desired things (for self-interested reasons) such as secure property
rights and investment in infrastructure. Their interests aligned with those
type of things that bring economic success more broadly. Giving them a
greater say in politics meant that more of their interests would become
policy.
According to Rubin, this is why England and the Dutch Republic began to
take off after the Reformation, while places like Catholic Spain lagged
behind despite tremendous inflows of silver and gold from the New World.
Cantoni, Dittmar, and Yuchtman (2018) find a similar transition of power
from religious to secular elites in the wake of the Reformation in Germany.
They show that university graduates in Protestant regions took more public
sector jobs, and construction shifted from religious to public and
administrative buildings. This meant that Protestant rulers had a larger group
of competent bureaucrats to draw from. Coinciding with the increased
bureaucratization of Protestant states was a shift in legal thinking from
religious to secular. Protestants relegated religious law to spiritual affairs,
leaving the state to deal with worldly issues (Berman, 2003). Combined,
these changes helped create the basis for the bureaucracies and legal
formalism that are the hallmarks of the modern state, especially in Northern
and Central Europe. Unlike Weber’s theory, these explanations have little to
do with the content of Protestant doctrine, but instead focus on the role
religion played (or ceased playing) in politics.
Is Islam the Cause of Middle Eastern Economic
Stagnation?
If Protestantism was good for growth (for whatever reason), might other
religions have been bad for it? The answer is dependent on time and place,
and it is unlikely that one religion was uniformly bad for economic growth.
For instance, the negative correlation between the presence of Islam and
economic development may be true of the last few centuries (see Figure 4.2),
but it has not always been the case. During the “Golden Age of Islam” –
roughly the 7th through 10th centuries – the Islamic Middle East was far
ahead of Western Europe in terms of wealth, technology, and culture. One
indication of the Muslim economic advantage is that it was much more
urbanized (see Table 4.1). Urban populations can only be large if there is a
surplus of food, and urban areas are generally where thriving markets and
trade arise. Hence, it is tough to swallow theories of economic growth that
blame some attribute of Islam – such as its “conservative” or “mystical”
nature (Weber, 1978; Landes, 1998; Lewis, 2002) – but do not also explain
the Muslim advantage that existed for centuries following the spread of
Islam.
Table 4.1 Most populous cities in Western Eurasia, 800 CE
Data source: Bosker, Buringh, and van Zanden (2013).
This does not mean that we should automatically discard theories that
attribute economic growth, or lack thereof, to Islam. Islamic law covered
numerous aspects of commercial life and was the law of the land in many
Middle Eastern states. If the secularization of law may have led to Protestant
economic growth, might religious law have led to Middle Eastern economic
stagnation? Kuran (2011) argues that it did, but for reasons more nuanced
than “religious law bad, secular law good.” Kuran argues that numerous
aspects of Islamic law were progressive and benefited economic growth in
the 7th- to 10th-century context in which they emerged. These features
include a relatively egalitarian inheritance system, an extensive corpus of
partnership law, and a law of trusts (waqf). Why might these laws, which
served Middle Eastern economies well in the Islamic Golden Age, also have
been a source of stagnation?
Kuran argues that Islamic law was relatively slow to respond to changes in
economic conditions. But religion had little to do with it. There was simply
little desire to change laws regarding commerce. A telling example comes
from Islamic laws of inheritance and partnerships. The Islamic inheritance
system was quite egalitarian for its day: women received a share (while only
half that of men, this was better than zero, which was the norm in many parts
of Europe) and numerous heirs were dictated by a pre-ordained formula.
This mattered for economic growth because of its effect on partnerships.
Islamic partnership law dictated that partnerships were to be broken up upon
the death of any partner. Partnerships could in theory re-form, but this would
take the cooperation of most of the partner’s heirs. If any of the heirs were in
a bind, they could seek liquidation of the partnership’s assets, potentially
costing all involved. In response to these incentives, Muslim merchants and
entrepreneurs kept their partnerships small and of limited duration. The logic
is simple: the more partners who were added or the longer the duration of the
arrangement, the more likely it was that one of the partners would die,
thereby creating a forced dissolution. More importantly, this also meant that
there was little demand for change in the law. Even as European business
arrangements were growing more complex – especially with the introduction
of tradable shares and the widespread use of the corporate form – there was
little incentive for Muslims to demand changes to the law. When business is
small by design, things like tradable shares or the corporate form – both of
which help big businesses grow – are unthinkable.
Politics was another arena through which Islam may have affected economic
growth. One reason is that Islam is good at legitimating rule. There is a
corpus of Islamic doctrine stating that Muslims should follow any ruler who
acts in accordance with Islam but should depose those who do not (Rubin,
2011, 2017). This made religion an attractive source of legitimacy for rulers
who faced threats to their power. In return, Muslim religious authorities had
their voices heard in political decision-making (Rubin, 2017; Kuru, 2019).
While this is not necessarily a bad thing, it can have detrimental
consequences. For instance, it helps explain why there was no printing press
capable of printing in the Arabic script in the Ottoman Empire for nearly
three centuries after Gutenberg’s invention. The printing press threatened the
monopoly the religious establishment had on the transmission and
interpretation of religious knowledge. Since the clerics were a powerful
interest group, they were able to have this invention blocked, despite it
arguably being the most important invention of the last millennium (Coşgel,
Miceli, and Rubin, 2012).
The outsized importance of religious authorities in Muslim societies also
meant that rulers supported religious education at the expense of secular and
scientific learning. Chaney (2016) finds that, following the consolidation of
the Muslim religious establishment and the rise of the madrasas (Islamic
schools) in the 11th–12th centuries, religious book production dominated
output in the Muslim world, while scientific production fell off a cliff. As
with restrictions on the printing press, the decline in Muslim science was
likely due to the increased political bargaining power of religious elites.
Blaydes and Chaney (2013) argue that a critical feature of Muslim politics
was that rulers had access to slave soldiers. This meant they did not need to
negotiate with other elites for military service or resources. Because
medieval and early modern European rulers did not have access to slave
armies, they had to cede rights to feudal lords (in the medieval period) and
parliaments (in the early modern period). This relative lack of executive
constraint was a source of political instability that is still a feature of Middle
Eastern politics in the 21st century. Since power was not dispersed in the
Middle East, there was always a group of people – those without political
power – who benefited from a change in the status quo. Revolt was therefore
common. On the contrary, in Europe, dispersed power meant that powerful
people tended to have an interest in maintaining the status quo, and revolt
was less common. As a result, European rulers tended to last longer,
especially after the feudal revolution of the 9th–10th centuries
institutionalized the dispersion of power (see Figure 4.4).
A related explanation of Middle Eastern political instability is provided by
Platteau (2017), who argues that the decentralized nature of Islam (as
opposed to the centralized nature of the Catholic Church) meant that there
would always be clerics, likely radical ones, left out of the ruling coalition.
These clerics were precisely the ones who could spark a revolt against
entrenched powers, as was the case during the 1979 Iranian Revolution.
In short, recent scholarship does not implicate Islam in all of the problems of
the Middle East. Nonetheless, it does suggest that the intermingling of
politics and religion, characteristic of many Muslim societies, and the
persistence of Islamic law severely restricted the possibilities for economic
growth. Economic stagnation and political instability in the Middle East are
byproducts of how Islam was instrumentalized by powerful elites. This is not
necessarily a reflection of Islam per se, as many other religions including
Christianity have also been used in this way.
Figure 4.4 Ruler duration in Western Europe and the Islamic world
Data source: Blaydes and Chaney (2013).
The Long-Term Persistence of Culture
The primary reason culture can have such a large impact on economic
growth is that it is so persistent. Even in the face of changing economic and
technological conditions, cultural values are slow to change, regardless of
whether this means a society is left behind. In what follows, we give a taste
of some of the recent research that shows just how persistent cultural norms
can be.
The North–South Italy Divide
In 1954–5, the anthropologist Edward Banfield and his family lived in a
village in southern Italy. To describe what he found among the peasants he
and his wife encountered, he coined the term “amoral familism.” Amoral
familism refers to a nexus of cultural beliefs. Amoral familists, according to
Banfield, maximize the material short-run interests of their families and
assume others will do the same. The society he described was one in which
public goods were not provided, there were few or no civil organizations,
people were disengaged from politics, and trust between strangers was
almost non-existent.
The consequence of amoral familism at the societal level is the
underprovision of public goods, a lack of checks and balance on local
government, corruption, disregard of the law, and endemically low levels of
trust. Such behavior is difficult to change. If everyone is believed to be
corrupt, there is little cost to being corrupt and no benefit to not being
corrupt. As Banfield (1958, p. 94) put it: “The amoral familist who is an
office-holder will take bribes when he can get away with it. But whether he
takes bribes or not, it will be assumed by the society of amoral familists that
he does.” Cultural norms can thus become self-reinforcing: given the
expectation that one will behave corruptly, a corrupt individual has no
incentive to change his or her behavior. This is one reason why cultural
norms are often highly persistent.
Putnam, Leonardi, and Nanetti (1993) built on Banfield’s observation,
identifying stark differences in civic participation between southern and
northern Italy. They argue that these differences trace back to the Middle
Ages. In northern Italy, free city-states and republics flourished, giving rise
to a rich culture of political participation and civic engagement. In contrast,
southern Italy was dominated by feudal and absolutist regimes. As a
consequence, a culture of political apathy and disengagement arose. Guiso,
Sapienza, and Zingales (2016) provide further empirical evidence for this
hypothesis. They show that civic engagement, as measured by the number of
non-profits in a region, is positively associated with the existence of a
medieval commune. Combined, these studies show that cultural differences
generated about a millennium ago still exist today, despite significant
political and economic development in the intervening time.
But why did these cultural differences arise in the first place? Schulz,
Bahrami-Rad, Beauchamp, and Henrich (2019), Henrich (2020), and Schulz
(2020) argue that the marriage policies of the medieval Catholic Church are
to blame. The Church sought to break kin ties, forbidding marriages between
cousins (up to the sixth degree!). As a result, kin groups became smaller in
places with deeper Church influence. These places were therefore more
likely to have governance institutions that relied on cross-kin cooperation. In
the context of Italy, these governance institutions were precisely the
communes at the core of the theories proposed by Putnam, Leonardi, and
Nanetti (1993) and Guiso, Sapienza, and Zingales (2016). Like those studies,
Schulz (2020) shows that differences in cultural norms persist to the present.
In southern Italy, where the influence of the Catholic Church was much
weaker during the early Middle Ages, cousin marriage rates are higher, and
trust, voter turnout (a measure of civic engagement), and judicial efficiency
are all lower (see Figure 4.5).
Greif (1994, 2006) provides further insight into why these types of cultural
differences may have affected economic growth. He compares the
“individualistic” culture of Genoa (one of the most powerful medieval
Italian city-states) with the more kin-based culture of Jewish merchants in
northern Africa. Greif shows that kin-based cultures have an advantage in
establishing trade networks when the total level of trade is small, since they
can trade within their kin networks and punish those who cheat. This is one
major advantage that kin-based cultures have: interactions requiring
cooperation are more likely to take place (Enke, 2019).
Figure 4.5 The north–south Italy divide: cousin marriage, trust, and judicial
efficiency
Data source: Schulz (2020).

Societies with an individualistic culture are not able to punish cheaters this
way. Instead, they must set up institutions to do this and to facilitate trust.
Such institutions are costly to establish, and they may not be worth it when
the scale of trade is small. However, as more trade opportunities arise, the
benefits of establishing such institutions may be high enough to convince
individualistic societies to adopt them. Once in place, these institutions
permit trade with a much larger set of potential exchange partners.
On the other hand, what was once an advantage in kin-based societies
becomes a disadvantage. Since their networks are kin-based, there is little
incentive to adopt costly, impersonal institutions. Yet, by not doing so, they
limit their trade partners to those within the kin group, forgoing trade with
much of the outside world. The consequences for economic growth are clear.
As inter-regional trade became more widespread and lucrative, those
societies that were able to take advantage of trading with as many partners as
possible grew, while those that remained confined to old (kin-based) trade
networks stagnated.
A similar argument can be applied to China. The clan was the key unit in
China for risk sharing and resource pooling. Clan members supported each
other in time of need and brought resources together for bigger projects. This
was rooted in a Confucian ideology that was centered on clan-based
obligations. This meant that there was little demand for larger financial
markets that could distribute capital more broadly (Chen, Ma, and Sinclair,
forthcoming). Why engage with someone you cannot trust when there are a
bunch of your kin for you to deal with? This was not the case in Western
Europe, where there were no larger family units to provide access to capital.
Eventually, financial markets emerged in Europe to fill this void (Greif and
Tabellini, 2017).
The importance of individualistic culture extends beyond the type of trade
and financial institutions a society has. Individualistic culture rewards
personal achievement. It stands to reason that innovators therefore gain
greater social status in individualistic societies than they do in collectivist
societies. Gorodnichenko and Roland (2011, 2017) find that societies that
are more individualistic have much higher income per worker, and much of
this comes from greater productivity and innovation. This is important: as
we will see in Chapters 7 and 8, innovation is one of the keys to modern,
sustained economic growth.
The Persistence of Trust Norms
Economists have long recognized that trust is an integral part of economic
exchange. Trust is important because most exchange is sequential. One party
gives the other party something, with the expectation that the latter will give
something back in return, possibly at a later date (Greif, 2000). We discussed
this in Chapter 3 in the context of the fundamental problem of exchange.
This is as true today as it was in the past. When you buy something online,
you provide your credit card number, and then money is immediately taken
from your account. The online merchant is then supposed to send you
whatever you purchased over the course of the next few days. But what if
they do not send it to you? They already have your money. Especially if they
never expect to sell to you again, why should they send you the goods?
In the example of the online retailer, it is obvious why they would send the
goods to you. Any company that regularly cheated customers like this would
be sued and made to pay damages. They would also get a bad reputation and
would likely not be in business for long. But court systems and means of
reputation building have not always been available. In their absence, why
would one trust that the entity they are dealing with will fulfill their end of
the bargain?
This is where trust comes in. If I trust that the online merchant is not going
to cheat me – regardless of my ability to sue – then I may go through with
the exchange. Of course, the merchant also needs to be likely to come
through on his or her promises. This is why societies that have high levels of
trust tend to do better economically (Tabellini, 2010). Trust enables mutually
beneficial exchanges that would not otherwise occur. In the words of Arrow
(1972, p. 357): “Virtually every commercial transaction has within itself an
element of trust, certainly any transaction conducted over a period of time. It
can be plausibly argued that much of the economic backwardness in the
world can be explained by the lack of mutual confidence.” Perhaps variation
in trust across countries can help explain why some countries are rich and
others are poor? Social scientists have in fact frequently noted differences in
trust across countries. People in richer countries are both more trusting and
more trustworthy than people in poorer countries (see Figure 4.6).
The question is: why are some societies more trusting than others? Trust
does not come from thin air. People are more trusting in environments that
are safer and when the likelihood of being cheated is lower. So, on the one
hand, levels of trust might reflect institutional quality rather than a separate
and identifiable cultural trait. On the other hand, recent work by economists
and political scientists has also shown that trust norms tend to persist long
after the reason they emerged in the first place. Thus, historical events which
affected trust in the past may help explain economic prosperity today.
Natural experiments can help parse out the role of history in the
development of trust norms as opposed to modern factors like contemporary
institutions. Natural experiments, like the partition of Korea discussed in
Chapter 3, occur when some people in a population are “treated” with some
event and others are not, much like a clinical trial in a medical experiment.
History is full of natural experiments, often due to shifting national borders.
One day, a group is under the dominion of one state, the next day part of the
population is under the dominion of another. If there is reason to believe that
this change might affect trust, we can compare people on opposite sides of
the border to see whether trust was indeed affected by the border change and
whether these differences persisted. For instance, Becker, Boeckh, Hainz,
and Woessmann (2016) find that people who live on the Habsburg side of
the old Habsburg–Ottoman–Russian border trust government officials,
courts, and police more in the present day. In the 18th and 19th centuries, the
Habsburgs provided public services more efficiently than their eastern
neighbors, increasing trust in government. The fact that these trust norms
exist in the present day strongly suggests that cultural norms persist after
their original cause is long gone.
Figure 4.6 The relationship between trust and per capita GDP
Data sources: Inglehart, Haerpfer, Moreno, Welzel, Kizilova, Diez-Medrano, et al. (2018) for
trust data, Bolt and van Zanden (2020) for per capita GDP data. Qatar dropped to make the rest
of the data more visible.

Lowes, Nunn, Robinson, and Weigel (2017) find evidence for the persistence
of cultural norms in a study of rule following by individuals living on
opposite sides of the old borders of the Kuba Kingdom, a state established in
the early 17th century in what is now the Democratic Republic of the Congo.
Contrary to expectations that the presence of a relatively powerful state
might have encouraged and reinforced pro-social norms, they find that Kuba
descendants are less likely to follow rules and more likely to steal. They
reason was that those living under Kuba rule had less need to generate norms
of rule following. Those who did not follow rules could be punished by the
institutions of the kingdom. Again, a key takeaway is that culture persists
long after the institutional and political environment under which it emerged
has changed.
Gender Norms
Most societies in history have had cultural norms that restrict the capacity of
women to work. For this reason, it is possible that women have historically
been the greatest untapped source of potential economic growth. Yet,
although most societies have restricted women in one way or another, some
societies placed greater restrictions than others. Why?
Cultural norms regarding female labor likely date to the Neolithic
Revolution, which saw the spread of settled agriculture. Boserup (1970)
argued that plow agriculture precipitated the emergence of a sharp gender
division of labor. Plows required significant upper body and grip strength,
both of which favored men over women. As a result, men gained significant
bargaining power over women in societies practicing plow agriculture. It is
therefore possible that gender norms favoring men emerged in such
societies.
Alesina, Giuliano, and Nunn (2013) tested this hypothesis. They document
that a social norm arose in societies with plow agriculture whereby men
worked outdoors in the field and women were confined indoors. The sexual
division of labor that arose in plow-dominant agricultural civilizations
proved to be self-reinforcing. In societies where grain provided the majority
of calories and society was organized around agriculture, the fact that
women played a subordinate role in the agrarian economy reinforced their
inferior social status. The evidence provided by Alesina, Giuliano, and Nunn
testifies to the persistence of these norms even today, in societies where the
vast majority of people work outside agriculture. In the 21st century,
societies with more traditional plow use have lower female labor
participation, lower female firm ownership, and less female participation in
politics (see Figure 4.7). Alesina, Giuliano, and Nunn also show that the
children of immigrants living in the US and Europe exhibit more unequal
beliefs about gender if their parents came from a country with a heritage of
plow use. Similarly, Fernández and Fogli (2009) find that the work and
fertility behavior of second-generation American women is affected by
gender cultural norms in the country of their ancestry. Combined, these
results point to a detrimental consequence of social norms that persist long
after the reason they emerged in the first place was relevant.
Cultural attitudes towards female labor can also shift due to economic
change. For instance, Xue (2020) studies the introduction in China of the
treadle-operated spindle wheel, which tripled the productivity of female
cotton spinners beginning in 1300. In cotton textile producing regions,
female incomes rose substantially. Their earning power increased many
times over, to the point where female incomes were comparable to or even
greater than those of men. Consequently, women began to be seen as more
important members of society. Pomeranz (2005) uses the term “economics
of respectability” to describe women’s rising status. For parents, as women
became productive members of the economy in their own right, it became
less financially costly to have a daughter. The prospect of daughters being
self-sufficient lowered the cost of having them. Xue (2020) provides
evidence that cultural attitudes towards women were transformed in the
affected counties. Today, in counties with pre-modern cotton textile
production, sex ratios are less biased against women. Additionally,
individuals in counties with pre-modern cotton textile production are more
likely to disagree with the statement that men are naturally more capable, or
that women should focus on family, and are more likely to have preference
for daughters over sons.
Figure 4.7 Traditional plow use, female labor force participation, and female
firm ownership
Data source: Alesina, Giuliano, and Nunn (2013).

The status of women mattered for economic growth in the past and continues
to do so. The studies cited above show how cultural norms may have been a
channel through which female status affected economic growth. We will
return to a discussion of gender and economic growth in Chapter 5, which
studies demographic trends and investment in human capital.
Chapter Summary
This chapter summarized the growing literature on the role that culture plays
in economic growth. Recent cultural explanations are much more nuanced
than those of the early 20th century, which were Eurocentric at best and
racist at worst. Modern theories tend to think of culture in the way that
anthropologists view culture: it is those aspects of society which forms
people’s worldview. This shapes how people respond to incentives, how they
interact with others, how and whom they marry, how many children they
have, and so on. Modern economic studies of culture focus on things such as
the role of trust, gender norms, and marriage norms in determining
outcomes. Religion may also affect economic development, often through its
effect on politics or law. One key reason that culture can affect long-run
economic development is that it persists. Even after the reasons certain
cultural traits emerged are long a thing of the past, they tend to shape the
outlook of the descendants of those past societies. For this reason, culture
tends to interact with some of the other determinants of long-run economic
development, such as institutions and demography. As we shall see in
Chapter 7, these interactions are at the heart of most societies’ long-run
economic trajectories, for both good and bad.
5
Fewer Babies?
It is January 24, 1700. A cold winter air blows through Westminster Abbey
in the center of London. Even open fires and coal braziers struggle against
the winter chill. Princess Anne, heir to the throne of England, is silently
sobbing into her bedclothes, surrounded by her maids and ladies-in-waiting.
Anne had miscarried again. Though only 33, this was her seventeenth and
last pregnancy. She had not produced a living heir. Of her four live births,
only one outlived early childhood. But Prince William died aged 11 of
pneumonia, having been bled and blistered by his doctors. We do not know
the reasons for Anne’s failed pregnancies. But her own health was fragile.
Historians have suggested that she may have suffered from a host of
ailments including Lupus, diabetes, or Rhesus autoimmunization (Emson,
1992). By her early thirties, she suffered from severe gout, which would
prevent her from walking and ensured she would have to be carried to her
coronation in 1702. Anne would die at 49.
Anne could afford the best medical treatment of her time. But it hardly
availed her and her family. Her mother only lived to 34. Her sister Mary died
at 32 of smallpox. Anne’s tale was not uncommon. Even for the rich, life in
the pre-industrial world was dominated by births, deaths, and disease.
This is clearly no longer the case. Even in the poorest parts of the world, life
expectancy is higher than it was in the wealthiest parts of the world during
Anne’s time. In 1703, average life expectancy in England was 38.5 years
(Roser, 2021c). In 2015, no country in the world had an average life
expectancy less than 51 years (see Figure 5.1). What changed? Might these
changes have affected growth?
For most of human history, families had many children, a few of whom
would make it to adulthood. These conditions led Thomas Malthus
(1798/2007) to famously conclude that this was the permanent condition of
humanity. He reasoned that most people would not be able to eke out much
more than a subsistence living. Malthus wrote in the late 18th century and
was not wrong about the human condition up to that point in time. His ideas
relating demography to economic development explain much about the pre-
industrial economy. But they cannot account for the incredible
transformations in the human condition that have arisen in the last two
centuries. What changed?

Figure 5.1 Life expectancy around the world, 2015

Data source: Roser (2021c).

In this chapter, we discuss the role that demography played in making some
parts of the world rich. We consider the theories of Malthus and consider the
extent to which the world he envisioned aptly describes the economic
realities of our ancestors. Then we ask: how did some parts of the world first
moderate and then escape the forces Malthus highlighted? What factors
made a transition from a Malthusian world to modern growth possible? In
particular, how did demographic change lead to investments in education
and human capital, and how did these investments foster economic growth?
Malthusian Pressures
The most frequently cited cause of persistent poverty in the pre-industrial
world is population pressure. There were simply too many mouths to feed.
This theory is most commonly attributed to Malthus (1798/2007, p. 13), who
put it succinctly:
That population cannot increase without the means of subsistence is a
proposition so evident that it needs no illustration.
That population does invariably increase where there are the means of
subsistence, the history of every people that have ever existed will
abundantly prove.
And that the superior power of population cannot be checked without
producing misery or vice, the ample portion of these too bitter
ingredients in the cup of human life and the continuance of the physical
causes that seem to have produced them bear too convincing a
testimony.
To explain these principles Malthus proposed a simple model:

1. As income rises, more children survive to adulthood.

2. As income rises, fewer people die each year.
3. As population increases, income per capita decreases. This is due to the
diminishing marginal product of labor. This is the idea that when there
are only so many jobs to do, every additional person added to the
workforce will be less productive than the last.
4. Hence, in the long run, population growth will absorb any gains in
income.

The Malthusian model can be depicted in a simple diagram (Figure 5.2).

Income per capita is on the horizontal axis. The vertical axis in the top panel
measures the birth rate and the death rate. Where these two lines cross, the
population is stationary. The lower panel depicts the relationship between
population and per capita income. It captures assumption (3). If resources
such as land are relatively fixed, population growth reduces the marginal
product of labor and results in each worker earning a lower income.
Suppose per capita income exceeds y*. In this case, the birth rate will exceed
the death rate and population will grow. Population growth, however, puts
pressure on resources and causes per capita incomes to fall. As incomes fall,
the death rate rises and the birth rate falls (as fewer children survive to
adulthood), thereby returning the economy to equilibrium at y*.
Occasional positive shocks such as a one-off improvement in technology or
the introduction of a new crop increase productivity, enabling a period of
population growth and temporary higher incomes. In the long run, however,
per capita incomes will return to y*. People will have more babies, and those
babies will eat up all the surplus. Countries with more fertile land or better
technology are therefore characterized by higher population densities, not
higher living standards.
Figure 5.2 The Malthusian model
Note: This figure is adapted from Clark (2007).

What happens if there is a demographic change? Consider the effects of a

fall in the birth rate (from Birth Rate to Birth Rate’ in Figure 5.3). Since the
death rate schedule is unchanged, the population falls. As the population
falls, the marginal product of labor rises. In equilibrium, per capita income
increases to y**. This increase is permanent. Similarly, an increase in the
death rate also raises per capita income.
But why might the birth and death rates change? Dramatic shifts in death
rates have been a common theme in human history. The “great levelers” that
are plague, war, revolution, and state collapse have repeatedly brought
massive and rapid deaths to human populations (Scheidel, 2017).
The Malthusian logic suggests that these tragic circumstances may have a
silver lining: they increase average income. Clark (2007, p. 101) draws out
the stark and counter-intuitive implications: “[T]he plague was not the harsh
judgment of a vengeful Old Testament God on a sinful Europe, but merely a
mild reproof by a beneficent New Age-style deity … [that] raised living
standards all across Europe.” On the flip side, Clark lists cleanliness, peace,
charity, hard work, and parental solicitude as “Malthusian vices.” These
practices enabled a larger and healthier population that would eat away any
gains in productivity.
There are reasons to be skeptical of the starkest Malthusian predictions.
Plague was only beneficial if we ignore the costs of elevated mortality in
assessing living standards. It also obviously does not account for the social
and political disruption caused by frequent and unexpected deaths. But
enough truth is captured by the simple Malthusian framework to make it a
compelling lens through which to view the past.
Figure 5.3 The Malthusian model: illustrating the effects of reducing the
birth rate
Note: This figure is adapted from Clark (2007).

Ashraf and Galor (2011) show that a Malthusian framework explains many
features of the world up to 1500. Specifically, they find that countries that
underwent the agricultural transition earlier had more productive land and
higher population densities in 1500. But they did not necessarily have higher
per capita incomes.
Yet, Malthusian forces operated gradually and in conjunction with other
factors. Even in a Malthusian environment there is variation in living
standards and economic growth is possible. As we saw in earlier chapters,
there were periods of relative prosperity in pre-modern Europe. There were
also episodes when per capita income rose well above subsistence in
Classical Greece, the Roman Empire, and Song China.
The fact that the long-run dynamics of the world economy are broadly
consistent with the Malthusian model does not mean that Malthusian
dynamics provide a complete explanation of short- or medium-run growth
fluctuations. The Malthusian feedback mechanism operated gradually and a
given economy could be “out of equilibrium” for many decades or longer.
Other factors such as epidemics of contagious diseases and warfare impacted
pre-industrial populations much more rapidly and with greater effect than
did gradual Malthusian feedback loops. The result was that pre-industrial
societies fluctuated around their Malthusian equilibrium, but sometimes with
significant variation.
The Black Death
How can we test whether the Malthusian model had any bite in the pre-
modern world? One way would be to see what happens following a massive
demographic shock. The most famous – and deadly – example of such a
shock was the Black Death, which ravaged much of the world in the mid-
14th century.
The Black Death was the most deadly pathogen to ever hit Europe and Asia.
Contemporaries estimated that a third of the world’s population died. For
much of the 20th century, historians scoffed at such high figures and
suggested that the overall mortality must have been significantly lower, say
5 or 10%. Recent research, however, confirms the higher previous estimates,
with some historians going as far to argue that as much as 60% of the
population in Western Europe may have died (Benedictow, 2005).
Scientists have identified the bacterium that caused the Black Death as
Yersinia pestis, or bubonic plague. As Europe and the Middle East had been
spared plague outbreaks for centuries, their populations had little or no
immunity to the disease. It was transmitted to Europe from Kaffa in the
modern Crimea, and from there to Italy and Western Europe. The mortality
rate of the disease was not related to pre-existing characteristics. At least as
many died in the countryside as in the cities. Southern Europe and the
Mediterranean were hit especially hard, and so were the British Isles (see
Figure 5.4).
The medieval population of Europe peaked in the early 14th century, several
decades before the Black Death. Between 1315 and 1322, excessive summer
rains led to successive harvest failures. As a result, a terrible famine swept
through much of Northern Europe. Bruce Campbell (2010, p. 287) describes
it as possibly “the single worst subsistence crisis, in terms of relative
mortality, in recorded European history.” It was accompanied by a bovine
plague that wiped out livestock. The population barely had time to recover
before the Black Death struck. As a consequence, the population of England
fell from between 4.5 and 6 million in 1300 to around 2 million by the
middle of the 15th century (Smith, 1991; Campbell, 2010). A similar
population collapse occurred throughout Europe (see Table 5.1) and the
Middle East.
Figure 5.4 Black Death mortality rates (%) in 1347–52
Notes: This map plots the location of all existing cities (i.e. localities ≥ 1,000 inhabitants) in
1300 for which we know their Black Death mortality rate (%) in 1347–52 as well as the modern
boundaries of eighteen Western European countries.
Source: Jedwab, Johnson, and Koyama (2019).

A tragedy of such scale is difficult to comprehend. There were clearly many

consequences that fall well outside the scope of conventional economics,
such as social dislocation and psychological trauma. But this does not mean
we should ignore its economic implications. The Black Death was a massive
shock to the population. Nor was it an isolated occurrence: bubonic plague
reoccurred sporadically across Europe and the Middle East in the following
three centuries. This permanently elevated the death rate. And as a
Malthusian model would predict, an increase in the death rate raised per
capita incomes.
The initial period following the pandemic was one of economic crisis. Trade
collapsed and real wages fell as food was left rotting in the fields and crops
were not harvested. Political elites across Europe also tried to prevent wages
from rising. In England, the Statute of Laborers (1349) sought to limit
nominal wages. In France, a comparable statute was passed in 1351 to
regulate wages, prices, and guilds admittances. In Florence, wages were
permitted to rise for urban workers but not for rural laborers. The latter faced
particularly stringent regulations and saw their real wages fall as they had to
purchase basic commodities at hyper-inflated prices (Cohn, 2007, p. 468).
Individuals who left their farms to seek new work were fined.
But economic pressures ultimately trumped the political will of the elites. In
the following decades, real wages increased. Pamuk (2007, p. 292) finds that
the Black Death caused urban real wages to rise by as much as 100% in the
decades after 1350. They remained above their earlier levels until late in the
16th century. This was true not only in Western Europe and the western half
of the Mediterranean but also around the eastern Mediterranean.
Table 5.1 Black Death mortality by country
Source: Jedwab, Johnson, and Koyama (2019). Original data from Ziegler (1969), Gottfried
(1983), and Benedictow (2005).
1300 population Mortaliy estimate
Country
(millions) (%)
Austria, Czech Republic, & 10.0 20
 Hungary
Belgium 1.4 22.5
England 6.0 55
France 16.0 50–60
Germany 13.0 20–25
Italy 12.5 50–60
Netherlands 0.8 30–35
Poland 2.0 25
Scandinavia 1.9 50–60
Spain 5.5 50
Land use also changed. Marginal lands were abandoned and landowners
shifted away from arable farming (which was relatively labor-intensive)
towards pastoral farming (which was more land-intensive). To paraphrase
Sir Thomas More (1516/1997), sheep devoured men. Jedwab, Johnson, and
Koyama (2019) find evidence for substantial geographic mobility in the
wake of the plague as people moved in search of better economic
opportunities.
The most important institutional consequence of the Black Death was the
demise of serfdom in Western Europe. In England in 1300, half of the rural
population were serfs. They owed labor and other feudal dues to their lords.
This changed in the aftermath of the Black Death. Bailey (2014) finds that,
in England, serfdom was in sharp decline from the 1350s onwards. This
suggests that labor scarcity and falling land values were critical to the
decline in serfdom. On the manors studied by Bailey, there was no attempt to
reimpose serfdom after the Black Death. The sharp demographic shock of
the plague simply made it impossible for landlords to maintain or reinstate
servile institutions and impose feudal dues on recalcitrant peasants. A serf
fleeing oppressive fines and labor requirements on one manor would easily
find work on the land of another lord. Landlords throughout Western Europe
were unable to coordinate their response. As a consequence, serfdom
disappeared in most of England by 1500, even though it was never formally
abolished.
Brenner (1976) argued that when serfdom ended in England, it permitted the
rise of agrarian capitalism. Former serfs became tenants and paid rents to
their landlords. They were thus easily dispossessed, allowing landholdings to
be consolidated. It was this agrarian capitalism that in Brenner’s telling
made possible the increases in agricultural productivity that he sees as
critically enabling the Industrial Revolution. In contrast, French peasants
gained control of their land. This impeded the development and
consolidation of large estates. The specifics of the argument Brenner
developed do not need to detain us here. Subsequent research has qualified
or undermined the factual basis for many elements of his broader argument.
What is indisputable, however, is that the impact of the Black Death and the
ensuing demographic retrenchment differed in Western Europe relative to
Central or Eastern Europe. While serfdom disappeared in England and
France in the 14th and 15th centuries, it did not disappear and in many cases
became more firmly entrenched in Germany, Poland, and Russia.
Why did the Black Death have this effect in Western Europe but not in
Central or Eastern Europe? Acemoglu and Wolitzky (2011) provide a model
in which landlords can use carrots (wages) or sticks (coercion) to incentivize
peasants. The incentive to use one or the other depends on how scarce labor
is, the outside options peasants have, and the costs of using coercion. From
this perspective, a massive demographic shock like the Black Death could
have countervailing effects. On the one hand, the resulting scarcity of labor
increased the incentive landlords had to use coercion and to defend or
reassert serfdom. On the other hand, labor scarcity also greatly improved the
outside options peasants had, and this reduced the incentive to use coercion.
Which effect dominated depended on their relative magnitude. Acemoglu
and Wolitzky interpret their model as indicating that in Western Europe the
costs of reliance on coercion ultimately outweighed the benefits. This was
largely due to the fact that peasants had good outside options. They could go
to the city or work on another manor. Thus, keeping peasants enserfed was
too expensive to justify the costs. Meanwhile, in Central and Eastern Europe,
coercion proved a more viable strategy. This is because there were fewer
cities, and those cities that did exist tended to be smaller. This meant fewer
outside options for peasants. This, in turn, made coercion a viable strategy
for landlords.
Voigtländer and Voth (2013b) argue that the shock of the Black Death
pushed Europe into a Malthusian steady-state characterized by higher per
capita incomes. Higher incomes increased the demand for manufactured
goods, including luxuries. As workers’ incomes rose, they spent a higher
proportion of their income on manufactured goods produced in cities.
Greater demand led to higher levels of trade and urbanization in many parts
of Europe. The intensification of warfare in Europe after 1350 also pushed
people into urban areas. Greater levels of urbanization then pushed up the
death rate further as cities were unhealthy population sinks. Thus, the origins
of Western Europe’s relatively high incomes in the centuries prior to the
Industrial Revolution can be found in the “Three Horsemen of Riches”: war,
plague, and urbanization (Voigtländer and Voth, 2013b, p. 776).
The late Middle Ages was a relative golden age for workers. Ordinary
people could afford richer and more varied diets. Meat consumption
increased, housing improved, and more money was available to be spent on
clothing and fashion (Dyer, 2005). Labor scarcity gave workers increased
bargaining power, which they used to demand both higher wages and greater
freedom.
After 1500, population growth resumed. In line with a Malthusian model, the
result was a gradual fall in real wages from the heights achieved in the late
Middle Ages. The period between 1550 and 1650 was “an iron century” in
which ordinary people’s standards of living fell (Kamen, 1971). This is
exemplified in England, where there was a clear inverse relationship
between wages and population prior to industrialization (see Figure 5.5).
Household Formation and the European Marriage
Pattern
In a simple Malthusian model, living standards are determined by the
intersection of fertility and mortality. As we saw in Figure 5.3, higher
income per capita can be obtained if fertility can be restrained. Malthus
himself considered this possibility, distinguishing it as a preventive check (as
opposed to a positive check, which refers to disease and starvation).
Figure 5.5 Population and wages in England, 1209–1750
Data sources: Galor (2005) and Clark (2010).

One example of the preventive check was the practice of late marriages. For
women, teenage marriage was common in many parts of the world since the
dawn of the institution of marriage. However, in parts of late medieval
Europe, women tended to marry in their mid-twenties. Hajnal (1965) labeled
this practice the European Marriage Pattern (EMP). This marriage pattern,
which was characteristic of most of Europe in 1900, had its origins in
northwestern Europe several hundred years earlier. Common in Scandinavia,
the British Isles, the Low Countries, Germany, and northern France, it was
less evident in Southern Europe and entirely absent in Eastern Europe. Why
might this marriage pattern matter for economic growth?
Before the modern period, female age at marriage was important in
determining aggregate fertility (see Figure 5.6). Childbirth outside of
marriage was rare. But birth control within marriage was not widely
practiced. Since fertility within marriage remained high, aggregate fertility
was significantly reduced by delayed marriages. Every two years a woman
was not married reduced the number of children she had, on average, by one
child. Malthusian theory therefore suggests that the EMP helped keep per
capita incomes higher than they would have otherwise been. Some scholars
have gone further and argued that the EMP could have played a decisive role
in the transition to modern economic growth. We consider both claims here.
Figure 5.6 Fertility and female age of marriage in England, 1590s–1830s
Data sources: Wrigley, Davies, Oeppen, and Schofield (1997, p. 130) and Galor (2005).

The EMP was associated with small, nuclear households, based on a single
married couple. After marriage, the husband left his parents’ home and
became the head of a new household. Prior to marriage, young people
worked in other households as servants or wage laborers. While working,
“women were not under the control of any male relative. They made
independent decisions about where to live and work and for which
employer” (Hajnal, 1982, p. 475). This contrasts sharply with pre-industrial
societies outside of northwestern Europe. There, joint households,
comprising two or more married couples, were common. These households
were characterized by universal and early marriage and high fertility.
These two systems reacted differently to population pressure. In joint
households, an increase in the population might increase the
underemployment of married adults. In contrast, in northwestern Europe,
population pressure would have simply caused delayed marriages. The
characteristics of the EMP can therefore be summarized as follows:

High age of first marriage: ≈ 25 for women.

Very low levels of illegitimacy.
≈ 10% never marry.
Nuclear families rather than stem families (adult married children live
with one set of parents in the latter).

One consequence of the EMP was that a considerable proportion of women

were able to earn money independently prior to entering into marriage. Late
marriage enabled young men and women to choose their own spouses
independent of the decisions of their parents (de Moor and van Zanden,
2010). Labor markets played a critical role in this development.
The EMP also had implications for how inheritances and marriages were
arranged. In Southern Europe, women received their inheritances through
dowries. The dowry system created an incentive for early marriage for both
the bride and her parents since a woman who waited too long to marry
became less desirable in the marriage market and thus required a large
dowry in order to compensate the groom. However, in Northern Europe,
women were not disinherited at marriage and dowries mattered less.
Conjugal inheritance, common in Northern Europe, meant that women could
expect to inherit a fair share of the household’s resources in the event of
separation or widowhood. This ensured that woman had an incentive to earn
money and accumulate resources within marriage.
The origins of the EMP are difficult to discern. It became prominent in the
centuries following the Black Death. The demographic collapse of the
second half of the 14th century increased the demand for labor and increased
both the opportunities women had for wage labor and the remuneration they
received. Without a functioning market for workers, it would have been
difficult for young people to set out on their own, save money, and form
households independent of their parents.
Did the EMP Spur Economic Growth?
Two distinct claims are made on behalf of the EMP. The weak claim is that it
played an important role in restraining fertility and hence maintaining per
capita incomes in a Malthusian economy. The stronger claim is that it played
a crucial role in the transition to modern economic growth. To address this
claim, we have to move beyond a simple static model like that in Figure 5.3.
Let us consider the evidence in favor of the stronger claim.
Theoretically, we have seen that the EMP could raise the equilibrium level
of income by a moderate amount in a Malthusian world. How might this
translate into a sustained increase in economic growth? Voigtländer and Voth
(2013a) argue that the demographic shock of the Black Death had a
differential effect in Northern Europe – where the land could be turned over
to pastoral agriculture – than in Southern Europe, where the land was more
suited for arable farming. As pastoral farming increased the demand for
female labor, this contributed to labor and marriage market outcomes in
which individuals married late and restricted fertility (the EMP).
In a related argument, Voigtländer and Voth (2006) simulate a model of the
English economy between 1700 and 1850. They find that industrialization
was dependent on England’s low-pressure demographic regime. Their model
suggests that in a high-fertility regime, faster population growth during the
early stages of economic expansion pushes down per capita incomes and
reduces the effective demand for manufactured goods. This prevents
sustained economic growth from getting started in the first place. England
was saved from this fate because of its low birth rates.
Another channel linking the EMP to growth is human capital investment.
Foreman-Peck (2011) argues that by lowering birth rates, the EMP also
lowered death rates and encouraged investment in human capital. This
argument builds on the claim of Becker and Lewis (1973) that families trade
off the quantity and quality of their offspring in response to relative prices.
Foreman-Peck (2011) provides suggestive empirical evidence that in 19th-
century England, low birth rates were associated with lower infant mortality
and greater human capital investments.
Reasons for Skepticism
Dennison and Ogilvie (2014) dispute the argument that the EMP had any
relationship with sustained economic growth. They argue that the EMP was
actually most developed in parts of Central Europe that saw economic
stagnation rather than growth in the early modern period. They dispute the
claim that England had a unique demographic regime and that fertility was
especially responsive to economic conditions. In support of this claim, they
show that when measured at the age at first marriage, the EMP was less
extreme in England than elsewhere. This was particularly true of the parts of
Central Europe that grew more slowly. They argue that “[w]hat is needed is
a theoretically coherent and empirically satisfactory account of how
particular aspects of the EMP were connected to the wider institutional
context, and which demographic and institutional features were responsible
for which economic outcomes” (Dennison and Ogilvie, 2014, p. 687).
Taking into account the wider institutional context is not necessarily
antithetical to EMP arguments. In fact, proponents like Carmichael, de Pleijt,
van Zanden, and de Moor (2016) argue that the EMP was a reflection of a
wider institutional package based on joint households and the idea of
marriage based on consent. Accordingly, it cannot simply be measured
narrowly as age at first marriage. The institutions of the EMP which
emphasized consent and participating in the workforce raised the age at first
marriage. But more prosperous economic circumstances lowered this.
According to Carmichael et al. (2016, p. 202), economically successful
regions with EMP institutions had lower marriage ages than those with
stagnating EMP regions.
However, it is clear that the EMP did not always simply reflect a voluntary
decision between bride and groom. Dennison and Ogilvie (2014) are on
stronger ground when they contest whether the EMP was good for women’s
economic opportunities or status. They contend that women’s rights and
status varied greatly within societies characterized by a high age of first
marriage: in “many regions of Switzerland, Germany, and France, as local
studies indicate, the EMP prevailed but women’s work, wages, property
rights, and in some cases even their consumption choices, were restricted by
local communities” (Dennison and Ogilvie, 2014, p. 674). Local institutions
such as guilds excluded women, and economically independent women were
often harassed by landlords.
Many instances of enforcement of the EMP involved coercion. Marriages
were policed by local communities, pre-marital sex was harshly punished,
and labor markets were not always welcoming places for women. Ogilvie
(2003) documents the extent to which guilds and local elites controlled
women’s ability to work in early modern Germany. Far from freeing women,
the highly regulated and guild-dominated labor markets of 17th-century
Germany were places where women’s labor was frequently exploited.
Another criticism of the EMP argues that many East Asian societies also
restricted fertility. If fertility restrictions were not unique to northwestern
Europe, then it can hardly have been crucial to its economic rise. Lee,
Campbell, and Feng (2002) provide evidence that the Chinese regulated
fertility through a range of different practices. Infanticide, for example, was
widely practiced. Female babies were often exposed and the resulting
unbalanced sex ratio meant that as much as 20% of the male population did
not marry and reproduce. Moreover, it was common in China for young
married couples to spend time apart, a practice that further reduced fertility.
Chinese families also practiced spacing and targeted a certain number of
children (Campbell, Feng, and Lee, 2002). As a result, marital fertility was
lower in China than in much of Europe. Similarly, in Tokugawa Japan,
fertility restraint was widely practiced through abortion, infanticide, and
male migration (Hanley and Yamamura, 1977, p. 25).
These practices were certainly important in shaping Chinese and Japanese
demography. They fall somewhat flat, however, as criticisms of the
significance of the EMP. What advocates for the importance of the EMP like
Carmichael, de Pleijt, van Zanden, and de Moor (2016) emphasize is that the
EMP was not simply a means of restricting fertility. It was also a set of
institutional arrangements that orientated households, and particularly
women, towards the market and human capital accumulation. Practices such
as infanticide may have constrained fertility, but they did so in a costly way.
These practices do not appear to have been part of a package of institutional
innovations that were favorable to economic development.
Demographic Change and the Transition to
Modern Economic Growth
It is possible for the beginnings of modern economic growth to arise in a
Malthusian economy. Our examination of the EMP suggests how different
demographic regimes can affect levels of per capita income. But, as we will
discuss further in Chapters 7, 8, and 9, sustained innovation is the key to
unlocking the modern economy. Not all societies have been innovative.
Innovation can take a stroke of brilliance. Innovation is also more likely to
occur when a society has the capacity to transmit knowledge of the past to
future generations. Larger populations likewise breed innovation (Kremer,
1993; Henrich, 2004). How does sustained innovation emerge in a
Malthusian economy?
The transition from Malthusian stagnation to modern economic growth has
been studied by Galor and co-authors (Galor and Weil, 2000; Galor, 2005,
2011). Galor proposed a unified theory of the transition from Malthusian
stagnation to sustained economic growth based on the interaction of
demography and the incentive to invest in human capital. He called this
theory unified growth theory.
Unified growth theory accounts for two important developments: (1) the
gradual increase in growth rates that occurred during the Industrial
Revolution; and (2) the demographic transition of the late 19th and early
20th centuries. The demographic transition saw fertility rates plummet and
ensured that as incomes rose, the rate of natural population increase
declined. Today, population growth in many rich countries is below the rate
of natural replacement.
Galor’s theory begins with the fact that for most of history, the rate of
technological progress was low. Consequently, the returns to investment in
human capital were also low. Parents thus had little incentive to invest in
education. They invested in the quantity rather than the “quality” of children.
The economy remained Malthusian. Improved technology led to more
people but not to higher per capita income.
Investment in human capital therefore occurs only when the stock of human
knowledge is large enough that technological improvement is common. But
how and why does the stock of human knowledge increase in the first place?
All else being equal, the larger the population is, the higher the chances of a
major invention or a new idea.
Over time, as the stock of knowledge increases, it eventually raises the
returns to human capital. As a result, it becomes worthwhile for parents to
invest in their children’s human capital. Consequently, the rate of economic
growth increases further. The returns to human capital increase to the point
that parents start to have fewer children. This induces a demographic
transition to a modern growth regime. In this regime, parents focus on the
“quality” of their children rather than the quantity. Hence, according to this
argument, the second phase of the Industrial Revolution after 1850 led to a
widespread increase in the demand for more educated workers. We will
return to these ideas in Chapter 9, when we discuss the role that population
growth played in the rise of the modern economy.
Chapter Summary
The basic facts of births and deaths dominate much of economic history. A
casual look at the travails of the English royal family demonstrates that the
rich and powerful were not exempt from these basic facts. At the macro-
level, historians have seen the ups and downs of pre-industrial history as
dictated, at least in part, by demography.
Perhaps the most dramatic example of this is the Black Death. It culled
Europe’s population and led to higher wages for ordinary workers. But
demographic factors did not operate in isolation. The birth rate was largely
determined by patterns of marriage and household formation (that is, by
institutional and cultural practices). In ancient Rome, women married as
soon as they reached sexual maturity. The consequent high birth rate was
partly responsible for the low average incomes earned by unskilled workers
in the Roman Empire (Harper, 2017). In late medieval Europe, and
especially after the Black Death, age at first marriage rose. This European
Marriage Pattern helped moderate demographic pressure and keep wages
relatively higher than they would otherwise have been, though its
importance for long-run growth is debatable.
The Industrial Revolution was followed by a demographic transition. Per
capita incomes grew modestly during the Industrial Revolution as population
growth accompanied the overall increase in GDP. With the demographic
transition, as population growth slowed, per capita income began to rise in a
sustained fashion. We will return to the demographic transition in Chapter 9.
It is one of the key reasons that economic growth has become sustained.
Above all, the demographic transition encouraged investment in human
capital. According to unified growth theory, as technological progress
accelerates, the returns to human capital increase, and this induces parents to
switch from large families and low levels of education to smaller families
with highly educated children. This is one of the reasons that demographic
factors enabled parts of the world to become rich. But was it decisive? Did
demography interact with other factors such as institutions and culture? We
will return to these issues in Chapter 7.
6
Was It Just a Matter of Colonization
and Exploitation?
In the 15th century, sailors from Portugal – a small, peripheral kingdom on
the edge of Europe that had only recently overcome the threat of Muslim
invasion from the south – began to explore the coast of Africa. Each year
they sailed further. Their motivations were mixed. Initially, some came in
search of Christian allies to join the wars against Islam and hoped to find the
legendary Prester John, ruler of Ethiopia. Others traveled in search of exotic
products from the east, particularly spices. Others still were in search of
precious metals like the gold that was produced along the West Coast of
Africa. Yet others sought slaves.
It was these Portuguese successes under Prince Henry the Navigator (1394–
1460) and the subsequent rounding of the Cape of Good Hope by
Bartolomeu Dias in 1488 that inspired Christopher Columbus. Columbus
hoped to reach India and China by sailing westwards across the Atlantic.
Instead, of course, he reached the Americas. In 1498, Vasco da Gama
became the first to reach India directly from Europe by sailing east. These
early voyages laid the foundations for Spain’s Atlantic empire and Portugal’s
empire in Southeast Asia and for the later colonial ventures of the Dutch,
French, and English. From the very beginning, many of the violent and
exploitative practices characteristic of European colonialism were evident.
Da Gama harassed local shipping, bombarded cities, and demanded that
Muslims be expelled from Indian cities. On one occasion, he burned to death
all the passengers of a captured ship.
The opening of trade routes to Asia and the Americas was a landmark event
in world history. It led to the formation of global empires and gave rise to
new patterns of trade and settlement. But was it crucial to the origins of
modern economic growth? A final set of explanations for how Western
Europe became rich hinge on the importance of colonization.
The process of European colonization was episodic. Following the
Portuguese ventures in Asia and the Spanish conquest of the Aztec and Inca
Empires in the Americas, other European powers outfitted and armed fleets.
They also encouraged settlers to search for new territories to exploit.
Initially, European colonies were located either in the Americas, where
epidemic disease rapidly depopulated the continent following contact with
Europeans, or in the periphery of Asia and Africa. Europeans were unable to
venture far into sub-Saharan Africa. Nor were European states powerful
enough to overcome the Mughal emperors of India or the Ming emperors of
China. It was only in the late 19th century that large parts of Africa,
Southeast Asia, and the Middle East also came under European purview.
The most common explanation for why colonization made Western Europe
rich is exploitation. The colonial powers exploited the natural resources of
their colonies. These included precious metals (South America), rubber
(Congo), spices and sugar (Indonesia), oil (Middle East), and slaves. This
had two consequences. First, cheap inputs and labor from the colonies
allowed for dramatic economic expansion in Western Europe. In one telling,
European industrialization is impossible to imagine without its vast colonial
empires. Second, the colonized countries were impoverished due to the
exploitation of their natural resources. Had they never been colonized, many
parts of the world (Africa, South Asia) would have been much better off than
they currently are. Hence, theories that rely on colonization attempt to
explain both why Europe became rich first and why much of the rest of the
world has been relatively slow to catch up. Do these explanations survive
upon further scrutiny? Colonization was brutal and extractive. Its legacy is
still with us in many respects. But was it responsible for modern economic
growth?
We focus in this chapter on the economic consequences of colonization. This
is certainly not a full accounting. The costs and benefits of colonization
cannot solely be calculated in monetary terms. Colonization entailed a wide
spectrum of actions and outcomes. At their worst, Europeans committed
genocide, enslaved Africans and natives, and tore up the pre-existing social
fabric of the colonies. These costs are unquantifiable. Yet, if we want to
consider colonization as a key cause of why the world became rich, we must
consider it relative to the counter-factual world where European colonization
never took place. Would Britain still have had an Industrial Revolution?
Would India and sub-Saharan Africa still be relatively poor? Recent research
in the social sciences has asked these and related questions. Here, we
examine their findings.
How Did the Colonizers Benefit?
Empire is as old as history. When the Assyrians captured Israel in the 8th
century BCE, and the Babylonians conquered Judah a century later, loot and
slaves enriched the cities of Nineveh and Babylon. The city of Rome grew
large and Roman elites grew wealthy on the back of an empire established
across the Mediterranean and Western Europe. The Mongol conquests of the
13th century saw the populations of China and the Middle East collapse. The
Ottomans enslaved Europeans and Africans on a large scale in the 15th and
16th centuries. But none of these empires saw sustained economic growth.
Looted wealth was simply a transfer from one place to another.
Nonetheless, one popular explanation attributes the rise of Europe to the
resources plundered from the Americas (and later Africa and Asia). There
was undoubtedly much plunder. Individuals like Thomas “Diamond” Pitt
and Robert Clive became extremely wealthy from looting India, as did the
Conquistadors who looted Mexico and Peru. Yet, the amount of wealth taken
from the Americas and British India is small compared to the increase in
overall national income that took place after 1800.
Previous episodes of empire building did not result in modern economic
growth. Nor did all of the colonial powers experience sustained economic
growth – Spain and Portugal stagnated in the 17th and 18th centuries.
Nevertheless, it is possible that colonization contributed significantly to the
onset of sustained economic growth in Britain and its spread to northwestern
Europe and North America.
The ultimate source of many of these arguments is Karl Marx. He outlined
his theory of primitive accumulation in his landmark work of political
economy Das Kapital (1868/1990, p. 915):
The discovery of gold and silver in America, the extirpation,
enslavement and entombment in mines of the aboriginal population, the
beginning of the conquest and looting of the East Indies, the turning of
Africa into a warren for the commercial hunting of black-skins,
signaled the rosy dawn of the era of capitalist production. These idyllic
proceedings are the chief moments of primitive accumulation. On their
heels treads the commercial war of the European nations, with the globe
for a theatre. It begins with the revolt of the Netherlands from Spain,
 assumes giant dimensions in England’s Anti-Jacobin War, and is still
going on in the opium wars against China, &c.
According to this argument, colonization provided the initial capital required
for the construction of the modern economic system. It was also a trying
ground for capitalist practices. Thus, says Marx (1868/1990, p. 918), “The
colonial system ripened trade and navigation as in a hothouse.” The trading
monopolies that dominated colonial trade
were powerful levers for the concentration of capital. The colonies
provided a market for the budding manufactures, and a vast increase in
accumulation which was guaranteed by the mother country’s monopoly
of the market. The treasures captured outside Europe by undisguised
looting, enslavement and murder flowed back to the mother-country
and were turned into capital there.
We will review some of the arguments specifically linking colonization with
the British Industrial Revolution in Chapter 8.
More recently, the book that made famous the term “the Great Divergence”
claims that one of the keys to Europe’s rise relative to China was all of the
new land (“ghost acreage”) in the New World. New land relieved population
pressures in Europe and brought in new natural resources (for more on
Pomeranz’s [2000] argument, see Chapter 2).
Certainly, there is much to the argument that Europe benefited from the
resources of the New World. For instance, Nunn and Qian (2010) show that
the potato was one of colonization’s great finds. The potato was a New
World crop that was much more nutritious and more efficiently grown than
Old World crops (see Table 6.1). Nunn and Qian estimate that the
introduction of the potato was responsible for about one-quarter of Old
World population growth and increase in urbanization between 1700 and
1900. Such numbers make it clear that the flow of goods from newly
“discovered” lands played an important role in the economies of early
modern Europe. But were such factors decisive in generating modern
economic growth?
How important colonization was for economic growth depends on which
parts of the world we are talking about. From Figure 6.1, we can see that a
large fraction of the world’s landmass was at some point under European
control. For some countries, the period of colonial rule was short and
transitory. For others, it was long-lived. Europeans had a negligible impact
on East Asian societies like China and Japan until after 1800 and so it is hard
to see how colonization had a negative effect on them prior to the Great
Divergence. Arguments pertaining to this divergence therefore focus on the
benefits of empire to Europeans.
Table 6.1 English crop yields, 18th century
Energy needed to feed one family for one year provides 42 megajoules of energy per day, or
approximately 10,000 calories.
Data source: Nunn and Qian (2010).
Average yield per Acres of land needed to feed a family
acre (kg) for one year
Wheat 650 1.7
Barley 820 1.4
Oats 690 1.6
Potatoes 10,900 0.5

Figure 6.1 Countries colonized by Great Britain, France, Spain, Portugal,

the Netherlands, or Belgium, 1500–1950
With respect to the Middle East, although some arguments center on the
negative aspects of colonization (focusing on, for instance, the Sykes–Picot
agreement of 1916, which split the region into various spheres of influence
with little respect for pre-existing ethnic divisions), Kuran (2011) notes that
the timing of such arguments is off. The divergence between Western Europe
and the Middle East happened well before the colonization of the latter. It is
therefore an unlikely culprit in the divergence.
Strong claims are made that conquest by the East India Company and the
establishment of the British Raj had catastrophic effects on the Indian
economy. These claims, however, are not supported by the facts. While
British rule brought Indians little improvement in per capita income, the
evidence suggests that the Indian economy was in deep decline decades prior
to the British takeover (Broadberry and Gupta, 2006; Clingingsmith and
Williamson, 2008; Broadberry, Custodis, and Gupta, 2015; Gupta, 2019).
We further examine Indian economic growth in Chapter 10.
With respect to Africa and Latin America, the colonizers certainly benefited
from the resources and slave/coerced labor provided by the regions.
Meanwhile, these regions also fell further behind because of colonization.
Some arguments focus on the role of the colonies and slavery in Britain’s
industrialization. Britain was far from the first to engage in the transatlantic
slave trade: Portugal sent millions of slaves to its Brazilian colony from the
16th century onwards. But Britain came to dominate the slave trade as it
proved increasingly successful in acquiring Caribbean islands and their
access to sugar, tobacco, and cotton (see Figure 6.2). For this reason, many
scholars – most notably Williams (1944), Solow (1987), and Inikori (2002) –
have seen something singular in the connections between slavery, the
Caribbean sugar economies, and subsequent industrialization.
The role that slave and coerced labor played in Britain’s industrialization has
been the source of heated discussion for decades, if not longer. This is an
important debate. After all, Britain’s industrialization played a key role in
how the world became rich. But in order to discuss this issue, we need a
better understanding of Britain’s Industrial Revolution. This is the focus of
Chapter 8. We will therefore hold off on discussing this until then.
In the remainder of this chapter, we focus on the varying detrimental
consequences of colonization for those that were colonized. If colonization
benefited the colonial powers, its negative effects on those parts of the world
that were colonized may have been greater still. A large literature has
emerged in recent years that attempts to explain the lingering effects of
colonization on the colonized. Some places subject to colonial rule clearly
ended up quite well-off (the US, Canada, Australia, New Zealand, Hong
Kong, and Singapore), while others remain poor today (much of sub-Saharan
Africa and Southeast Asia). What accounts for these differences? What role
did colonization play, if any? Why has poverty persisted in many of the
colonies?
Figure 6.2 Number of slaves in the transatlantic slave trade by carrier
Data sources: The Transatlantic Slave Trade Database at www.slavevoyages.org, downloaded
March 23, 2021. Also see Whatley (2018).
The Slave Trades
Of the many odious aspects of colonization, the most odious was the slave
trade. The slave trade is as ancient as history. During the expansion of the
Roman Empire, millions of slaves were transported to Italy. In just one
episode, Caesar sold 53,000 individuals into slavery following the defeat of
the Atuatuci. According to his own estimates, over 1,000,000 individuals
were killed or enslaved during his conquest of Gaul. The Arab Conquests of
the 7th–8th centuries also saw a revival in slavery in Europe and the Middle
East.
Between 1400 and 1900, Africa experienced four slave trades: the
transatlantic trade (to the New World), the trans-Saharan trade, the Red Sea
trade, and the Indian Ocean trade. The colonial powers were the primary
participants in the transatlantic trade, which brought over 12 million slaves
to the New World (Nunn, 2008). This number does not include those killed
in slave raids or those who died on the journey to the port. It is thus an
underestimate of the total number of Africans lost to the slave trade. Most of
these slaves came from the west coast of Africa (see Figure 6.3). It is hard to
overstate the impact of the slave trades on economic and demographic
growth. According to Manning (1990), by 1850, Africa’s population was
only half of what it would have been had the slave trades never taken place.
Figure 6.3 Number of slaves taken in the slave trades
Data source: Nunn (2008).

Many of the costs of the slave trades were not directly economic. The
psychological costs of being enslaved are incalculable. The sociological
costs of what the slave trades did to African communities, as well as the
damage done to slave families torn apart in the New World, may well be
greater than the economic costs of forgone development. Yet, this does not
mean that we should be uninterested in the economic costs of the slave
trades. They play a significant role in Africa’s continued poverty. Nunn
(2008) finds that countries that had high levels of slave “exports” (an
unfortunate term when speaking of human beings) have lower GDP, greater
ethnic fractionalization (which itself is associated with lower income in
numerous economic studies), and worse political institutions (see Figure
6.4). The gap grew following the collapse of European colonial rule.
Between 1950 and 2000, the per capita GDP of high slave export countries
was nearly constant (at a low level of less than $3 a day), while the per
capita GDP of low slave export countries nearly doubled from around $4 to
$8 a day. This suggests that the slave trades might be responsible for both
the relative poverty of sub-Saharan Africa and differences of income within
Africa. But the slave trades have ceased to exist for well over a century. Why
would their residue still be with us?
One reason the slave trades still affects outcomes is that they shaped the
culture of societies damaged by them. As we noted in Chapter 4, culture can
persist long after the original impetus for the cultural trait has disappeared.
One of the most lasting cultural impacts of slavery arose from the way in
which slaves were captured. Some were captured through state-organized
raids and warfare, while many others were kidnapped or tricked into slavery
by people such as close friends or family members. This produced a culture
of mistrust and uncertainty in those regions affected by the slave trades.
Nunn and Wantchekon (2011) found that people whose ancestors belonged
to ethnic groups that were heavily exposed to the slave trades still have
lower trust today of relatives, neighbors, co-ethnics, and local government.
This negatively impacted Africa’s economic development and may explain
some of Nunn’s results cited above linking the slave trades to long-run
economic outcomes. As we noted in Chapter 4, trust is a crucial component
of exchange, especially with previously unknown persons. The dearth of
trust in sub-Saharan Africa, engendered by the slave trades, is therefore an
impediment to the region’s development.
Other consequences of the slave trades abound. Whatley and Gillezeau
(2011) find that places more heavily affected by them have higher ethnic
fractionalization today. That is, there are more ethnic groups living in close
proximity to each other in these regions. Africa does in fact have many
ethnic groups (see Figure 6.5). But what does this have to do with the slave
trades? The logic is straight-forward: where slave raiding was profitable,
local groups would raid each other rather than form larger, cohesive states.
Ties across villages and ethnic groups were weakened. Inter-ethnic alliances
and marriages were less common. This led to more ethnic groups over time.
Figure 6.4 The relationship between slaves exported and economic
indicators
Data sources: Nunn (2008) for slave exports and state development, Bolt and van Zanden
(2020) for GDP.
Figure 6.5 Africa’s ethnic boundaries prior to colonization
Data source: Nunn (2008).
There are many reasons that ethnic fractionalization might be negatively
associated with economic growth. In fractionalized states, some groups rule
over others. This can be disastrous, especially if these groups have a history
of animosity towards each other. In these settings, fractionalization can cause
civil conflict, less public good provision, and lower trust. In fact, Easterly
and Levine (1997) find that ethnic fractionalization is responsible for around
25% of the differences in African and Asian economic growth. As the results
of Whatley and Gillezeau (2011) suggest, this may be a residue of the slave
trades.
The Resource Grab
From the point of view of long-run economic growth, perhaps the most
damaging aspect of colonialism was the institutions the colonizers
established. As we saw in Chapter 3, institutions can be hard to change.
They also tend to stick around well beyond the time their original purpose is
relevant. This can be really bad for economic development if the original
institutions were exploitative in the first place.
European colonizers mostly set up institutions in their colonies to maximize
the amount of resources extracted. Some of these institutions built off of
institutions that were there prior to colonization. Others were completely
new to the environment. Extraction often required forced labor and brutal
means of suppression. In the Belgian Congo, for instance, local chiefs were
given rubber quotas. If coerced laborers failed to meet these quotas, they
could be imprisoned, burned, or murdered (Lowes and Montero,
forthcoming). The Spanish set up similar forced labor institutions in their
South American colonies, where natives were forced to work in silver mines
– most notably in Potosi. These institutions were extractive. Their primary
purpose was to extract resources, most of which went back to the colonizing
country.
Where extractive institutions were established, rights for the native
population were limited (if they existed at all), and investments in public
goods tended to be restricted to those that facilitated extraction (such as
roads leading from mines to ports). Unfortunately, many post-colonial
governments found these extractive institutions useful as well. As a result,
these institutions often persisted after independence. This is one of the
reasons why “bad” governance – in terms of checks and balances and
freedoms secured – is more common in the formerly colonized world than in
Western Europe. However, not all of the former colonies got bad institutions.
For instance, Australia, New Zealand, Canada, and the US all have
institutions that place limits on the extractive ability of the state. Why did
some colonies end up with “good” institutions and others end up with “bad”
ones?
Acemoglu, Johnson, and Robinson (2001) were among the first to offer a
comprehensive answer for the large variation in contemporary institutional
quality and economic outcomes in the former colonies. They argue that
colonizers set up different types of institutions depending on how frequently
settlers died in the colonies. In places with climates poorly suited for
European settlement – such as Africa’s “malaria belt,” where European
mortality rates were extremely high – the incentive for Europeans was to
extract as much as they could. There was little reason to set up European-
style institutions, since this would limit their capacity to exploit the native
populations. On the other hand, in more temperate climates similar to those
found in Europe – such as the US or the east coast of Australia – there was
more incentive for Europeans to settle. As more Europeans came over, they
brought with them the type of legal, political, and religious institutions that
were so vital to their continent’s economic growth. The analysis conducted
by Acemoglu, Johnson, and Robinson supports these relationships. They
find that places with higher settler mortality still have worse institutions
today, and those places with worse institutions are also poorer (see Figure
6.6). This might also be responsible for the “reversal of fortunes” that they
found in a follow-up study (Acemoglu, Johnson, and Robinson, 2002:
discussed in Chapter 1, see Figure 1.8). Those places that were the
wealthiest in the world in 1500 were among the poorest by the end of the
20th century. It was precisely those places with easily exploitable natural
resources that got the bad colonial institutions associated with poor long-run
economic development.
Figure 6.6 Settler mortality, institutions, and long-run development
Data source: Acemoglu, Johnson, and Robinson (2001) for settler mortality and expropriation
risk, Bolt and van Zanden (2020) for GDP.

Sokoloff and Engerman (2000) argue that the reversal of fortunes was
especially pronounced in the Americas, where places with good agricultural
suitability – the Caribbean, large parts of Latin America, and the southern
US – got institutions that strongly favored a small landholding elite. These
institutions brought wealth to the elite, but also caused tremendous
inequality, much of which is still present today. On the other hand, the more
marginal farming lands of the northern US and Canada were poorly suited
for growing cash crops. Instead of relying on the exploitation of the native
population, these colonies relied on laborers of European descent with
relatively high levels of human capital. Institutions favoring local enterprise,
rather than cash crops and labor exploitation, arose in these areas and have
largely persisted to the present day. Bruhn and Gallego (2012) provide a
slightly alternative view, arguing that labor-exploiting institutions in the
Americas are associated with a lack of political representation in the present.
Areas exploited in the past still have less political voice today. This enables
more rent-seeking by the plutocratic class and lower overall economic
development.
The resource grab was the dominant theme of Spanish colonization in South
America. Its mines provided a large share of the world’s precious metals in
the 16th and 17th centuries. Mining is a dangerous, labor-intensive
enterprise, hence, the Spanish forced natives to do this work. One of the
most pernicious institutions that facilitated this forced labor was the mita, a
system that required indigenous communities to send one-seventh of their
adult male populations to work in the mines. Dell (2010) found that those
living within the old mita boundaries have less consumption and worse
health today, despite the fact that the mita was abolished in 1812. This is
likely due to the type of colonial institutions set up in mita areas. There was
less education provided, less connection to the system of roads, and
increased subsistence farming. All of these persist in some form to the
present day and continue to hold back the economic potential of former mita
regions.
Another example comes from the Belgian Congo. Belgian King Leopold II
(r. 1865–1909) set up one of the most extractive colonies of the entire
colonial period. As discussed above, local chiefs were given rubber quotas,
and violence was likely if the quotas were not met. Ultimately, this meant
that the chiefs who were most prone to enforce rubber quotas by
transgressing the rights of their people stayed in power. This is a prototypical
“bad” institutional design. Its effects are still present today. Lowes and
Montero (forthcoming) find that places that were in the rubber concession
zone have much worse education, wealth, and health outcomes than those
that were not. The most likely reason is that village chiefs in these regions –
many of whose positions are hereditary – are still less likely to provide local
public goods like road maintenance and conflict arbitration.
Colonial institutions were established not only to extract natural resources,
but also to tax the local populations. How these taxation systems worked
was important. Some gave significant power to local authorities in return for
tax collection. This tended to be bad for long-run economic development.
Local power brokers wanted to keep their rents flowing after independence,
and thus extractive institutions tended to persist. Banerjee and Iyer (2005)
studied these taxation institutions in colonial India. They found that, even
decades after independence, places in which rights were given to local
landlords continued to have greater inequality, lower agricultural
productivity, and less investment in health and education. These differences
were mostly due to differences in government spending. Places where
landlords dominated in the past tend to irrigate and fertilize less in the
present, leading to lower crop yields (see Figure 6.7).
India provides a fertile testing ground for examining the effects of colonial
rule. Not only was it by far the most populous of the European colonies
(colonial India also included modern-day Pakistan and Bangladesh), but only
parts of it were ruled by the British. The rest of the subcontinent, known as
the “Princely States” because they were ruled by local princes, maintained
some degree of political autonomy. Iyer (2010) found that areas that were
formerly under British rule have much less access to schools, health centers,
and roads. They are also no better off in terms of agricultural productivity or
investment. One explanation for these results is that local princes funneled
less tax revenue into their own pockets than did the British, instead spending
more on public goods. Another reason is that the British removed the worst
princes in the colonial period. This gave an incentive for princes to be
relatively good rulers. It is not clear if this result extends beyond India,
however. Lange (2004), on the other hand, finds that former British colonies
that were under direct rule (that is, they were ruled by the British
administrative apparatus) tend to have more political stability, bureaucratic
effectiveness, rule of law, and freedom from government corruption than do
those that were under indirect rule (like the Princely States).
Another set of negative consequences from colonization stemmed from poor
political design. Colonial powers sought to rule groups of people they knew
relatively little about. This led to some disastrous decisions. In the US,
Native Americans were placed on reservations at the tribal level. However,
most Native American political decisions were historically determined at the
sub-tribal level. Dippel (2014) studied the impact of this forced coexistence
on Native American tribes and found that reservations that combined
multiple sub-tribal bands are around 30% poorer today than those that did
not. The primary explanation is poor local governance. These reservations
have more political corruption and internal conflict, while having less
certainty about the contracting environment and less investment by local
government.
Michalopoulos and Papaioannou (2016) find further evidence of poor
colonial political design in the “scramble for Africa.” In the late 19th
century, much of sub-Saharan Africa remained among the last places on
earth that had not come under some type of colonial rule. The European
powers sought to change this. Meeting in a board-room in Berlin (the Berlin
Conference of 1884–5), they partitioned Africa among Great Britain, France,
Germany, Italy, Belgium, Portugal, and Spain. The people in charge of
dividing Africa into spheres of influence had little knowledge of the
continent. The consequences were disastrous. The colonial powers gave little
thought to pre-existing ethnic divisions. They just wanted to maximize their
own share of the pie. This meant that rival ethnic groups were placed in the
same states – a situation that continued after independence as these colonial
borders largely remained. Michalopoulos and Papaioannou find that these
partitions (which affected many ethnic groups throughout Africa: see Figure
6.8) triggered political violence, political instability, discrimination, and
ethnic wars. This was bound to happen in an environment where some ethnic
groups rule over others, especially when there is a long history of animosity
between them. Michalopoulos and Papaioannou also find that ethnically
partitioned groups are worse off on a host of economic outcomes, including
education and wealth.
Figure 6.7 Agricultural investment in India
Data source: Banerjee and Iyer (2005).

Figure 6.8 Ethnic partitioning and the “scramble for Africa”

Data source: Michalopoulos and Papaioannou (2016).
Some Silver Linings of Colonialism?
On balance, the effects of colonization on the colonized world were almost
certainly negative. This is true of Africa, where the economic costs of the
slave trades are only one part of the overall costs faced by those enslaved
and their descendants. It is also likely true of Latin America, South Asia, and
Southeast Asia. Yet, it is important to emphasize that the colonial experience
was highly heterogeneous. Some economies stagnated under colonial rule.
Others developed rapidly. It goes without saying, of course, that economic
development does not excuse the injustices that took place.
Colonization brought some economic benefits, even in those places that
remain relatively poor today. During the colonial period, Frankema and van
Waijenburg (2012) find that real wages grew considerably in British colonial
Africa. This was accompanied by urbanization and structural change. As a
result, incomes in many African countries were above those of many parts of
Asia in 1950. Frankema and Van Waijenburg (2012, p. 912) note that “the
average annual growth rates in Accra between 1900 and 1960 were
comparable to the average growth rates in nineteenth-century London
(1840–1900).” Likewise, in a study of islands that were colonized by the
European powers, Feyrer and Sacerdote (2009) find that former colonies
tend to be better off the longer they were under colonial rule. This was not
true of all colonizers – Spanish and Portuguese colonization tends to be
associated with negative outcomes. Why might the colonial activities of
other countries (Dutch, British, French) have been associated with more
positive outcomes? These countries hardly colonized for benevolent reasons.
Yet, colonizers sometimes brought with them modern transport technologies
(such as railroads), access to education, and modern medicine. A literature
has recently emerged that tries to understand how these aspects of
colonization have affected modern economic outcomes.
Public Goods and Education
Even if one takes that view that colonialism was mostly about extraction, it
is still true that some of the colonial powers invested in their colonies – even
if the point of investment was to enhance extraction. Some of these
investments lasted after independence, either because they were fixed, like
railroads, or because they took minimal upkeep, like schools and health
clinics. Although we often do not know what types of public goods would
have been provided in the absence of colonization, the fact that some of
these goods were in fact provided is a silver lining of colonization.
Among the most important goods provided by some of the colonial powers
were railroads, which they built largely for military and (self-serving)
economic reasons. Despite this, they are one of the lasting legacies of
colonialism. Donaldson (2018) studied the effect of British investment in
Indian railroads, which began in 1853 (soon before the mutiny of 1857,
which highlighted the usefulness of railroads for military purposes). By
1930, there were 67,247 kilometers of track laid in India, making it the
fourth largest network in the world (see Figure 6.9). This was by far the
dominant form of public investment in British India. While the primary
reason the British laid so much track was military, there were economic
benefits to railroad expansion. Previously isolated parts of India became
connected with both local and international markets. Donaldson finds that
investment in railroads increased income, trade, and market integration
throughout British India. Chaudhary and Fenske (2020) provide additional
evidence that the spread of the railroad improved literacy. In a study on
Ghana, Jedwab and Moradi (2016) find that places that received colonial
railroads are more developed today despite the fact that many of the
railroads went into disuse after independence. This is because the network
encouraged urbanization around the railroad lines. Investment and economic
activity followed where urban populations were relatively dense.
Figure 6.9 The Indian railroad network, 1930
Source: Map provided by Dave Donaldson from Donaldson (2018).
Sometimes, extractive institutions can have unintended positive benefits in
the long run. Dell and Olken (2020) study one such institution: the Dutch
Cultivation System imposed in Java (Indonesia). Under this system, peasants
were forced to cultivate sugar, which was then processed in nearby factories
before being shipped to Europe. This was an extremely lucrative trade,
accounting for up to one-third of Dutch government revenue. The cultivation
system reorganized economic life in Java. Millions of Javanese worked
(often by coercion) in the sugar factories, a major shift away from the
predominantly agricultural society that had previously dominated. Villages
surrounding the factories were reorganized to grow sugar cane. Although the
Dutch did this to maximize extraction, Dell and Olken find unanticipated
consequences that are still with us. People living in proximity to the old
factories are today much less likely to be employed in agriculture and more
likely to be employed in manufacturing or retail. That is, areas near those old
factories are more developed than areas that are not. These households have
about 10% higher consumption than those living further away from the old
factories. Why do these effects persist? First, downstream industries (those
that used processed sugar as an input, such as food processing) were located
near the old sugar factories. Second, the transport network was better around
the old factories, mostly because the Dutch needed ways of getting the raw
sugar to the factories and the processed sugar to the docks. Third, some of
the increased wealth around the factories was reinvested in the area. These
regions have, on average, greater access to electricity and schools than
nearby regions. Much like the studies above, this study comes with a caveat.
It is not comparing Javanese development against what it would have been
in the absence of colonization. Instead, it merely notes that some aspects of
the colonial experience ended up having less negative long-run economic
impacts than others, even if this was not the intention.
In general, the types of colonial investments that have lasted consisted of
some type of physical facilities or had local positive externalities. This is
why transport infrastructure may have contributed to economic
development. Once railway track is laid, it is costly to take away. This also
goes for schools and health facilities. In a study of French West Africa,
Huillery (2009) found that around 30% of current performance in education,
health, and infrastructure is explained by colonial investment. She provides
evidence suggesting that physical investment in these facilities and increased
demand for local public goods are the reasons these investments persisted
over time. Within colonial Africa, Grier (1999) finds that former British
colonies outperform former French colonies. Much like the studies noted
above, investments in public goods – in this case, education – can explain
the differences in performance.
Frankema (2012) warns, however, that we should not view this as some
benevolent policy of the British. It was hardly a top priority of their colonial
policy to educate their colonial subjects. Most of the education advantage of
the British colonies was instead due to missionaries, who set up schools in
order to gain converts to Christianity. The British tended to provide better
environments for missionaries to work in, which explains the British
education advantage. More generally, missionaries provided a host of (non-
religious) goods that benefited the colonies. Because of this, they can be
viewed as one of the “silver linings” of colonialism. We turn to them next.
Missionaries
As we have mentioned before, some former colonies have done much better
than others. It is not just the wealthier, former British colonies that are better
off than others (the US, Canada, Australia, New Zealand). Argentina, Brazil,
Costa Rica, and Botswana are middle-income countries whose economies
are likely to continue to grow in the coming decades. Meanwhile, other
former colonies, such as Haiti, Mali, Sudan, and Niger, remain desperately
poor. What can account for these differences in outcomes among the
colonized? Why have the riches of economic development spread to some
but not others?
One feature of the colonial experience can account for much of this
variation: the presence of missionaries. As part of the colonization process,
Christian churches sent missionaries to far-off lands with the goal of
converting the local populations. To be clear, this literature does not claim
that it was something about Christian values or theology that enabled some
of the colonies to eventually escape the poverty trap. Instead, it emphasizes
the various other things that missionaries did in order to achieve their
conversion goals, many of which had unintended long-run economic effects.
Woodberry (2012) finds evidence of one important channel through which
missionaries may have prevented some of the worst outcomes of
colonialism: democracy. He claims that the placement of Protestant missions
helps explain about half of the variation in democracy in Africa, Asia, Latin
America, and Oceania. The reason democracy was more likely to flourish in
regions with missionaries was not due to any religious doctrine or because
missionaries promoted democratic thinking. Much more important was that
Protestant missionaries helped promote mass education, mass printing,
newspapers, and civil society. Probably the most important of these is
education, which Lankina and Getachew (2012) find was positively
associated with missionary activity in India.
Why is education related to democracy? Highly literate societies with strong
civil societies tend to be where democracies prosper. In these societies, a
larger part of the population wants a say in government and has the means to
fight for it. This links back to missionaries not because they valued
education for its own sake or what it could contribute to economic well-
being. The primary goal of missionaries was conversion, and they promoted
education largely because they wanted people to read and interpret the Bible.
This is yet another example of unintended consequences playing an
enormous role in shaping long-run political and economic development.
More broadly, one of the common themes in this literature is that
contemporary educational attainment is greater in places where missionaries
set up shop. For instance, in Africa, Cagé and Rueda (2016) find that places
near Protestant missions with printing presses have numerous contemporary
socio-economic outcomes that are much better. These include more
education, greater trust, greater political participation, and higher newspaper
readership. In South America, Valencia Caicedo (2018) finds that proximity
to (Catholic) Jesuit missions is associated with higher education attainment
today – and thus higher income – despite the fact that Jesuit missionaries
were kicked out in 1767 (see Figure 6.10). This is likely due to the fact that,
as in other missions around the world, Jesuit missions placed emphasis on
reading and writing. In Mexico, Waldinger (2017) finds that places with
Mendicant missions – which were committed to alleviating poverty by
educating the native population – have higher contemporary literacy rates
and educational attainment. Bai and Kung (2015) report a similar finding for
Protestant missions in 19th-century China.
Figure 6.10 Modern literacy and proximity to Jesuit missions in Argentina,
Brazil, and Paraguay Binned scatter plot.
Data source: Valencia Caicedo (2018).

We want to be clear that the claim in this literature is by no means that

colonization was a good thing for local populations just because missionaries
promoted education and other public goods associated with higher incomes.
The point is simply that places with missionaries tended to do better than
other places that were also colonized. This is because they were more
developed. History is rich and complex. The economic consequences of
colonialism were highly heterogeneous. It was very bad in some places, less
bad in others, and probably good in a few others. Appreciating these nuances
is important to gaining a better understanding of how colonization
contributed to modern wealth and the distribution of wealth. In the best case,
missionaries may have played a positive role on development and education.
In the worst case, they may have merely mitigated some of the damaging
effects of the broader colonial enterprise.
Chapter Summary
Colonization played a large role in the making of the modern world. It
brought vast riches to some in Europe, and it still has an effect in the present
on parts of the world that were colonized. But is it responsible for how the
world became rich? Here, the evidence is mixed.
Yet, there is little controversy regarding the damaging role that colonization
played on the colonized. A large literature has emerged showing various
mechanisms through which the colonial legacy is still with us in many parts
of the world. This includes institutional development, trust norms, human
capital accumulation, and public good provision. All of these are key factors
in either promoting or inhibiting economic catch-up with the leading
economies. By this metric, the colonial legacy is dark indeed.
Part II
Why Some Parts of the World Became
Rich First, Why Other Parts Followed,
and Why Some Are Not There Yet
7
Why Did Northwestern Europe
Become Rich First?
In attempting to answer the question “How did the world become rich?” we
have considered the roles played by geography, institutions, demography,
culture, and colonialism. Among the factors we have studied, which best
explain the timing and location of the onset of modern economic growth?
To begin to grasp these issues, it helps to restate the problem. During the
19th century, Western Europe and some of its offshoots (the US, Canada,
Australia) began to experience sustained economic growth. They were
followed by countries like Japan and Russia and later other countries in East
Asia. McCloskey (2006) calls this the Great Enrichment. How did this
happen? In 1700, no economy in the world showed signs that it was capable
of sustained economic growth. This typically involved structural change in
the economy: a movement away from agriculture and towards industry and
services. It came with much greater levels of urbanization. In the long run, it
was aided by a demographic shift to lower birth and death rates. Most of all,
it required a massive increase in the rate of innovation. These factors
coalesced in northwestern Europe in the 18th and 19th centuries and
ultimately led in the mid-19th century, to modern, sustained economic
growth. Why did this happen when and where it did?
You may suspect that the answer is “the Industrial Revolution.” You would
not be completely wrong. It is certainly true that Britain’s Industrial
Revolution was a key stepping stone on the path to the modern economy.
Britain industrialized first, beginning in the second half of the 18th century,
and was followed in the 19th century by the US and a few European
countries. Once this industrial transformation occurred, it created a new
global division of labor, in which countries like Australia and Denmark
could become rich by specializing in non-industrial sectors of the economy
like commercial agriculture.
But industrialization is just a proximate cause. Why did industrialization and
sustained innovation – and the modern economy that followed in their wake
– first take place in northwestern Europe? Why not Southern Europe (which
dominated Europe’s economy in the medieval period)? Why not the Middle
East (which was ahead of Europe for centuries following the spread of
Islam)? Why not China (which was technologically dominant until around
1500)? Why didn’t the pace of innovation slow down, as occurred in prior
growth spurts around the world?
So far, this book has presented a survey of some of the most well-known and
meticulously researched answers to these questions. Some do a better job
than others. In our view, a good answer needs to address at least three
questions. First, why was Europe behind most of the rest of Eurasia for
centuries following the fall of the Western Roman Empire? Most answers
that assume European economic dominance was inevitable have a hard time
addressing this question. Second, what happened in Europe in the two to
three centuries prior to the 19th century that set the stage? The modern
economy did not arise out of nowhere. By the 18th century, Britain was
clearly in a comparatively favorable position to achieve sustained economic
growth. Why? Third, why did modern economic growth first happen in
northwestern Europe? Modern economic growth was not a pan-European
phenomenon. Simple comparisons of “Europe vs. elsewhere” are
misleading. In the 19th century, Southern and Eastern Europe were closer to
the Middle East or East Asia on most economic dimensions than they were
to northwestern Europe. By 1700, the center of Europe’s economic
geography had moved northwards away from Italy and the Mediterranean
and towards economies that faced the Atlantic – especially to the Dutch
Republic and the British Isles. A convincing explanation must account for
this.
Hopefully we have given the reader a dispassionate view of the dominant
theories of long-run growth. In this chapter, we pull together arguments from
Chapters 2–6 to provide our own view of the origins of modern economic
growth. Something as complex as the origins of the modern economy is not
monocausal. In our view, the most convincing explanations bring together
multiple arguments, considering how they interact and fill in each other’s
blanks.
A comprehensive explanation for the onset of sustained growth has to
explain both the divergence between Europe and the rest of Eurasia and the
divergence within Europe. It also has to be consistent with the timing of
growth. Chronologically, many of the institutional developments that
distinguished early modern Europe from elsewhere can be traced to the
Middle Ages. These include the rise of representative institutions, city-states,
the rediscovery of Roman law, and the development of the corporate form.
They preceded the onset of modern economic growth by many centuries. But
modern economic growth was dependent on these developments.
Our favored arguments draw on multiple chapters in this book. First, we
view institutions as being of central importance. But institutional
developments did not occur in a vacuum. For example, the possibilities for
both economic growth and institutional change were constrained by
geography. Europe’s fractured geography and distance to the steppe frontier
led to persistent political fragmentation. Political fragmentation explains
several important institutional developments that were unique to medieval
Europe. These include the rise of representative institutions such as self-
governing city-states and parliaments, public debt, and the notion of
separation between religion and the state.
Another key interaction was between institutional development and culture.
Culture should not be seen as isolated from institutional, political, and
economic factors. For example, one of the lasting legacies of the Catholic
Church in the High Middle Ages was in breaking down kinship groups.
Catholic scholars also played a critical role in the revival of Roman law. In
contrast, Islamic law constrained institutional developments, particularly the
corporate form, in the Middle East (Kuran, 2011). In both cases, Catholic
and Islamic legal institutions are difficult to fully disentangle from Catholic
and Islamic cultural values and norms.
In this chapter, we outline why, for a host of reasons, Western Europe was on
a distinctive institutional path from the late Middle Ages onwards. To be
clear, we distinguish here between institutional and economic trajectories.
Even the richest parts of Europe at the end of the medieval period were poor
by modern standards. The continent as a whole was probably less developed
than China, even if it had overtaken the Middle East by this point. The major
economic divergence did not occur until later.
Several factors were important in explaining the divergence between
northwestern Europe and the rest of the world. Many of these factors were
also responsible for the mini-divergence between northwestern and Southern
Europe. These include the rise of Atlantic trading networks as well as
cultural and religious developments. Perhaps the most important religious
development was the Protestant Reformation. But this was not because of a
superior work ethic, as Weber famously suggested (see Chapter 4). Rather, it
was the institutional consequences of the Reformation that helped ensure the
rise of representative institutions in northwestern Europe.
In the final part of this chapter, we sketch the most important preconditions
for the onset of sustained economic growth as it emerged in Britain. By this
we mean those institutional features that ultimately played an important role
in the structural shifts characteristic of Britain’s economy in the 18th and
19th centuries. None of the preconditions were enough by themselves. In
fact, the Dutch Republic shared many of these preconditions with Britain.
But it did not achieve sustained economic growth until much later. We save
our explanation for Great Britain’s economic rise, especially its Industrial
Revolution, for Chapter 8. Here, we are interested in understanding the
conditions that enabled the modern economy to arise in the first place.
How Geography Shaped Institutional
Development
Chapter 2 examined the importance of geography in the origins of economic
growth. The arguments we reviewed suggested that geographic factors were
even more important historically than today due to the limitations of pre-
industrial transportation and communication technologies. Yet, geography on
its own can at best explain only the location of economic activity. It has little
to say about the timing of economic growth. The most important effects of
geography work through economic and political institutions.
It is not always obvious that “good” geographic endowments lead to
economic success. In fact, good geographic endowments can sometimes be a
detriment to economic development. There is a large literature on what is
known as the “resource curse” (Sachs and Warner, 2001; Mehlum, Moene,
and Torvik, 2006; Robinson, Torvik, and Verdier, 2006; Ross, 2015;
Desierto, 2018). The resource curse explains the observation that many
countries that are plush with resources are still very poor. This is a particular
problem in sub-Saharan Africa. Why are some countries unable to use their
natural endowments as a gateway to wealth? The answer lies primarily in a
society’s political institutions. Where political institutions are extractive, to
use a phrase from Chapter 3, natural resources strengthen the ruling elites’
grip on power. They can use those resources to pay off friends and enrich
themselves. This can lead to even more extractive institutions down the road.
In short, natural resources can sometimes be a blessing, but they can also
very much be a curse.
The resource curse is just one example of how geography and institutions
interact with each other. Geography can also lead to institutional
developments that, in the long run, promote economic growth. One such
example is the “fractured land” hypothesis. Developed by Diamond (1997)
and Jones (2003), this hypothesis suggests that Europe’s geography explains
its persistent political fragmentation. This fragmentation, in turn, had
important consequences for future institutional development. The
topographical structure of Europe, with “its mountain chains, coasts and
major marches, formed boundaries at which states expanding from the core-
areas could meet and pause…. [T]hese natural barriers helped to hold the
ring between the varied ethnic and linguistic groups making up the European
peoples” (Jones, 2003, p. 226).
In particular, the location of Europe’s mountain ranges ensured that there
were several distinct geographic cores of roughly equal size that could
provide the nuclei for future European states (Fernández-Villaverde,
Koyama, Lin, and Sng, 2020). The Alps separate the Italian Peninsula from
the rest of Europe, and the Pyrenees do the same for the Iberian Peninsula.
Meanwhile, China is dominated by a single large northern plain between the
Yangtze and the Yellow Rivers. Fernández-Villaverde et al. find that the
presence of a core region of high land productivity in China – the North
China plain – and the lack thereof in Europe was crucial for the emergence
of political unification in China and fragmentation in Europe.
A related geographic factor that can explain Europe’s persistent
fragmentation in comparison to China is the location of the Eurasian steppe.
This vast highway of grassland that links Eastern Europe and East Asia (see
Figure 7.1) played a key role in state development. After steppe nomads
domesticated horses in the first millennium BCE, they provided a perennial
and unresolvable threat to sedentary populations until the 18th century.
While Genghis Khan and the Mongols may have been the most famous of
these groups, they were only one in a long chain of predatory steppe
nomads. The fragile ecology of the steppe meant that during periods of
drought or cold weather, steppe nomads were more likely to invade
neighboring populations (Bai and Kung, 2011). China’s proximity to the
steppe meant that a strong, northern-based, Chinese state had to arise if it
were to protect its frontier. If such a state were capable of fending off the
threat from the steppe, it would also be powerful enough to unify the rest of
China (Ko, Koyama, and Sng, 2018).
Figure 7.1 The steppe and state formation in China and Europe
Each shade represents 600 kilometers from the steppe. Source: Ko, Koyama, and Sng (2018).

On the other end of Eurasia, the Western European city most exposed to the
steppe (Vienna) is as far from the steppe as the least exposed major city in
China (Guangzhou). The “steppe threat” was therefore not nearly as potent
in Western Europe. But this did not relieve Europe from invasion. On the
contrary, settled people in post-Roman Europe could be invaded from
multiple directions. And indeed they were: Huns, Avars, Magyars, Arabs,
Moors, and Vikings invaded Europe for centuries from nearly every
direction. Any prospective empire builder in Europe would thus face a
multidimensional threat that would strain his resources. This is one reason
why attempts to build a large centralized state in Europe failed after the fall
of the Roman Empire.
Why did Europe’s persistent political fragmentation matter? From the point
of view of Smithian economic growth, introduced in Chapter 2, empires
could be good news. The Roman Empire was able to create a fairly unified
market economy that spanned the Mediterranean. It suppressed piracy,
limited internal trade duties, and introduced a standardized monetary system
(Temin, 2006). Similarly, the “Pax Islamica” and the “Pax Mongolica”
allowed trade to thrive in the Middle East and Central Asia for centuries.
Chinese dynasties also invested in transport infrastructure, as we saw in
Chapter 2. From estimates for the mid-18th century, we know that levels of
price integration in China were relatively high (Shiue and Keller, 2007;
though it declined quite sharply in the late 18th century – see Bernhofen, Li,
Eberhardt, and Morgan, 2020). In contrast, Europe’s endemic fragmentation
was accompanied by frequent warfare which often disrupted inter-regional
trade.
But European fragmentation also had positive and unforeseeable
consequences. Scholars dating back to Montesquieu (1748/1989) and Hume
(1762) have argued that the most important consequences of Europe’s
fragmentation were institutional. As we saw in Chapter 3, Scheidel (2019)
argued that the failure of European rulers to rebuild a continent-wide empire
after the fall of Rome resulted in a period of economic decline and military
weakness – the so-called “Dark Ages” – but it also laid the foundations for
long-run economic growth.
The polities that succeeded the Roman Empire in Western Europe were
weak. They lacked the ability to tax their populations or provide basic goods.
As a consequence, political power became unbundled from economic and
military power. Ideological power became the near-monopoly of the
Catholic Church. The separation of sovereignty between rulers, the Church,
and the nobility was an important precondition for the emergence of
parliaments, independent cities, and other representative institutions that we
discussed in Chapter 3. These dispersed pockets of power were unique to
Europe in the medieval period. Ironically enough, it was the very weakness
of European rulers that allowed these alternative sources of power to arise.
Within states, it meant that rulers had to cede more to elites to stay in power
(Blaydes and Chaney, 2013; Salter and Young, 2019). It also meant that
there was more interstate competition, which gave impetus to economic,
political, scientific, and technological breakthroughs (Hoffman, 2015;
Mokyr, 2016; Scheidel, 2019; Kitamura and Lagerlöf, 2020). As we shall
discuss below, these were important preconditions for future economic
growth.
Why Was There No Medieval European Take-off?
During the 11th and 12th centuries, self-governing or independent cities
emerged on the edges of what had been the Carolingian Empire – in northern
Italy, the Low Countries and then later in the Rhineland and northern
Germany. As we saw in Chapter 3, the absence of a single strong ruler
enabled merchants to rise to political prominence. They implemented
reforms that favored their own interests but also, by and large, were
favorable to the overall expansion of trade. This made possible the European
Commercial Revolution. The new cities were manufacturing centers and
trade entrepôts. Trading networks based on the market economy emerged in
the absence of a central authority. These cities were characterized by what
McCloskey (2006) calls “bourgeois values.”
Unlike in either the Byzantine Empire, the Islamic world, or China, Europe’s
political polycentricity allowed for multiple sources of power. In addition to
merchants, the Catholic Church took on an unprecedented political role. This
had important intellectual and cultural consequences. For instance,
Fukuyama (2011) notes the role the Church played in undermining the
claims of clans and extended families. Focusing on the emergence of the
individual, Siedentop (2014) sees Christianity as critical to the emergence of
liberal societies. The research we touched on in Chapter 4 by Schulz,
Bahramni-Rad, Beauchamp, and Henrich (2019), Henrich (2020), and
Schulz (2020) provides empirical support for the specific claim that the
Church undermined traditional kinship networks. They link the Church’s
prohibition on cousin marriage to the formation of medieval communes. It
was precisely in these communes that the great medieval city-states were
born. These were the political units that relieved Europe of its post-Roman
economic doldrums. It is difficult to see how such independent, free cities
could have emerged under the thumb of the type of strong ruler who ruled
over much of the rest of Eurasia.
If the preconditions for sustained economic growth emerged in the medieval
period, why didn’t Europe take off then? Medieval Europe did experience
several centuries of growth during the Commercial Revolution. Could these
developments have led to sustained economic growth in the Middle Ages?
What was holding the medieval European economy back?
Answering these questions with certainty is impossible. In history, we lack
controlled experiments. For example, we do not know how the European
economy would have developed had Europe not been hit by the Black Death
(as discussed in Chapter 5). The Black Death may have had positive
institutional implications in the long run, but its immediate impact on trade
and the medieval economy as a whole was devastating. In any case, it is
possible that the medieval economy was already on the verge of crisis prior
to the Black Death. Many medieval historians have long thought that an
economic crisis was all but inevitable even before the Black Death struck
(Postan, 1973).
Economic growth did occur in the Middle Ages. But it was not sustained,
and it was prone to reversals. To see why, we need to consider how medieval
economic growth occurred. Trade and the expansion of markets were an
important source of economic growth during the Commercial Revolution.
Van Zanden and Prak (2006) argue that medieval city-states were able to
successfully create political communities based on trust and cooperation.
City-states were able to overcome free-rider and other agency problems and
to elicit high contributions in money and time from their populations through
a concept of active citizenship. They enforced property rights and supplied
market-supporting public goods.
But was this enough? Medieval city-states such as Florence, Genoa, and
Venice saw rapid economic growth in the 12th and 13th centuries. But even
before the Black Death, there is evidence that the economic dynamism of
these cities was on the wane. These city-states may have grown, but they did
not develop. Their growth was subject to reversals. Stasavage (2014) finds
that autonomous city-states grew more rapidly than non-autonomous cities
in the initial years of independence but more slowly thereafter. Growth was
not sustained. The primary reason was that merchant oligarchs tended to put
in place barriers to entry in order to consolidate their own positions and the
positions and fortunes of their heirs. In other words, they did not transition to
a fully open-access social order.
In this respect, medieval city-states contained the seeds of their own ruin.
Florence illustrates this. Although it remained a center for international trade
and banking in the 15th century, its prowess as a manufacturing center
peaked a century earlier. Florence manipulated and restricted market access
to maintain its regional primacy within Tuscany at the cost of impeding
regional economic integration (Epstein, 1991, 2000). It also imposed large
and distortionary taxes on its peasantry. The financial services offered by
Florentine bankers became increasingly monopolized in the hands of a few
banking families, of whom the Medici were the most powerful. In the 15th
century, Florence’s competitive political institutions were subverted by the
Medici (Belloc, Drago, Fochesato, and Galbiati, 2021). All of these were
consequences of a rent-seeking ruling elite.
Another example comes from the city-state of Venice. Venice eventually
built an empire on the basis of its commercial success. From the 10th and
11th centuries onwards, the prosperity associated with trade gave rise to a
new Venetian merchant class. These merchants became powerful enough to
influence and shape the political system. Trade promoted social mobility.
Puga and Trefler (2014) show that there was increasing movement of
families into and out of the Great Council (a ruling body) before 1297,
suggesting a fluid and competitive political elite. However, more open
access to politics also threatened the profits the elites earned as a result of
their control over Venice’s foreign trade. The reaction of existing elites led to
a period known as the Serrata (“closure”) in the early 14th century. During
the Serrata, established merchants used their power in the Council to pass
laws to restrict access to trade. First was a law in 1297 restricting new
entrance into the Council. Then another law in 1323 restricted entrance into
long-distance trade. As a result, Council seats became fully hereditary
among the nobility. The nobility then used state power to monopolize
international trade by collectivizing control of the galleys, which were
previously privately owned. The rights to use these ships were auctioned off
among the nobles.
These accounts suggest that prosperous Italian city-states became
increasingly restrictive and exclusive after around 1300. Rent-seeking
among commercial elites increased. Economic growth began to decline.
Incidentally, the cultural flowering of Renaissance Italy occurred perhaps a
century and a half after its economic peak.
The technological base of the medieval economy was also limited. There
was some innovation in the late Middle Ages, notably in clock-making,
spectacles, and later printing. Navigational techniques also improved, paving
the way for the voyages of discovery that would begin in Portugal and Spain
in the 15th century. But the rate of innovation remained too slow to
overwhelm demographic and other retarding factors (Mokyr, 1990, chs. 3,
8). An important reason for this was that the costs of reproducing knowledge
remained high prior to the invention of movable-type printing (Buringh and
van Zanden, 2009).
In short, many of the preconditions for Europe’s eventual economic rise
emerged in the medieval period. The multiple centers of power that
characterized medieval European life set the stage for the continent’s
eventual economic rise. But this rise was by no means pre-ordained, and it
took centuries to come to fruition. Nor was it certain by the end of the
medieval period that Europe would eventually take this path. History is not
deterministic. Had a few things gone differently, modern economic growth
might not have begun in Europe. Indeed, many of the wealthiest parts of
Europe at the end of the medieval period, such as northern Italy and Spain,
did not experience modern economic growth until the 20th century.
But this does not mean that the history is impossible to understand or that
some events are just as likely to happen in one place as another. As we will
argue below, the political conditions characterizing Europe at the end of the
medieval period did indeed matter for subsequent events. Even if these
events were not pre-ordained, they are difficult to imagine without the
medieval heritage. But how and why did this heritage matter? What
happened in the early modern period (roughly 1500–1750)? Understanding
what happened in this period is probably even more important for
understanding why northwestern Europe was the first part of the world to
become rich. It is this period we turn to next.
Divergence within Europe Just before the Take-off
By the end of the medieval period, Europe was no longer obviously behind
the rest of the world. The medieval European resurgence was led by the
trading and manufacturing centers of northern Italy: Venice, Genoa,
Florence, Milan, and many others. Yet, over the course of the 16th and 17th
centuries, the economic center of Europe moved away from the
Mediterranean. By 1800, the Italian city-states had long lost their
independence and prosperity, and Italy was among the most economically
backward areas in Western Europe. The reversal of fortunes became clear
during the 17th century, when the Italians were driven out of textile
production by the English and Dutch. Historians have debated over whether
or not this decline resulted in an absolute decline in living standards or
merely a relative decline (Braudel, 1949/1973; Cipolla, 1952). The real wage
and per capita GDP estimates compiled by Malanima (2003, 2005, 2007)
suggest that this decline was absolute.
One dramatic event was the discovery of the Americas and the Cape Route
around Africa. This shaped the economies of both Europe and the Middle
East. The old trade routes between Asia and Europe lost much of their value,
leading to a decline in the economic fortunes of cities in Central Asia and the
Middle East as well as in Italy (Blaydes and Paik, 2021). In the 16th and
17th centuries, the Atlantic economy rose to prominence. This was true
relative both to Europe and to the rest of the world. It was this shift that
ultimately set the stage for the modern economy. What can explain this
transformation in economic fortunes?
One factor often cited in explaining this mini-divergence within Europe was
demography. Chapter 5 considered the role of late and voluntary marriage –
the European Marriage Pattern (EMP) – in European development. While
this demographic pattern may have deep roots in European history, it appears
to have become prominent after the Black Death.
The labor scarcity that resulted from that catastrophe encouraged women to
enter the workforce and helped produce active markets for agricultural labor.
The high wages that followed should have resulted in a rapid population
recovery. But the practice of late and voluntary marriage and small, nuclear
families moderated this recovery. It dampened Malthusian pressures and
enabled wages to remain higher than would otherwise have been the case.
Europe’s particular demography is clearly part of the reason why its real
wages were higher than those recorded for Asian countries like China, India,
and Japan as far back as the Middle Ages.
Demographic factors help explain why real wages tended to be higher in
Northern Europe, where the EMP was strongest, than in Southern Europe.
But it is also evident that demographic factors were not sufficient by
themselves for sustained economic growth. Otherwise, the Industrial
Revolution would have happened in northern Germany, which was
economically stagnant. It is also difficult to reconcile the timing of the
emergence of modern economic growth with purely demography-based
explanations. The EMP preceded industrialization and sustained economic
growth by at least four centuries.
But this does not mean that demography was unimportant for the eventual
emergence of sustained economic growth. Indeed, it may be a key reason
why industrialization did not immediately lead to a rise in incomes. We will
return to this issue in Chapter 8.
Many explanations for Europe’s economic rise focus on the opening of the
Atlantic. And with good reason. This was one of the key economic and
political events of the three centuries preceding the onset of sustained
economic growth. It makes sense to start with the simple fact that an entirely
new world opened up to Europe, and those with access to the Atlantic had a
natural advantage in accessing it. But not everyone benefited equally. Nor
was the opening of the Atlantic a uniformly good thing for European
economies. One of the most easily visible effects of the discovery of the
Americas was on the monetary base. Inflows of gold and silver from
American mines enriched the Habsburg rulers of Spain and funded wars
across Europe. This is not why the Atlantic economies pulled ahead,
however. These inflows of precious metals ultimately led to higher prices
and not higher levels of output. Inflation reached levels not known to
Europeans for at least a millennium. This so-called “price revolution” led by
Spain was, if anything, detrimental to the economic fortunes of the region.
The decline of Spain is an interesting case. It tells us much about what was
important for the long-run economic development of Europe. Along with
Portugal, Spain was the first European nation to benefit from the opening of
the Atlantic. By the dawn of the 16th century, Spain had a worldwide
empire, and Ferdinand and Isabella were bestowed the prestigious titles of
the “Catholic King and Queen” by Pope Alexander VI. Through inheritance
and marriage, the Spanish Habsburgs would add the wealthy Low Countries
to their empire. Throughout most of the 16th century, Spain was probably
the most powerful nation in Europe, and among the wealthiest. Meanwhile,
England was emerging from a bloody civil war (the Wars of the Roses) and
was far from the European economic frontier.
Yet, it was in the 16th century that the seeds for reversal were sown. By the
end of the century, England and Spain were no longer so far apart
economically (even if it did take an English stroke of luck to keep the
Spanish Armada out of its harbors). Within another century (by 1700 or so),
Spain was clearly behind the economic leaders of Europe. England and the
Dutch Republic, the latter recently liberated from Spanish rule, pulled far
ahead. By the 18th century, Spain was at best a second-rate power in Europe.
What happened?
Ironically enough, the decline of Spain was closely tied to the discovery of
the Americas. The new trade routes opened up a new world to European
manufacturing and trade. But not everyone was able to take advantage of
these opportunities. How countries responded depended on their institutions.
Acemoglu, Johnson, and Robinson (2005b) argue that where the profits from
Atlantic trade were controlled by the crown, access to the Atlantic led to a
strengthening of autocratic power. Rulers like the Spanish Habsburgs,
especially Charles I (r. 1516–56) and Philip II (r. 1556–98), used Atlantic
profits to fund wars and consolidate power. The “royal fifth” – 20% of all
precious metals and other commodities coming in from the Americas – went
straight into royal coffers. These riches strengthened the Spanish crown
relative to its parliaments.
The inflows of precious metals (largely silver) were massive. Between 1500
and 1600, precious metals imported from the Americans dwarfed Europe’s
stock of precious metals in 1492 almost ten-fold (Palma, forthcoming). The
immediate effect of the gold and silver extracted from mines in the Americas
was both to enrich the Spanish crown and to give a boost to the European
economy, where specie was in short supply. In the medium and long run,
however, the effect was inflation.
North (1981, 1990) attributed the decline of Spain to political institutions
that encouraged the Habsburg monarchs to pursue economically inefficient
policies such as granting monopoly rights to guilds, failing to tax the
nobility, defaulting on debts, and confiscating property. These extractive
political institutions undermined the foundations of commerce: the “structure
of property rights that evolved in response to the fiscal policies of the
government simply discouraged individuals from undertaking many
productive activities and instead encouraged socially less productive
activities that were sheltered from the reach of the state” (North, 1981, pp.
151–2).
In Spain, the crown held a monopoly on colonial trade. The monopoly rents
associated with colonial trading routes were enormous. For example, the
cargo of the Manila galleons that took Asian goods from the Philippines to
Mexico amounted to around 2% of the GDP of the entire Spanish Empire
(Arteaga, Desierto, & Koyama, 2020). The costs associated with these
monopolies was vast. Spanish trade was tightly restricted for the benefit of a
relatively small number of elites. As Adam Smith (1776/1976) – a fierce
critic of colonial empires and monopoly trading regimes – understood, this
led to a severe misallocation of resources.
Recent research demonstrates that the Habsburg monarchs of Spain were
hardly all-powerful. In particular, they were limited in their ability to raise
taxes. But institutional explanations for the decline of Spain remain
persuasive. Drelichman and Voth (2008) argue that the resource curse
associated with large inflows of American silver afflicted the Spanish
economy by increasing the returns to rent-seeking and undermining the
institutions that limited the power of the monarch, nobility, and clerical
establishment. Resources also undermined efforts to standardize or
centralize a fragmented and inefficient fiscal system. This fiscal
fragmentation was accompanied by institutional, legal, and economic
fragmentation (Grafe, 2012).
Yet, institutional weaknesses in Spain are only part of the story of
divergence. A compelling explanation must also account for why England
and the Dutch Republic pulled ahead in the early modern period. The Dutch
Republic became the world’s dominant economy beginning in the late 16th
century. The English economy was primed for industrialization by the 18th
century. What changed in these economies? Why was the modern economy
born there and not elsewhere?
Parliaments and the Rise of Limited,
Representative Government
In Chapter 3, we discussed the role of institutions. One important set of
institutions we discussed were parliaments. These assemblages of important
people – nobility, clerics, and urban elite – constrained rulers and their worst
whims. But parliaments were more powerful in some places than in others.
As noted above, the Spanish cortes were relatively hapless when it came to
preventing abuses by the Habsburg crown. This ended up not being the case
in England and the Dutch Republic. There, parliaments grew in strength over
time and ultimately were able to place significant constraints on central
authorities. The period after 1600 saw the rise of representative political
institutions first in the Dutch Republic and then in England. Meanwhile, in
Southern Europe, monarchical power was consolidated. But why did this
matter? Any why did limited governance arise in northwestern Europe but
not in Southern Europe?
It is worth revisiting some of the relevant history. The most successful
economy of the 17th century was the Dutch Republic. The cities of the Low
Countries (modern-day Belgium and the Netherlands) became prosperous in
the late Middle Ages. In the 15th century, the cities of the northern
Netherlands prospered due to the wool trade and their control over Baltic
trade routes. The wealth of their urban bourgeoisie is evident in the oil
paintings of the era. As a result of a series of dynastic marriages and
accidents, these rich cities came into the possession of the Habsburg
Emperor Charles V (r. 1516–56) and they were passed down to his son
Philip II, ruler of Spain (r. 1556–98). Tax revenues from these towns and
cities helped to fund Habsburg expansion and warfare against the Ottomans.
The rich burghers of the Dutch cities resented paying taxes to a distant
Habsburg monarch. At first, there was little they could do. The Habsburgs
were powerful and had a legitimate claim on Dutch rule. But in the 1540s
and 1550s, Protestant ideas began to spread throughout the Low Countries.
This gave those looking to throw off the Spanish yoke an opportunity to do
so. The heavy-handed Habsburg response – as many as 2,000 Protestants
were burned alive as heretics – helped galvanize resistance from among the
Dutch nobility and city leaders. The Reformation therefore helped kick-start
a wider political rebellion. It resulted in the establishment of an independent
Dutch Republic in the northern Netherlands and an eighty-year war with
Spain.
This is precisely what we mean when we say that culture and institutions are
often inseparable. It is difficult to imagine how the Dutch Revolt could have
succeeded without the spread of Protestant (Calvinist) ideas. These
motivated and legitimated the rebellion against Habsburg rule – binding the
rebels together in a way that mere shared economic interests were unlikely
to. Meanwhile, it is difficult to imagine how a religious movement like the
Reformation could have succeeded without the political and institutional
changes that secured Dutch independence from the fiercely Catholic
Habsburgs.
The polity that arose as a result of the Dutch Revolt was a federal republic.
William, Prince of Orange, was the most influential noble to lead the
rebellion. He might have become the sovereign of an independent
Netherlands, but he was assassinated. The position of sovereign was also
offered to Queen Elizabeth of England. Only after these options were
exhausted did the Dutch parliament (States General) assume full sovereignty.
The result of the Dutch Revolt was therefore a religiously divided Republic
in which merchants and commercial interests held political power (de Vries
and van der Woude, 1997).
The Dutch Republic created institutions that benefited members of the
economic elite. As a result, despite an ongoing war with Spain, it
experienced rapid economic growth in the century following 1580. This
growth was the result of structural changes to the Dutch economy. In other
words, this was a period of Dutch economic development. Benefiting in part
from the destruction of Antwerp by Spanish forces in 1576, Amsterdam
became Europe’s financial capital. Real wages grew faster than in the rest of
Europe, despite a doubling of the Dutch population. Urbanization increased
rapidly. Large-scale investments in canals and other inland transport helped
ignite a trade boom. Dutch shipping dominated the Baltic. The United East
India Company was founded in 1603 and soon helped win the Dutch an
empire in Southeast Asia. Throughout the 17th and 18th centuries, Dutch
real wages and per capita income were the highest in the world (see Figure
7.2).
Dutch economic success was a direct result of institutional change. The rise
of limited, representative governance was one of the key driving forces
behind the Dutch economic expansion. There was no centralized authority to
extract resources, trample over property rights, or infringe on personal
liberties. This is not to say the Dutch States General was perfect. It could –
and did – favor some interests over others, and it wasn’t exactly in favor of
religious freedom once its preferred religion won the day. It was also not a
modern democracy. Each of the seven provinces retained considerable
power.
While the rise of limited government was an important precondition for
long-run economic growth, it was not enough on its own. The Dutch ended
up being relatively late to the industrialization game, although they remained
among the world’s leading economies. Why, then, do we place so much
emphasis on limited, representative government? For one, it allowed the
Dutch to become the world’s leading economy for over a century. But it was
also a precondition for Britain’s rise.
Figure 7.2 Real per capita GDP, 1450–1700, select countries
Data source: Broadberry, Guan, and Li (2018): 2021 international dollars converted from 1990
international dollars at rate of $2.03:1.

In the 18th century, the locus of economic growth moved from the Dutch
Republic to England, or, as it became known after 1707, Great Britain. Even
prior to the Industrial Revolution, Great Britain had emerged as one of the
world’s leading economies. Institutional change was critical in this
development.
Changes in labor market institutions played a role in unleashing the domestic
economy. While the medieval economy was dominated by craft and
merchant guilds that regulated entry, by 1700 the power of English guilds
had greatly diminished. Britain was, along with the Netherlands, quite
different from much of continental Europe, where guild power remained
entrenched. This hampered economic development by allowing insiders to
block competition and innovation (Ogilvie, 2019).
The centuries leading up to modern economic growth saw the emergence of
Parliament as the dominant legal and political force in England. Chapter 3
examined how Parliament emerged in 13th-century England following the
Magna Carta. A particularly important development – one solidified in the
reign of Edward I (r. 1272–1307) – was that Parliament came to represent
urban interests and not just the nobility. As shown in Figure 3.8, the English
Parliament met frequently during the Middle Ages. This was largely a
reflection of how often the crown was at war. When the crown did not need
additional revenues, it did not have to call Parliament. Strong medieval kings
typically had the ability to dominate Parliament. When there were major
challenges to royal authority, they usually came from the nobility, who still
maintained their own private armies, rather than from Parliament.
This institutional arrangement began to change in the late 15th century.
Following the Wars of the Roses (1455–85), the first Tudor, Henry VII (r.
1485–1509), came to the throne. Henry won the crown on the battlefield and
had a very weak claim to the throne. Greif and Rubin (2021) argue that to
bolster his legitimacy, he turned to Parliament, ruling by acts of Parliament
much more than his predecessors. Henry also weakened the power of the
noble families, particularly those whose blood might make them potential
challengers (Penn, 2011). His son, Henry VIII (r. 1509–47), relied on
Parliament even more frequently, especially after the Reformation further
weakened one of the crown’s key sources of legitimacy, the Catholic
Church. Although the crown continued to employ religion as a source of
legitimacy, the new Anglican Church was under its thumb. It therefore could
not legitimate rule like the Catholic Church could. These factors were also
present under Henry VIII’s three Tudor successors, Edward VI (r. 1547–53),
Mary I (r. 1553–8), and Elizabeth I (r. 1558–1603). They all came to the
throne with low legitimacy. Mary and Elizabeth were the first two female
monarchs in English history and had both been declared bastards. They
therefore relied heavily on Parliament. As Parliament’s power increased, so
did its willingness and ability to limit the crown. This set the stage for the
tumultuous events of the 17th century, in which Parliament twice deposed a
Stuart king whom they believed transgressed their rights.
As recent research confirms, it was in the 17th century that England’s
political institutions diverged from those of continental Europe (Henriques
and Palma, 2020). The first key event of the 17th century was the English
Civil Wars (1642–51). The Civil Wars pitted Parliamentarians against
supporters of King Charles I (r. 1625–49). A vast body of scholarship
considers the causes of these civil wars from a variety of perspectives. For
our purposes, one can view the conflict as primarily over the proper
institutional structure of English governance (Greif and Rubin, 2021). Did a
king have the legitimate right to rule without Parliament (as Charles I had
tried to do in the decade preceding the Civil Wars)? Or was following the
law, as created by Acts of Parliament, essential to being a legitimate king?
Under the Tudors, England had increasingly moved to the latter
arrangement. This was not by design – both Henry VII and Henry VIII had
autocratic aspirations. It occurred partly because of Henry VIII’s need for
Parliamentary support for his break with Rome and particularly because
historical accident landed England with a minor and two women as his
successors. Conflict between crown and Parliament came to a head after
James I (r. 1603–25) and his successor Charles I sought to subordinate
Parliament to the crown. This conflict was in large part over how powerful
the monarchy should be. In the end, the Parliamentarians won and Charles I
was executed.
The English Civil Wars were an important turning point. They brought about
a change in the ruling coalition. Jha (2015) explores how emerging overseas
economic opportunities helped the formation of a coalition in favor of
constraining the crown. Many of the landed elite purchased shares in
overseas trading companies, aligning their interests with the merchant class.
Ownership of shares in overseas trade shifted the views of non-merchants,
helping to consolidate support for reformers in Parliament. They therefore
had an interest in fighting with Parliament against the king. This aligned the
interests of the economic elite with a broad set of powerful people, which, in
turn, gave them a central seat at the political bargaining table.
The Civil Wars sharply accelerated the ultimate pre-eminence of limited
governance. Such institutional changes were important for the rise of the
modern economy. However, even though the Parliamentarians won the day,
this did not mean that limited governance immediately followed. The
conflict between Parliament and the Stuart kings was not permanently
resolved by the Civil Wars. It resulted in another conflict a generation later,
between Charles I’s son James II (r. 1685–8), a Catholic who aspired to
create a more autocratic monarchy along French lines, and his opponents in
Parliament. In 1688, a Parliamentary faction invited William of Orange and
his wife, Mary (the daughter of the king), to overthrow James. James fled
and William and Mary (r. 1689–1702) came to the throne with little
bloodshed (at least in England; it was quite different in Scotland and
Ireland). This capped off the so-called Glorious Revolution. In the process,
William and Mary accepted a Bill of Rights whereby they relinquished
numerous rights and agreed to limit the power of the crown. This was a
major turning point in the history of limited governance.
The change in English government was part of a broader global and
expensive war against France. The settlement following the Glorious
Revolution helped fund this war. Because Parliament now had power over
the English purse-strings, creditors were more willing to believe they would
be paid back (North and Weingast, 1989). William of Orange brought with
him Dutch advisors and knowledge of Dutch fiscal and financial practices
(Hart, 1991). A critical event was the establishment of the Bank of England
in 1694, which helped fund the war effort. Over time, it led to a substantial
drop in borrowing costs (see Table 7.1). This enabled an enormous growth in
state power that would become a theme of the 18th century and beyond.
By making England (after 1707, Britain) a constitutional monarchy, the
Glorious Revolution laid the foundations of the party system and cabinet
government (Stasavage, 2002, 2003; Pincus and Robinson, 2014; Cox,
2016). These developments did not all take place immediately after 1688. It
took several decades for the implications of the Glorious Revolution to fully
take shape. But they provided the political and institutional stability that was
important for Britain’s subsequent economic growth.
North and Weingast (1989) argued that the credibility of the English
monarchy to repay its debts after 1688 translated into more secure property
rights in general. While this claim has not survived subsequent scrutiny, in
other respects there was an improvement in institutional quality after 1688.
Rather than securing property rights, these changes made it easier to reorder
property rights in order to exploit new investment opportunities.
In other words, what mattered was less the “security” of property rights in
the abstract than the ability to rearrange residual claimancy as new economic
opportunities emerged. Feudal property rights were secure but they were
designed to support feudal society and not to maximize productivity. Land
rights in 17th-century England were complex and constrained. The
ownership of land came with feudal entails which meant that potential heirs
could veto anything that could be claimed to detract from the future capital
value of the land (such as cutting down a forest or draining a lake).
Table 7.1 British borrowing and interest rates, 1693–1739
Data source: North and Weingast (1989, Table 4).
Date Amount (£) Interest (%)
Jan. 1693 723,394 14.0
Mar. 1694 1,000,000 14.0
Mar. 1694 1,200,000 8.0
Apr. 1697 1,400,000 6.3
July 1698 2,000,000 8.0
Mar. 1707 1,155,000 6.25
July 1721 500,000 5.0
Mar. 1728 1,750,000 4.0
May 1731 800,000 3.0
June 1739 300,000 3.0
Prior to the Glorious Revolution, estate bills often failed due to political
conflict. However, as a result of changes brought on by the Glorious
Revolution, Parliament became a forum where land could be reallocated
towards more productive uses (Bogart and Richardson, 2009, 2011). As a
consequence, investment in road and river transport dramatically improved,
with important consequences for subsequent economic growth (Bogart and
Richardson, 2011). Parliamentary regulation helped keep internal trade
relatively unimpeded, especially in comparison to the Holy Roman Empire
or France (Bogart, 2012). Parliament played a crucial role in regulating the
tolls that maintained England’s road and canal network. Tolls were kept low,
in part by Parliamentary regulation and in part by market competition. Toll
roads were funded by users and in competition with river and canal routes.
This was not a move towards greater democracy. Only a small proportion of
adult males could vote. And after 1715, elections became less frequent (held
only every seven years). In many ways, the power of the rich was entrenched
and historians have often viewed the 18th-century British state as designed
to favor the propertied classes. Certainly it ruthlessly enforced Enclosure
Acts and penal laws against the poor (Hay, Linebaugh, Rule, Thompson, and
Winslow, 1975). For the most part, early 18th-century Parliaments were
characterized by unabashed rent-seeking. Parliament passed many acts that
benefited specific interests – most notably the Calico Act of 1721, which
banned the importation of most cotton textiles – at the expense of the larger
public. None of this shocked contemporaries. Members of Parliament were
expected to look out for their own material interests and to pursue what to
modern eyes looks like venality (Root, 1991). This changed over the course
of the 18th century. Mokyr and Nye (2007, p. 58) note that “[p]urely
redistributional actions … began losing their appeal. Many special interest
groups’ legislated privileges, monopolies, exclusions, limitations on labor
mobility, occupational choice, and technological innovation found
themselves on the defensive as the 18th century wore on.”
In other words, if we are to discern the distinctive features of the British
political system on the eve of the Industrial Revolution, it is less useful to
focus on features such as its corruption or lack of democratic representation.
These were features that it shared with almost all pre-modern states. More
insight is gained from considering which factors were critical in allowing it
to attain a high degree of political stability and prosperity.
In this respect, the British system was successful in constraining the
independent power of the monarchy, while balancing the interests of
landowning elites with those of mercantile and financial elites. It was able to
mobilize tremendous resources for warfare without crushing the domestic
economy. It was not a democracy, as it limited political representation to
those with property. But it did provide scope for “voice” through regular
elections. It also provided greater freedom for religious minorities than did
its competitors in Europe (with the exception of the Dutch Republic) while
also prohibiting Catholics and religious dissenters from positions of political
power (Johnson and Koyama, 2019, pp. 179–83).
Chapter Summary
By around 1700, northwestern Europe had many of the necessary
preconditions for sustained economic growth. Per capita incomes and real
wages were high by pre-industrial standards. Markets were relatively well
developed and extensive. The institutional framework was conducive to the
expansion of internal trade. State institutions were strong enough to provide
a measure of law and internal peace. But these factors alone were unlikely to
have been enough for modern economic growth.
This is demonstrated by the example of the Dutch Republic. Though the
Dutch Republic has been hailed as “the first modern economy” (de Vries and
van der Woude, 1997), the Dutch pattern of commercial, Smithian, trade-
driven growth more closely resembled earlier episodes of temporary growth
than it did the sustained economic growth that characterized Western Europe
and North America after 1800. As Goldstone (2002, p. 340) writes: “[W]hile
Golden Age Holland did indeed experience an ‘efflorescence’ of innovation,
intensification and productivity growth in agriculture, and stable per capita
incomes despite substantial population growth, such a pattern is neither
uniquely Dutch nor ‘modern’ by global standards.”
In the 18th century, the Dutch Republic remained rich but its economy did
not experience further rapid growth (de Vries and van der Woude, 1997).
There were many factors responsible for this stagnation. Inequality rose and
merchant elites based in Amsterdam were able to entrench their political
power (van Bavel, 2016). Institutions like the Dutch East India Company
(VOC) benefited a relative small number of shareholders. The Dutch
Republic thus followed a similar pattern to Italian city-states like Florence
and Venice that grew rich on the back of trade before eventually stagnating.
Another factor was the high taxes and high levels of government debt
incurred fighting numerous wars for survival against the French. Moreover,
the mercantilist policies of the British and the comparative failure of the
Dutch to invest further in fiscal capacity also contributed to their relative
decline (O’Brien, 2000). Overall, the Dutch were not able to achieve a
dramatic and sustained increase in living standards. This would not happen
until the Great Enrichment that began after 1800, and it was driven by
developments in Britain.
The Dutch Republic was at the forefront of the Scientific Revolution.
Christiaan Huygens made important contributions to astronomy and
mathematics. Antonie van Leeuwenhoek pioneered the field of
microbiology. There were also important Dutch developments in
engineering, especially hydraulic engineering. Yet, the Dutch did not
experience the combination of growth of industry and structural change that
characterized Britain’s Industrial Revolution.
Britain did experience this combination in the 18th and 19th centuries. The
result was the first modern economy – one in which economic growth was
sustained without reversal. Why did this happen first in Britain? We began
this explanation in this chapter, noting that Britain had some of the important
institutional preconditions. Most importantly, it had a (relatively) limited and
representative government. But this was clearly not enough. If it were, the
Dutch would have had the first modern economy. What else was needed for
Britain to prosper? We turn to this question in the next chapter.
8
Britain’s Industrial Revolution
We are now in a position to address the question “How did the world
become rich?” The answer to this question begins with Britain’s Industrial
Revolution. Britain’s industrialization set in motion a series of events that
ultimately resulted in modern, sustained economic growth. Since the first
few decades of the 19th century, the world has become richer and billions
have been lifted out of poverty. This was due to sustained economic growth.
This is why we care so deeply about it.
Figure 8.1 reports the growth of total GDP, population, and GDP per capita
in England from 1270 to 1700 and then for Britain from 1700 to 1870.
Between 1700 and 1870, the size of the total economy increased by a factor
of 10. Population also grew roughly four-fold. Per capita GDP more than
doubled. Such an economic transformation defied the logic of the
Malthusian economy. By the middle of the 19th century, the British
economy began to exhibit modern, sustained economic growth. Per capita
GDP grew in a continuous fashion even as the population also continued to
expand. Perhaps most importantly, despite the ups and downs of wars and
business cycles, there were no serious growth reversals.
The first seven chapters have laid out various theories that give insight into
why modern, sustained economic growth was likely to happen in some
places but not others. In this chapter we go further. Answering the question
“How did the world become rich?” means establishing the reasons for both
the location of modern economic growth and its timing.
We begin this pursuit by exploring the causes of the Industrial Revolution. It
began in Britain some time in the second half of the 18th century. This part
is uncontroversial. What is more controversial is why it began when and
where it did. Having outlined some of the institutional prerequisites for
growth in Chapter 7, in this chapter we consider the development of the
British economy more generally in the 18th and 19th centuries. We also
consider what made the Industrial Revolution a “revolution.” It was not the
rate of economic growth, which remained modest. It was that growth was
sustained thereafter.
Figure 8.1 GDP, GDP per capita, and population in England/Britain, 1270–
1870 (1700 = 100)
Data source: Broadberry, Campbell, Klein, Overton, and van Leeuwen (2015).

Above all else, the major revolutionary change during the Industrial
Revolution was an increase in the rate of innovation. The acceleration in
innovation ensured that economic growth continued and did not peter out.
New and important technologies emerged at a rapid pace in late 18th- and
early 19th-century Britain. Why? Any answer must account for how British
society became particularly innovative.
We first consider the British economy on the eve of the Industrial
Revolution, paying particular attention to several important preconditions.
These include the rise of a market-oriented society and its implications for
labor supply and consumption patterns, the size of the domestic economy,
commercial agriculture, culture and social norms, and the increasing
significance of the Atlantic economy. Many of these features were also
shared by the Dutch Republic.
But the Industrial Revolution did not begin in the Dutch Republic. We
therefore turn our attention to factors that may have distinguished Britain
from its rivals. These include its high level of state capacity and its dominant
role in the transatlantic slave trade. While these factors played a role in
Britain’s economic success, however, neither provides a full accounting of
why this success led to industrialization. To answer the question “Why
Britain?” we therefore focus on two important arguments. First, we consider
Allen’s (2009a) argument that innovation was a response to high wages and
cheap capital and energy. Second, we consider Mokyr’s (2009, 2016)
argument that cultural and intellectual developments within British and
European society, along with increased human capital and skills, were
responsible for Britain’s industrialization. But first we provide some
background on Britain’s economy on the eve of industrialization.
A Consumer Revolution
To identify the relevant preconditions for industrialization, we must know
something about British society and its economy in the century or so prior to
industrialization. There was peace (in England, though not yet Scotland)
following the Civil Wars (1642–51). The domestic economy can be
described as a market economy. That is, although problems with silver
coinage meant that monetarization was far from universal, economic
activities were oriented around market exchange. All large-scale societies
rely on markets to some extent. Even in Soviet Russia there was market
exchange, both legal and on the black market. Nevertheless, many societies
that allow markets to play an important role in the allocation of final goods
rely on non-market systems for allocating factors of production (land,
capital, and labor).
By 1700, Britain had a fully developed market economy. The expansion and
improved integration of domestic markets can account for much of the
relative prosperity the country enjoyed in the 18th century. As we reviewed
in Chapter 2, the integration of what was a comparatively large domestic
market rested on a domestic road and canal network that was greatly
improved in the 18th century (Bogart, 2014). Allen (2009a, p. 106) observes
that “cities grew, London’s wages were high, agriculture improved, and
manufacturing spread across the countryside.” Another characteristic of a
market society emerged in this period: the rise of the consumer. Historians
have called this period the Consumer Revolution. Put simply, households
became more oriented towards the market (McKendrick, Brewer, and
Plumb, 1982; Brewer and Porter, 1993).
The Consumer Revolution was a move away from within-household
production and consumption to market-oriented production and
consumption. It was a sea change in how people consumed goods and
services. Late medieval households, while not completely self-sufficient,
produced many products within the household. They might, for instance,
make their own clothes from yarn or cloth purchased from a whole-seller, or
they might brew their own beer. This changed in the 17th and 18th centuries.
Retail shops emerged, which enabled customers to purchase goods
immediately. It became possible to purchase ready-made textiles as opposed
to buying them wholesale and taking them to a dressmaker or making one’s
clothes at home (Mui and Mui, 1989).
British consumption habits changed as a result. Weatherill (1988) found that
the number of households owning durable goods in the inventories of the
London’s Orphans’ Court increased significantly between 1675 and 1725.
The frequency of goods such as saucepans, cutlery, clocks, china, pewter,
and earthenware increased dramatically. Utensils for hot drinks were almost
completely absent from 17th-century inventories but they were found in 80%
of inventories by 1725. Lemire notes that even servants could save up the
“six or seven shillings needed to purchase sufficient cotton cloth to make a
gown, or the eight shillings for a ready-made gown.” This created “a
potentially vast market among working-women, for whom these prices
meant perhaps one week’s wages or less” (Lemire, 1991, p. 97).
Scholars have linked this Consumer Revolution to the growing prosperity of
this period. De Vries (1993, 2008) in particular argues that new consumption
opportunities created by the expansion and development of markets gave rise
to an “industrious revolution.” By this, he means that as households became
more active participants in the market economy, they had to work harder to
earn the wages to buy all of these new and affordable goods. New
consumption opportunities meant that fewer goods were produced within the
household economy. Households began to purchase goods that had no
domestic substitute. Instead of consuming their surplus income as leisure,
they spent it on an increasingly wide range of consumption goods (Koyama,
2012). The “industrious revolution” can thus be viewed as the other side of
the Consumer Revolution.
According to de Vries, this “industrious revolution” originated in the
Netherlands in the 17th century and spread to England and other parts of the
Atlantic economy over the course of the late 17th and early 18th centuries.
But why was it an important predecessor to the Industrial Revolution?
Improvements in GDP per capita can either come from increased labor
inputs, greater capital investment, or improvements in efficiency (often
equated with innovation). Part of the growth in GDP per capita that took
place during the 17th and early 18th centuries was due to an increase in labor
inputs, both working hours and the number of days worked. The reason,
according to de Vries, was a new “industriousness.” Workers worked harder
because they wanted additional income to engage in new consumption
opportunities.
Increased industriousness helps resolve another puzzle involving wages and
industrialization. The 19th century did not witness a dramatic rise in English
real wages. Contrast this with the period following the Black Death, which
saw real wages rise precipitously (see Chapter 5). Yet, following the Black
Death, GDP per capita did not rise as much as real wages. And the post-
Black Death rise in wages was not sustained in the long run. There were two
key differences between the two periods. First, labor markets were thin in
the late Middle Ages. Even though measured wages were high, this did not
mean that workers could find reliable work at those wages. Second, even
when wage laborers did find work, they often “consumed” their higher
incomes in the form of increased leisure. So, even though daily wages were
higher for some time following the Black Death, yearly incomes rose much
less rapidly (Humphries and Weisdorf, 2019).
This changed between 1500 and 1700. In the Netherlands, de Vries and van
der Woude (1997) find that the average number of working days increased
for day laborers by 25% between 1550 and 1650. In England, Voth (2001)
finds evidence of a particularly dramatic increase in the working day after
1750. While these estimates are sensitive to assumptions and to the
particular data employed, there is little doubt that there was an increase in
the total labor inputs in this period (Allen and Weisdorf, 2011). This
increased willingness to work longer hours for the wages required to
purchase new consumer goods can be seen as a precondition for the rise of
the factory system (Clark, 1994). As we will discuss below, factories
required large investments in fixed capital. These were only worthwhile if
there was a willing workforce that could man the factories, and if necessary
work long and exhausting hours.
Capitalist Agriculture
In the century preceding the Industrial Revolution, English agriculture was
highly commercialized relative to the rest of Europe. Production was geared
towards the market. The majority of workers were wage laborers. And farms
were large compared to continental Europe, allowing them to exploit
economies of scale. By the mid-18th century, England was a major exporter
of food. Many historians have viewed this distinctive “capitalist” agriculture
as an important precondition for the Industrial Revolution.
It is evident that labor productivity in English agriculture was comparatively
high prior to the Industrial Revolution. Output per worker in England was
similar to that in Italy and France in 1500. By 1750, it was higher in England
and in the Low Countries than elsewhere in Europe. What was responsible
for this increase in productivity?
In medieval England, the dominant form of farming was small-scale
agriculture, organized around open fields and commons. Peasants farmed
small, scattered plots located across the manor. These open fields enabled
farmers to share risk. An individual farmer who owned several small plots of
land scattered around the village was insured against idiosyncratic risk – say
a hailstorm, a flood, or crop blight (McCloskey, 1976). This open-field
system limited the harm that could arise from local shocks. There were
downsides to this system, however. It was costly and time-consuming to
move between different plots of land. Small, disjoint, and irregular plots
often made it unprofitable to introduce new crop types or equipment.
We saw in Chapter 5 that the Black Death shock depopulated the countryside
across Western Europe. Changing factor prices and changing patterns of
demand led to a shift in land use. Land, particularly in the north and west of
the country, was given over to pastoral agriculture. As a result, landowners
sought to consolidate many patches of land. They did this through the
process of enclosure. Many medieval enclosures occurred through private
negotiation: farmers who wished to enclose the land had to buy out those
who did not. It was also possible to petition Parliament for an Enclosure Act.
These acts would pass if somewhere between three-quarters to four-fifths of
landowners (by value) supported it. The holdouts would receive
compensation. By 1500, 45% of farmland in England was enclosed (Allen,
1994, p. 99).
The trend towards larger farms, what historians like Brenner (1976) term
“capitalist agriculture,” accelerated after 1500. While economic historians
used to think in terms of a distinct Agricultural Revolution directly
preceding the Industrial Revolution, more recent evidence from labor
productivity data suggests a general increase taking place over several
centuries. Farms became larger and more capital-intensive. The pace of
enclosures increased in the 18th century, driven by Parliamentary legislation.
These enclosures had long been the subject of intense controversy. Their
supporters among contemporaries and later historians saw them as
contributing greatly to increased yields. They also made possible the
eventual mechanization of agriculture in the 19th century with machines
such as threshers. Their critics, including Karl Marx, saw them as acts of
class warfare. Poor smallholders were forced off their land by rapacious,
richer farmers, with scant compensation. Looking at the South Midlands,
moreover, Allen (1992) finds little evidence that the late 18th-century
enclosures actually improved yields.
There is evidence, however, that they led to more land being reclaimed and
in the growth of larger farms and more capital-intensive agriculture. The
gains from these changes, Allen contends, were largely captured by rich
landlords. More recently, Heldring, Robinson, and Vollmer (2021) have
studied the impact of enclosures across the whole of England. Their
estimates suggest that enclosures led to an improvement in productivity.
They also find that infrastructure improvements were associated with
enclosures.
This rise in agricultural productivity between 1500 and 1700 in northwestern
Europe was important. It helped to banish the specter of famine. It also
helped sustain a dramatic rise in the proportion of the population living in
cities. After all, urban development is only possible when there is a large
enough agricultural surplus to feed all those city-dwellers. Improved yields
and commercial agriculture may have laid the foundations of Britain’s
relative prosperity from 1600 onwards. But they were certainly not sufficient
for sustained economic growth after 1800. When Britain did industrialize,
the increase in agricultural production was not sufficient to keep up with
population growth, and the agrarian economy did not offer a large market for
manufactured goods. Indeed, Britain became a net food importer during the
Industrial Revolution.
Do Political Institutions Explain Britain’s
Industrialization?
Now that we have a better understanding of some of the key features of the
British economy on the eve of industrialization, we can circle back to the
discussion in Chapter 7 regarding the preconditions for growth. We ended
that chapter noting that the political environment in Britain and the Dutch
Republic was more conducive to economic growth than the rest of Europe
(and the rest of the world). Both countries had some degree of limited,
representative governance. In the British Isles, political institutions provided
a measure of stability after 1688. This had both political and economic
consequences. In the political realm, it allowed government borrowing to
increase dramatically. It also resulted in greater fiscal and military power.
Political stability enabled Smithian growth. But this is not what made Britain
unique.
Political institutions alone cannot explain why Britain industrialized first.
Traditionally, historians have argued that what made the Industrial
Revolution a “revolution” was the wave of innovations that consumed
Britain beginning in the latter half of the 18th century. Although British
political stability and protection of property rights were important, they
cannot fully account for this development. Britain did have intellectual
property rights. A patent system existed and could be used to protect
innovation. Yet, while it was ruthlessly employed by some of the Industrial
Revolution’s most famous innovators (like James Watt), patents were neither
necessary nor sufficient to account for the wave of innovations that Britain
experienced in this period. The innovator responsible for coke pig iron,
Abraham Darby, for example, did not take out a patent (Mokyr, 2009). Many
inventions required too much knowledge of how they worked to be copied.
Other innovators kept their inventions secret or selectively revealed them to
the public. None of these strategies required intellectual property rights.
Where does this leave us? There are many possibilities to consider. First, just
because institutions do not fully explain why Britain industrialized, they can
explain why other parts of the world did not. By the mid-18th century,
British citizens could feel relatively secure that their property, innovations,
and industrial output would not be seized by the prying hands of the
government or anyone else with coercive power. Even though British
political institutions were far from perfect and certainly corrupt to modern
eyes, there was enough constraint on executive power that the majority of
the population was reasonably well protected from infringements on
property rights. This was not the case in other parts of the world, especially
those with autocratic governance. The Ottoman and Qing Empires, for
example, regularly infringed on the rights of their people, especially the
economic elite (Balla and Johnson, 2009; Kuran, 2011; Ma and Rubin,
2019). Even within Europe, the Spanish crown was more than willing to
transgress property rights, especially those of its merchants. For instance, the
16th-century kings Charles V and Philip II regularly reneged on their debts
and confiscated treasure coming in from the Atlantic trade (Drelichman,
2005; Drelichman and Voth, 2011). They gave foreign merchants privileges
(for a price) over domestic merchants. They trampled over the rights of
religious minorities. None of this encouraged domestic production on the
type of scale that would come to typify Britain.
Mercantilism and Empire
Economic policy throughout the century or so leading up to industrialization
was unabashedly mercantilist. Mercantilism is the label used to describe
economic policies that favored exports rather than imports. Mercantilist
policies often favored domestic market integration. When it came to
international trade, they supported the use of tariffs, subsidies, and
monopolies for special interests to obtain a favorable balance of trade.
Mercantilist economic policies were therefore embroiled with the dynastic
and violent conflicts that characterized European international relations for
much of the 17th and 18th centuries.
The Atlantic economy that emerged in the 18th century was the product of
British success in a series of wars with France and Spain. Its origins lay in
the mid-17th century, including the capture of Jamaica in 1655. After this,
the Atlantic economy began to boom. It centered on the rich agricultural
economy of the Caribbean. In the 18th century, the British state defeated its
main rivals at sea and secured the lion’s share of trade routes between the
Americas, Europe, and West Africa.
The rise of the Atlantic economy changed Britain’s economic landscape. The
new westward orientation of international trade that came with it altered the
structure and geography of the British economy. Ports like London, Bristol,
and Liverpool expanded operations as Britain’s growing Atlantic empire
offered new opportunities. With the exception of London (which exploded,
becoming the largest city in the world by 1800), the economic geography of
Britain shifted to the Northwest (see Figure 8.2). Table 8.1 shows the largest
English cities (excluding London) between 1520 and 1801. In 1520,
Norwich was the largest city outside London. This was due to its
prominence in the wool trade and proximity to the Low Countries. The only
other cities with populations larger than 10,000 were York, the historical
capital of the north, and Bristol, a major port. By 1801, this urban hierarchy
had been transformed. The industrial center Manchester, which ranked as
only the 82nd largest town in England in the 17th century with a population
of around 2,000, numbered 94,876 inhabitants by 1801. By 1841, it had a
population of 311,269. The only city that grew faster was Liverpool, which
rose from being the 233rd most populated British city to the third most
populous by 1801.
The shift of the British economy and population towards the Northwest
reflects two processes. First, the rise of Atlantic trade favored ports,
particularly those on the west coast. This is why cities like Liverpool grew
so rapidly. Second, as manufacturing began to expand in the 18th century, it
was centered in Yorkshire, Lancashire, or areas abundant with coal such as
Newcastle.
Areas like the West Midlands came to specialize in metallurgy. Liverpool
became the center of the watch trade (Kelly and Ó Gráda, 2016). Other
centers of manufacturing arose such as Sheffield (associated with the steel
industry) and Birmingham (associated with the gun trade, clocks, locks, and
toys) (Kelly, Mokyr, and Ó Gráda, 2020). These manufacturing centers
required many highly skilled workers to produce their goods. As we will see
shortly, the agglomeration of these highly skilled workers in urban centers
may have been one of the factors that set Britain apart.
Figure 8.2 England and its largest cities, 1520–1801
Table 8.1 Most populous English cities excluding London (with populations
of at least 10,000)
Data source: Clark (2001).

The shift to the Atlantic also helped fuel the Consumer Revolution. New,
exotic, addictive products were introduced to Europe by the Atlantic trade,
particularly tea, tobacco, and sugar. These goods were initially luxuries, but
they soon became accessible to the population at large. As Berg (2004, p.
365) describes the process: “The history of these colonial groceries is one of
the transformation of exotic luxuries into necessities.” In the 17th century,
tea was a luxury consumed by the rich. By 1800, it had become a staple of
working-class diets. Tea was consumed with sugar, which the Atlantic
economy made cheaply and widely available. In fact, by the end of the 18th
century, sugar was the single most important import into the British
economy (de Vries, 2003, pp. 151–8).
Many of these goods were produced by slave labor. Harvesting tropical
goods, especially sugar, is a dangerous and laborious task. Indentured
servants tended to avoid the Caribbean, even though it offered a shorter term
of servitude. The high profits made from slave labor reflected both the
exploitation of the labor force and the high demand for the goods slaves
produced. The Atlantic-facing British cities associated with the slave trade
became important in their own right. But how crucial was slavery for
Britain’s industrialization? This is a heated debate. In the next section, we
will discuss this debate and the extent to which the sugar–slavery nexus was
a crucial ingredient for British industrialization.
Does the Transatlantic Slave Trade Explain
Britain’s Industrialization?
Numerous scholars have linked European colonization with the British
Industrial Revolution. Two of the most powerful arguments come from
Williams (1944) and Inikori (2002).
Williams (1944) first popularized the link between the slave trade and
commercial and financial development in 18th-century Britain in his classic
Capitalism and Slavery. He argued that the profits of the slave trade helped
fuel the Industrial Revolution. He drew attention to the trade nexus that
linked British manufactured exports with the slave trade in West Africa and
the sugar, tobacco, and cotton plantations in the Americas. As Solow (1987,
p. 732) describes the period before the Industrial Revolution:
Total trade increased greatly, and the Atlantic was crisscrossed by
British ships carrying manufactured goods to Africa, the West Indies,
Brazil, Portugal, and British North America.
The Atlantic islands were exporting wine, Africa slaves, Brazil gold,
and the West Indies sugar and molasses. Some of the British North
American colonies were sending rice and tobacco to Britain; others
were sending fish, lumber, horses, and flour to the West Indies and were
buying British manufactures with the proceeds. Every one of these
flows depended on the product of slave labor.
Slavery was at the center of this trade. Conditions on sugar plantations were
exceptionally harsh. As a consequence, it proved difficult to attract free
workers to settle. Initially settled by white laborers, often as indentured
servants, by the 18th century the West Indies had become slave economies.
Of course, slaves have no say in working conditions. Slavery enabled
plantation owners to extract the entire surplus generated by forced labor in a
hot and harsh climate (Wright, 2020). Given the centrality of sugar (and to a
lesser extent tobacco), the 18th-century Atlantic economy was inseparable
from the enslavement and exploitation of Africans.
These facts were often neglected in traditional accounts of the British
economy in the 18th century. Williams’s argument about the profits from the
slave trade fueling industrialization established an important correlation. But
was it causal?
Scholars following Williams have not established a link from the investors
and landowners who benefited from exploiting slave labor in the Caribbean
to the innovative developments taking place in the north of England. There
are two reasons for this. First, the entrepreneurs, factory owners, and
inventors who were key to the Industrial Revolution funded their firms from
profits and their own savings and were not well integrated with London-
based capital markets. While slavery was crucial to certain industries and
made many British families rich, it was not directly linked with the more
innovative manufacturing sector. Indeed, sugar was less connected to the
overall economy than were coal, iron, and textiles (Eltis and Engerman,
2000, p. 140). Second, economic historians have pointed out that super-
normal profits were not made in the long run due to competition, and the
sugar industry was small relative to the British economy as a whole (Eltis
and Engerman, 2000). The direct contribution of slavery to the British
economy was small as a matter of simple accounting.
Nevertheless, perhaps the slave trade played an outsized role because of its
strategic importance in the British economy? Scholars including Solow
(1987) have suggested numerous other connections between slavery and the
wider British economy. The slave trade ensured an elastic supply of sugar
and tea, goods that helped fuel an “industrious revolution.” Derenoncourt
(2019) finds that cities linked with the transatlantic slave trade grew faster
than other cities between 1600 and 1850. More generally, slavery raised the
return on investment across the empire. This may have enabled faster
structural change and industrial growth. Inikori (2002) focuses on the role
played by sugar and slavery in the rise of overseas trade in the late 17th and
early 18th centuries. It was this expansion in overseas trade, he claims, that
drove initial increases in productivity. Technological progress built on this
initial increase in productivity. To assess these arguments, however, one has
to go beyond simply establishing plausible empirical linkages. What is
required is a method of assessing the quantitative economic significance of
these linkages.
The theoretical frameworks that Inikori (2002) and Darity (1992) propose
stress the existence of linkages between overseas trade and domestic
manufacturing. Slavery, by being so vital to British overseas trade, was at
the heart of these linkages. However, the evidence for such important
connections has not yet been provided. Hence, modern assessments do not
greatly depart from Solow’s (1987, p. 733) view that “[t]o argue that slavery
was important for British economic growth is not to claim that slavery
caused the Industrial Revolution.” Eltis and Engerman (2000, p. 138) make
the simple point that no industry was indispensable to the Industrial
Revolution. Atlantic slavery was nonetheless a background condition tied to
Britain’s rise to both economic and military prominence in the 18th century.
Was It Cotton?
Williams and Inikori focused on the role played by slavery in the Caribbean
economy of the 18th century. More recently, Beckert (2014) focused on
cotton’s role in creating the modern economic system in the 19th century.
This argument has risen to prominence as part of the new “History of
Capitalism.”
Hobsbawm (1968) declared that, for all intents and purposes, cotton was the
Industrial Revolution. Beckert’s argument builds on this claim. Certainly
cotton textile production was one of the most dynamic sectors of the
industrializing economy. The outward supply shift in cotton textiles induced
an 85% decrease in the price of cotton cloth between 1780 and 1850 (Mokyr,
1990). Once a luxury only for the rich, cheaper cotton goods were a
tremendous boon for consumers of all classes. Almost every Brit could now
afford lightweight, easily washable garments for the first time.
But how did Britain build a world-leading cotton textiles industry? Beckert’s
answer lies in the policies of aggressive colonialism overseas and state
intervention, regulation, and coercion against the labor force at home. Thus,
for him: “Slavery, colonialism, and forced labor, among other forms of
violence, were not aberrations in the history of capitalism, but were at its
very core” (Beckert 2014, p. 441).
One problem with this argument is that it reduces the Industrial Revolution
to cotton textiles. Though cotton textiles were among the most dynamic
industries in Britain during the Industrial Revolution, economic historians
like Mokyr (2009, p. 296) argue that one cannot reduce the Industrial
Revolution to one industry: “If there had been no cotton, there still would
have been an Industrial Revolution, even if its exact shape would have
differed.”
So what was the link between exports and economic growth? McCloskey
(2010, p. 222) observes that “[p]eople innocent of economics … believe that
trade just is growth.” But there is no reason to privilege trade with a
foreigner above trade with one’s fellow citizen. Historians like Beckert focus
on export industries, as these are commonly seen as key drivers of economic
growth. But exports are the price we pay for imports. Harley (2004, p. 192)
notes that “a person or nation fully employed … yearns to acquire goods, not
to get rid of them. Exports are an unfortunate sacrifice that people or nations
must make to acquire imports for consumption.”
Harley further notes that the share and prominence of international trade in
national income accounts is a poor indication of its economic significance.
To assess the economic significance of international trade, he presents
counter-factual estimates of the importance of trade to the British economy.
He finds that:
Self-sufficiency in 1860 … would have cost Britain only (50 per cent) *
(0.125) or about 6 per cent of national income. Six per cent of national
income – or even, if, improbably, the terms of trade effect were twice as
great, 12 per cent – looks small beside bold metaphors of Britain’s
“dependence” on foreign trade. (Harley, 2004, p. 194)
These calculations suggest that the importance of trade to the British
Industrial Revolution was sizable but not so significant to warrant being
described as critical or essential.
Was It Market Size?
While certain types of institutions may have prevented other parts of the
world from experiencing sustained growth, they do not fully explain why
Britain did experience such growth. The same applies to other preconditions
such as access to international markets and a large domestic market
relatively free from internal taxation. Britain had both. This was in no small
part due to the evolution of British political institutions, which (as we
discussed in the previous chapter) increasingly favored the interests of the
economic elite. We noted previously how the rise in the Atlantic trade
contributed to Britain’s rise as an economic power. Equally significant were
the large domestic markets in which British producers could offload their
goods. Important improvements in transport networks in the 18th century
(see Chapter 2) lowered the cost of domestic shipping. Meanwhile, the
British state was committed to free internal trade. This was no doubt due, in
part, to the pre-eminence of economic elites in Parliament. This contrasted
with fractured states like the Holy Roman Empire and France. In those
states, internal tariffs stifled domestic trade. Along the River Rhine,
merchants faced a new tariff in each of the many territories they would pass
on a routine trip between cities (Johnson and Koyama, 2017, pp. 9–10). It
was not until the formation of the Zollverein trade customs union in the mid-
19th century that domestic trade was freed of tariffs and domestic markets
became relatively integrated (Shiue, 2005).
Some economists have theorized that Britain’s market size played a crucial
role in providing incentives for innovation and bringing about sustained
growth. This idea goes back to Adam Smith (1776/1976), who argued that
the size of the market determined the extent of the market. This in turn
determined both the productivity of labor and capital and the incentives for
investment and innovation. Building on this insight, Desmet and Parente
(2012) link increasing market size with increasing firm size and argue that
these two interlinked developments were critical in accounting for the
Industrial Revolution. The size of markets, particularly urban markets,
expanded considerably in 17th-and 18th-century England. This played an
important role in enabling regional specialization and promoting Smithian
growth. Areas with poor-quality land like the Northwest and Midlands
developed their comparative advantage as centers of manufacturing (Kelly,
Mokyr, and Ó Gráda 2020). But this was not enough by itself.
One reason why institutions and markets were not enough is that they were
not unique to Britain. Numerous studies have found comparatively high
levels of market integration in parts of pre-industrial Europe (Bateman,
2011, 2012). Even in England, markets were already highly integrated by the
late Middle Ages (Federico, Schulze, and Volckart, 2021). Bouts of market
integration also occurred previously and in other parts of the world without
inducing a sustained increase in innovative activity. For instance, under the
Qing dynasty, China achieved comparatively high levels of integration
(Bernhofen, Li, Eberhardt, and Morgan, 2020). Moreover, the Dutch had
reasonably secure property rights and access to large international markets.
Why didn’t the Dutch have an Industrial Revolution? Why didn’t they end
up turning their trade networks, physical capital, and human capital into
sustained growth and innovation?
How About State Capacity?
All of the preconditions we have discussed so far either have not been
unique to Britain or were not directly related to innovation. This does not
make them unimportant. They were all part of the bigger story of why
Britain industrialized in the 18th century. But they leave some pieces
missing. One of these missing pieces is that Britain’s state capacity was
second to none in Europe.
In particular, simply because it governed a much larger territory, Britain’s
state capacity was much greater than that of the Netherlands. The Dutch
Republic was the leading economy of the 17th century. But it had to expend
tremendous resources to fend off French invasions in 1672–8, 1688–97, and
1701–14. It is a testament to the resilience of the Dutch economy that it did
not collapse from the fiscal challenges it faced in fighting the French. The
costs were huge. De Vries and van der Woude (1997, p. 681) estimate that,
in the mid-18th century, 7% of total Dutch GDP was spent on debt
financing. Interest payments constituted 70% of tax receipts. The Dutch
Republic remained rich – its per capita GDP exceeded that of Britain’s until
after 1820 – but it lacked the capacity for rapid, sustained growth.
Throughout the 18th century, the Dutch controlled a large share of world
trade. Amsterdam remained a financial capital. But the large debts incurred
during the French Wars had to be financed and this meant high taxes. When
a renewed crisis came in the 1780s, the Dutch Republic was unable to
respond. The Republic was eventually brought to an end by the French
invasion of 1795.
In contrast, Britain was able to finance numerous wars with France during
what historians have come to call the “Second Hundred Years’ War”
between 1688 and 1815. Like the Dutch Republic, the British state took on a
tremendous amount of public debt (Vries, 2015). Debt as a portion of GDP
soared to 250% by 1815. But unlike the Dutch Republic, the British state
was able to support this debt without resorting to draconian levels of
taxation. British taxes were higher than in France (about 12% of national
income compared to 6–7% in France), but they were not so high so as to
impede growth. As Brewer (1988) demonstrated, the bulk of taxes were
raised through indirect taxation, particularly on goods like beer.
This suggests the possibility that despite having many of the prerequisites
for modern economic growth, in a world characterized by interstate violence,
the Dutch Republic was simply too small to support the type of economic
growth that characterized industrializing Britain. The British could engage in
dynastic and commercial wars with their well-funded rivals without
destroying their economy. The Dutch could not. Of course, the Dutch could
have tried to avoid warfare, but this was difficult in this period. Any nation
that did not have a robust military, such as Poland-Lithuania, tended to be
gobbled up by its rivals. Yet, state capacity merely gives us one reason why
industrialization did not begin in the Dutch Republic. It does little to tell us
why the British were so innovative beginning in the latter half of the 18th
century. This requires knowing something more about the British people
themselves.
Maybe It Was Skilled Mechanical Workers?
Another important factor unique to Britain was its large supply of highly
skilled workers. These included craftsmen, printers, watch-makers,
carpenters, and engineers (Kelly, Mokyr, and Ó Gráda, 2014, 2020). Britain
also had a large supply of wrights, who were highly skilled mechanical
craftsmen (Mokyr, Sarid, and van der Beek, 2020). These craftsmen
specialized in water-powered machinery, which gave Britain an edge until
well into the 19th century, when steam power finally replaced water power.
One thing tying all of these workers together was fine mechanical skills.
These were the types of workers who would eventually create many of the
innovations of the Industrial Revolution. They would also be the ones who
would produce and repair these innovations at scale. Metal machines
requiring precise measurement and engineering acumen were the hallmarks
of the Industrial Revolution. It was these workers who made it possible
(Kelly, Mokyr, and Ó Gráda, 2020). The Dutch Republic, with its strong
focus on merchant activity and international trade, did not have an
equivalent workforce. As we will see later in this chapter, such skilled
workers were crucial to Britain’s industrialization. The Dutch Republic’s
relative paucity in this respect likely inhibited any possibility of an industrial
revolution there.
One critical factor that supported the existence of a highly skilled workforce
was the system of apprenticeships. In Britain, the contract between the
apprentice and a master was a private one, and hence voluntarily enforced
(Humphries, 2010). But it was regulated by municipal authorities. These
contracts were a way of overcoming a fundamental problem in the market
for human capital. How can talented but poor individuals acquire training in
a profession if they lack the means to pay for it? The apprentice contract
sought to overcome this problem by locking an apprentice in for a certain
number of years, usually seven, during which time he would provide labor
services for the master in return for bed, board, education, and training. As
the apprentice became more skilled, his labor would become much more
valuable than his costs of upkeep and training, allowing the master to recoup
the outlay of the earlier years.
Apprenticeship was not unique to Britain, but it was not tied to the guilds as
it was in the rest of Europe. Wallis (2008, p. 854) notes that apprenticeships
in early modern England “thrived despite, not because of, the guilds.” In
practice, apprentices often left their contracts early (Minns and Wallis,
2012). Journeymen would take their skills from one town to another. This
was important because the type of skills they transferred were best
transferred in person (de la Croix, Doepke, and Mokyr, 2017). As a result of
the movement of labor and a fluid and mobile labor market for apprentices
in London, craft skills were diffused widely both in London and beyond.
This can help explain Britain’s relatively high level of human capital. It can
also help explain why the difference in wages between skilled and unskilled
workers was relatively low (van Zanden, 2009).
In short, Britain had many of the prerequisites for industrial expansion – at
least, those prerequisites we can now see with the benefit of hindsight. It had
political institutions that protected property rights, while also allowing their
adjustment and renegotiation. It was open to innovation and invention
(despite the downsides associated with too rigorous an enforcement of
intellectual property). It had access to the Atlantic and its slave economies,
while avoiding the perils of the resource curse. Its political elites, while
mercantilist, encouraged domestic trade and, despite tariffs and other
restrictions, did not repress international trade. It had labor market
institutions that avoided the costs associated with guild privileges, but
provided skills and training on a large enough scale.
Britain was not the only place with at least one of these traits. The free cities
of the Holy Roman Empire had many of the best-skilled laborers on the
continent. The Dutch had secure property rights and access to international
markets. The Spanish and Portuguese had worldwide colonial empires.
Perhaps the difference was that the British had all of these factors? Take any
one away and it is unlikely that Britain would have industrialized the way it
did. But how did Britain industrialize? We turn to this crucial issue next.
An Innovative Economy
The Industrial Revolution saw a range of innovations concentrated in certain
sectors of the British economy. To illustrate the cumulative nature of the
major breakthroughs, we focus on one of those sectors: the cotton textile
industry.
For centuries, the productivity of spinners had been constrained by the use of
a single spinning wheel. In 14th-century China, there were experiments with
multiple spindles. In Europe, this development did not occur until the mid-
18th century. The first successful machine using this technique was the
spinning jenny, invented by James Hargreaves in 1764 or 1765 (see Figure
8.3). Prior to Hargreaves’s invention, spinning was a labor-intensive activity,
usually performed by women working from their own homes. In both
Europe and Asia, spinning was produced through a decentralized system of
household production, often in the countryside. Merchants or “putter-outers”
would distribute raw cotton fiber to spinners and then return a week or so
later to collect the spun cotton thread. Weaving – also a labor-intensive
activity – tended to be the prerogative of men and was typically better paid
than spinning.
Figure 8.3 The spinning jenny
Source: Figure in the public domain, available at
https://en.wikipedia.org/wiki/Spinning_jenny#/media/File:Spinning_Jenny_improved_203_Mar
sden.png.

Hargreaves was able to solve the problem of operating multiple spindles at

once by placing the spinning wheel (which powered the spindles) on its side,
while placing the spindles themselves in a vertical position. It took several
years for him to iron out problems in the design, but once he had done so,
spinning jennies began selling across the northwest of England. As Allen
(2009a) documents, the spinning jenny reduced the costs of spinning by
more than half. It also changed the way work was organized. Individuals
working in their homes could not afford such an expensive piece of
machinery and it only made sense to employ it in a larger enterprise. Thus,
spinning jennies facilitated the rise of factories in which capitalist
entrepreneurs owned the capital-intensive machinery and the spinners earned
a wage. This development also enabled longer working hours and was a
precondition for the replacement of human labor by machine labor.
While the spinning jenny was an important breakthrough, its impact was
limited by the fact that it could only spin weft yarn (Styles, 2021) and its
spinning wheel was still powered by hand. In 1769, Richard Arkwright
developed a machine that could be powered by water: the water frame (see
Figure 8.4). Critical to this development were rollers which drew out the
fiber so that it could be twisted by the spindle. Arkwright built on earlier
innovations and designs, and his use of rollers was borrowed from
techniques used in metallurgy. The water frame represented a significant
advance and led to the establishment of large cotton mills, often close to
rivers.
The next development was Samuel Crompton’s spinning mule (see Figure
8.5). The mule combined the spinning jenny and the water frame and
subsequently enabled the rise of steam-powered textile mills. Unlike the
jenny or the water frame, the mule could produce fine yarn which could rival
that produced by hand-spinners in India. Alongside the invention of these
machines, many other processes were mechanized and improved. The result
was a dramatic fall in the real price of cotton yarn. Overall productivity
doubled between the 1760s and the 1830s, by which time British cotton
textiles were more competitive than Indian cotton textiles, even though
British wages were four to five times higher in nominal terms (Allen, 2009a,
pp. 151–5).
Cotton textiles saw remarkable productivity growth. It was the largest of a
number of industries, including iron-making and watches, that experienced
continuous productivity improvements in the latter half of the 18th century
(Mokyr, 1990; Kelly and Ó Gráda, 2016). More change would come in
subsequent decades. Why did these changes take place when and where they
did? This is the key question, and it is hotly debated among economic
historians. We turn now to this debate.
Figure 8.4 Arkwright’s water frame
Source: Figure in the public domain, available at
https://en.wikipedia.org/wiki/Spinning_frame#/media/File:Spinning_frame01.jpg.
Figure 8.5 Crompton’s spinning mule
Source: Figure in the public domain, available at
https://en.wikipedia.org/wiki/Spinning_mule#/media/File:Mule-jenny.jpg.
High Wages and Induced Innovation
Allen (2009a) argued that the Industrial Revolution occurred when and
where it did because it was a response to the relative prices of labor, capital,
and energy. This is an argument that economists call “induced innovation” or
“biased technological change.” Specifically, Allen argues that labor-saving
technologies were profitable to develop in Britain, but not elsewhere,
because labor in Britain was expensive whereas capital and energy were
comparatively cheap.
Allen compares two economies with access to the same fundamental
production function, but with different factor endowments (that is, land,
labor, and capital), and hence different factor prices. The argument has two
stages. In the first stage, initial relative factor prices determine the initial
choice of technology. When labor is relatively expensive, producers choose a
technology which is labor-saving and capital-intensive. On the contrary,
when labor is cheap, producers will choose labor-intensive production. In the
second stage, there is relatively rapid technological progress in the capital-
intensive technology. This makes the capital-intensive technology profitable
even in locations where labor costs are low and capital and energy are
relatively more expensive.
Allen’s model is best suited to explain the pattern of innovations in cotton
textiles. The spinning jenny did not require knowledge of advanced
mathematics or science. It was an engineering challenge in which numerous
small problems of implementation had to be overcome. But it did require
capital. Hargreaves was supported by Robert Peel, a local putting-out
merchant and farmer. Similarly, Arkwright’s water frame solved an
engineering problem: “[T]he originality was not in thinking up the roller,
rather the challenges were the practical issues of making the roller work in
application” (Allen, 2009a, pp. 200–1).
The steam engine was different. Here, prior scientific advances were crucial.
Particularly important were an understanding of atmospheric pressure and
the realization that as water evaporates it produces a vacuum. Otto von
Guericke’s demonstration of this point, through his air pump of 1657, was
critical. Christopher Huygens experimented with the idea of a “gunpowder
engine” in which he pioneered the development of a piston-based engine.
Using this knowledge, Denis Papin built several experimental steam engines
in the late 17th century. While none of these were close to being
commercially viable, Thomas Newcomen drew on these early models when
he developed his atmospheric engine (see Figure 8.6) (Wooton, 2015).
One of the earliest uses of the steam engine was in coal mining. Coal mines
suffered from frequent and dangerous flooding. Engines could pump out the
water, making mining safer. As Allen (2009a, p. 161) puts it: “Scientific
curiosity and court patronage may have been reason enough for Torricelli,
Boyle, Huygens and other scientists to devote their time and money to
studying air pressure, but Newcomen was motivated by prospective
commercial gain.” After Newcomen’s invention, it was possible to
incrementally improve the design. The coal consumption needed to run a
steam engine fell from around 45 to 30 pounds per horsepower hour between
1712 and the 1760s to around 17 pounds by the 1770s due to improvements
made by John Smeaton (Allen, 2009a, pp. 165–6).
Figure 8.6 Schematic of the Newcomen steam engine
 Source: Figure in the public domain, available at
https://en.wikipedia.org/wiki/Newcomen_atmospheric_engine#/media/File:Newcomen6325.pn
g.

The big breakthrough in steam technology came from James Watt in

combination with his business partner Matthew Boulton. Watt’s engine
improved efficiency by introducing a separate condenser (see Figure 8.7).
Allen (2009a) characterizes Watt’s efforts as epitomizing the private R&D
model of technological change. Major improvements in pumping had to
await the expiration of Watt’s patent, but after 1800 there were dramatic
improvements in steam technology. Although it took decades for steam
engines to be widely adopted, they ended up revolutionizing many
industries, including transport. Steam locomotives and steamships would
become the predominant form of transport in the 19th century.
According to Allen (2009a), inventions like the steam engine, and
improvements upon those inventions, were driven by high British wages.
Entrepreneurs sought labor-saving methods to avoid paying those high
wages. But why were they so high? Part of the answer has to do with the
developments we outlined in the previous section. Allen accounts for high
British wages in the context of the comparative commercial success
achieved during the 17th and 18th centuries, in which overseas trade played
a particularly important role.
Figure 8.7 The Watt steam engine
Source: Figure in the public domain, available at
https://en.wikipedia.org/wiki/Watt_steam_engine#/media/File:Watt_steam_pumping_engine.JP
G.

Cheap energy is another part of Allen’s story. Cheap energy was partly the
result of prior developments. The coal industry developed in England in
response to a shortage of timber in the 16th century. In particular, the growth
of London exhausted nearby sources of timber and induced a switch to coal-
burning. This was a drawn-out process that required innovations like
improvements to the chimney. It also provided incentives for the expansion
of the mining industry. Cheap coal was a particularly important spur to the
development of steam engines (see Figure 2.10).
Allen’s argument has come under critical scrutiny. First, technological
change does not always economize on the most expensive factor. For profit-
maximizing entrepreneurs, all costs are economized. The conditions under
which directed technological change seeks to economize on the most
expensive factor depend on the degree of substitutability between labor and
capital. We do not yet have a good estimate of whether these conditions were
met in Industrial Revolution Britain.
Second, more detailed studies have refined Allen’s account in the specific
context of the Lancashire cotton industry in the mid-18th century. Styles
(2021), for instance, argues that it was not the overall level of wages in the
British economy that mattered for the incentive to adopt a new technology. It
was the specific cost of labor in regional textile centers like Lancashire.
Humphries and Schneider (2019) provide counter-evidence suggesting that
female spinners did not in fact earn as high wages as Allen claimed.
Third, Allen infers that labor was expensive in Britain because wages were
high. However, high real wages reflected high levels of human capital and
not just the cost of labor. British workers were better fed, taller, capable of
working longer, and more skilled and numerate than their equivalents
elsewhere (Kelly and Ó Gráda, 2014). The higher wages they commanded
may therefore not be an accurate measure of labor costs.
Finally, Allen’s explanation does not address one key aspect of Britain’s
industrialization: its large supply of highly skilled workers. It was these
workers who drove the Industrial Revolution. Allen’s explanation also does
not account for the role that scientific advancements played in
revolutionizing many key industries. Sure, science was not important for
some of the advances in cotton textile machinery. But it was for the steam
engine and metallurgy. A satisfying explanation of the Industrial Revolution
needs to account for these factors while also accounting for why it began in
Britain. We turn next to such an explanation.
An Enlightened Economy
Thus far, we have noted numerous preconditions for industrialization. All
were apparent in Britain on the eve of industrialization. These include a
large supply of highly skilled workers, a large domestic economy, limited
and stable governance, and access to the growing Atlantic economy. Yet,
none of these explanations can account for why British innovators were so
adept at taking advantage of recent advances in science. This is the last part
of the puzzle in need of explanation.
Mokyr (2009, 2016) offers a theory addressing precisely this puzzle. He
emphasizes the role that cultural elites of the Enlightenment played in
propelling European – and particularly British – technological innovation.
Specifically, Mokyr (2016) emphasizes the role played by the Republic of
Letters in producing a culture that rewarded and encouraged innovation. The
Republic of Letters was a Europe-wide forum in which Enlightenment elites
disseminated and disputed the cutting-edge scientific findings and
philosophical insights of the day. It provided a setting for ideas to be tested
and norms of good behavior and scientific standards to develop. In previous
eras and in other societies, innovators were often siloed. Brilliant individuals
often worked in isolation (like Renaissance polymath Leonardo de Vinci).
Or they were dependent on the patronage of a single individual, often a
monarch whom they might offend or displease. But individual genius was
not enough to produce a culture of innovation. And the patronage systems of
most pre-modern societies were not conducive to the pursuit of innovative
new ideas.
The Republic of Letters crossed national and religious borders and followed
strict rules of intellectual engagement. Networks of elite minds were formed
that would have been impossible without this forum. For instance, the
famous French philosopher Voltaire corresponded with cultural elites far
away from his home in Paris – in England, Spain, Italy, Portugal, Germany,
the Netherlands, and beyond (see Figure 8.8). The Republic of Letters was
remarkably open to new scholars advancing ideas that overturned existing
orthodoxies, while also succeeding at vetting for quacks and charlatans.
Participants in the Republic of Letters created a hierarchy of merit wherein
individuals were judged on the basis of their ideas and not their social
pedigree. The Republic of Letters was successful because it weeded out bad
ideas and enabled good ideas to diffuse and spread.

Figure 8.8 Number of letters in Voltaire’s correspondence in the Republic of

Letters, 1755–76
Figure does not include 100 letters with Russia, three with Sweden, one with Ecuador, one with
Haiti, three with India, one with Kazakhstan, one with Panama, one with Turkey, and one with
the US. Data source: Edelstein et al. (2010).
According to Mokyr (2016), great individuals and scientists mattered, but
they did not act on their own. Mokyr depicts in vivid detail the followers and
secondary figures who played a crucial role in disseminating the new
ideology of progress. For instance, individuals such as Samuel Hartlib
played a central role in the establishment of the Royal Society (the world’s
oldest surviving scientific academy, founded in 1660 in Great Britain). So
did John Wilkins, Warden of Wadham College Oxford, who was another
founder of the Royal Society. It was these lesser known scientists, along with
the more famous thinkers of the day such as Isaac Newton, who helped build
a marketplace for ideas. This was not a deliberate or planned process. The
actions of various writers, intellectuals, and scientists across Europe built a
shared community of thinkers and innovators from which emerged the
Republic of Letters.
This culture of growth cannot be assessed in isolation from other
developments. For example, Mokyr (2016) emphasizes that the emergence
of a Europe-wide postal service was key to scholarly communication. This
began in the 15th century as the de Tasso family began organizing a postal
system in Italy before expanding into the Holy Roman Empire a century
later. By the 17th century, a postal network linked all of Europe and made
feasible a continuous and reliable correspondence between scholars living in
different countries.
Political fragmentation was also important. What made Europe unique,
according to Mokyr, was the combination of cultural unity with political
fragmentation. Fragmentation per se imposes numerous costs, some of
which we discussed in Chapter 7. Any benefits from fragmentation could
only be obtained because it coincided with a thriving intellectual culture that
spanned political borders. The political divisions of Europe meant that
innovative and heretical thinkers had an avenue of escape from heavy-
handed political authorities. This escape valve prevented the ideas and
innovations of the Renaissance and Reformation from being suppressed or
lost once the Counter-Reformation became ascendant in Southern Europe
after 1600. Fragmentation and polycentricism allowed Descartes and Pierre
Bayle to flee France, and Hobbes and Locke to flee England.
The political divisions of Europe also meant that there was a host of
potential patrons and protectors. No writer or scientist was dependent on the
favor of a single, all-powerful monarch. Furthermore, the cultural unity of
Europe meant that the inventors, innovators, and tinkerers in England and
the Dutch Republic could build on the advances of the European-wide
Scientific Revolution. Europe’s interconnectivity due to the Republic of
Letters helped to give rise to a continent-wide Enlightenment Culture.
But how did the Republic of Letters contribute to the onset of
industrialization? More to the point, why did a pan-European institution help
facilitate industrialization in Britain (and not elsewhere)? This is where the
presence of other preconditions is important. Mokyr (2009) argues that it
was not just the ideas of the Enlightenment that mattered, but also the
capacity of certain people to take those ideas and put them into practice. This
required a large group of people with practical skills: craftsman, artisans,
and tinkerers. On the eve of industrialization, England had these people in
abundance. The new spirit of scientific inquiry met a response from this
large group of apprentice-trained and skilled craftsmen. Most other parts of
the world did not have such a large group of highly skilled mechanical
workers. Those that did, like the independent cities of the Holy Roman
Empire, lacked a number of the other preconditions for growth. In the rest of
the world, other important preconditions did not materialize. Political
fragmentation in the medieval Middle East and pre-modern India does not
seem to have promoted innovation. Meanwhile, the political unity of Qing
China produced an elite culture that was conservative and stifled free
thinking.
According to Mokyr (2009), it was British skilled workers who internalized
key Enlightenment cultural ideas. Among the most important of these ideas
was that the world could be transformed for the betterment of humankind.
The mentality that the world could be improved upon was key to increasing
the rate at which technological change occurred (Howes, 2017). This was
why so many innovators of the period contributed new ideas to areas outside
of their specialization or technical background (Mokyr, 2009). Edmund
Cartwright, best known for his invention of the power loom, exemplified this
mentality. It was not just textile spinning that he attempted to improve. He
also “developed agricultural machinery, designed fireproof building
materials, made medical discoveries, contrived a crank-operated, horse-less
‘centaur carriage’, and experimented with manures and potatoes as the
superintendent of the Duke of Bedford’s model farm” (Howes, 2017, pp. 3–
4). Cartwright was hardly unique in this regard. Many of the best-known
innovators of the period contributed to a wide spectrum of fields. These
ideals culminated in what Mokyr (2009) calls an “Industrial Enlightenment,”
with its locus in Britain.
As Crafts (2011) notes, Allen’s and Mokyr’s views of the origins of the
Industrial Revolution can be reconciled. Technological change in the
Industrial Revolution could have been labor-saving and a response to high
labor costs. At that same time, a cultural transformation along the lines
Mokyr envisions could have been critical in increasing the supply of would-
be inventors, tinkerers, and entrepreneurs. Although we side with the latter
as being more critical, both arguments shed significant light on why Britain
industrialized.
Chapter Summary
This chapter addresses one of the most important questions regarding how
the world became rich: why did the Industrial Revolution take place when
and where it did? We first identified the many preconditions that Britain had
on the eve of industrialization (around 1750). These included relatively
limited and representative governance, a large domestic economy, access to
the Atlantic economies, and a large base of highly skilled mechanical
workers. Other places in Europe (and around the world) had some of these
prerequisites, but only Britain had all of them. We argued in this chapter that
they were all necessary, at least for British industrialization to proceed the
way it did. In fact, many of these preconditions interacted with others so that
one mattered only in the presence of another.
Having identified the preconditions for industrialization, we proceeded to
examine two of the primary recent theories on why Britain industrialized
first. One, by Allen, emphasizes Britain’s high wages and relatively cheap
energy. This combination incentivized producers to innovate the types of
labor-saving technologies that were the hallmark of the Industrial
Revolution. However, this explanation does not account for why Britain had
so many highly skilled mechanical workers on the eve of industrialization. It
was these workers who were so important to creating, implementing, and
repairing the inventions of the Industrial Revolution. Nor does Allen’s
argument account for the use of science in many of the key inventions of the
Industrial Revolution. Although some inventions in cotton spinning did not
require scientific knowledge, other inventions did. Most famously, advances
in steam engines and metallurgy used cutting-edge scientific principles.
These facts are accounted for in the second major theory, proposed by
Mokyr. Mokyr argues that an “Industrial Enlightenment” pervaded Britain in
the late 18th and 19th centuries. This movement drew upon the newest
scientific principles from across Europe. Unlike other parts of Europe,
Britain was able to complement scientific production with mechanical skill.
It was this combination that enabled the many innovations of the Industrial
Revolution and ensured that Britain’s industrialization was not just a blip. If
anything, the rate of innovation has continued to increase ever since.
Clearly, Britain no longer has a monopoly on innovation. Nor is it the richest
economy in the world. It was overtaken in the early 20th century. In any
case, Britain’s industrialization did not immediately result in large gains in
per capita income. That would have to wait for the middle decades of the
19th century. It was only then that modern, sustained economic growth
began. How did this happen? How did Britain become rich? How did other
parts of the world become rich? Understanding what happened in Britain is
important, because that is where modern economic growth first emerged.
But if we care about the processes through which billions have been lifted
out of poverty and billions more have somewhat comfortable lifestyles, we
need to leave Britain and address how (parts of) the rest of the world became
rich. This is the focus of the next chapter.
9
The Rise of the Modern Economy
The Industrial Revolution was a technological revolution. Over time, it
would bear economic fruit. But it did not do so immediately. Modern
economic growth, characterized by sustained increases in per capita income
without major reversals, did not begin until the middle decades of the 19th
century. How did this happen? How do we connect the dots from
industrialization to modern economic growth? After all, Britain’s industrial
period was not the first time in world history that economic growth occurred.
But previous episodes of growth were overwhelmed by negative shocks or
Malthusian forces. Why did this episode of innovation and expansion
become self-sustaining? How did this episode ultimately impact the wider
population? How did it spread? Why did it spread rapidly to some parts of
the world but it took centuries to spread elsewhere? These are the questions
we answer in these concluding chapters. When we are done, we will have a
pretty good idea of how the world became rich.
The Fruits of Industrialization
The Industrial Revolution is sometimes conceived as a “take-off” (for
example, by Rostow, 1960). This metaphor suggests an ever-accelerating
rate of economic growth. But this is a little misleading. Overall economic
growth during the Industrial Revolution was modest by 20th-century
standards. British growth during industrialization was much slower than in
21st-century China, post-World War II West Germany or Japan, or the US
around the turn of the 20th century.
But the Industrial Revolution was a revolution. What made it so
revolutionary was that Britain was ultimately the first economy to achieve
sustained and permanent per capita GDP growth over a long period. It was
also the first large economy to transform the basis of the economy away
from agriculture to industry. Crafts (2018, p. 11) describes the achievements
of the Industrial Revolution in the following terms: “[T]he economy of the
mid-nineteenth century was established on a different trajectory from that of
a hundred years earlier. In particular, sustained labour productivity growth
based on steady technological progress and higher levels of investment had
become the basis of significant growth in real income per person
notwithstanding rapid population growth.” In other words, this was a period
of economic development for the British economy.
It is these changes that are responsible for the economy we know today. But
how did this revolution affect the common person? Per capita GDP only tells
part of the story. Wealth need not be distributed to the masses. Clearly, at
some point the lot of most became better. As we noted in Chapter 1, people
living in wealthy countries who are at the bottom of today’s income
distribution are better off on most fronts than almost everyone who ever
lived prior to 300 years ago. This is an immense accomplishment. But how
did it happen?
Possibly the most important economic change brought on by the Industrial
Revolution was that the structure of the economy changed. Since the
Neolithic Revolution some 6,000–10,000 years ago, most people in every
settled society in the world were engaged in agriculture. While there were a
few smaller states built on trade (such as the medieval Italian city-states or
early modern Holland), never before was a large state anything but
overwhelmingly agricultural. This changed with industrialization, first in
Britain and then elsewhere.
In fact, this transformation began prior to the Industrial Revolution. Labor
left agriculture and traditional industries and moved into manufacturing and
industry (Taylor and Wrigley, 2014). The proportion of English workers in
agriculture was less than 40% in 1700, testifying to the sophistication of the
English urban economy. By 1851, the share of workers in agriculture had
fallen to 23.5%. In contrast, 45% of the labor force were in industrial
employment (Crafts, 2018, p. 28).
Were the fruits of industrialization widely distributed? In the short run, the
answer is no. Figure 9.1 reveals that while GDP per capita took off in the
late 18th and early 19th centuries, wages stagnated until the 1830s. Real
wages even fell slightly in the second half of the 18th century, just as Britain
was industrializing. Afterwards, “some slight progress was made in the mid-
1830s … [but] it was not until the mid-1840s that they at last started to
ascend to a new height” (Feinstein, 1998, p. 649).
It is possible that movements in real wages reflect differences between the
industrializing north of Britain and the rest of the country. According to
Kelly, Mokyr, and Ó Gráda (2020), areas which traditionally had lower
wages such as Manchester and Liverpool experienced rapid wage growth
between 1770 and 1840, while the south of England experienced
deindustrialization and falling wages. The apparent puzzle of stagnant real
wages in the Industrial Revolution may thus be an artifact of economic
historians looking at the average of the two phenomena.
Be that as it may, between the 1780s and 1850s, real wages rose less than
15% for working-class families despite significant economic growth. Why
did real wages stagnate during the Industrial Revolution? Several
explanations have been proposed. First, Malthusian forces remained
relevant. The population of England and Wales increased from 6.1 million in
1750 to 17.9 million in 1851. A Malthusian framework suggests that such
rapid population growth should have exerted severe downward pressure on
real wages.
Figure 9.1 GDP per capita and real wages in England/Great Britain, 1270–
1870 (1700 = 100)
Data sources: Broadberry, Campbell, Klein, Overton, and van Leeuwen (2015) for GDP data,
Allen (2001) for real wage data. Data refer to England between 1270 and 1700 and Great
Britain from 1700 to 1870.

A second factor was war. Britain was engaged in a nearly continuous

twenty-five-year struggle with Revolutionary and then Napoleonic France
during the middle years of the Industrial Revolution. Population growth
meant that Britain had become a net importer of food. War, blockages, and
disruption meant that food prices soared, eating into workers’ disposable
incomes. Protection, in the form of the Corn Laws, ensured high food prices
until their repeal in 1841. The period following the end of the Napoleonic
Wars was one of depression and crisis as the British government strove to
return to the Gold Standard and to restructure finances strained by years of
conflict.
Third, technological change in this period was generally labor-saving. In a
period before labor unions, this entailed a fall in labor’s share of GDP during
the early years of the Industrial Revolution. In contrast, the share of profit in
national income rose. The consequence was that inequality rose. The
majority of the gains in income went to the owners of land and capital rather
than to workers. Allen (2009b) calls this “Engels’ Pause” after Friedrich
Engels, Karl Marx’s co-author of the Communist Manifesto (1848) and the
author of The Conditions of the Working Class in England in 1844 (1845).
These conditions gave rise to a pessimistic view of the promise of
industrialization. Poets like William Blake and Robert Southey condemned
the smoke and smog of mills and textile factories. They likewise railed
against the dehumanizing nature of industrial work. Blake made famous the
phrase “dark satanic mills,” likely in reference to a steam-powered flour mill
built by Boulton and Watt that was close to where he lived. The pessimistic
view was most famously expressed by Marx and Engels in their Communist
Manifesto, in which they saw no gain in living standards accruing from
industrialization and mechanization. It continued to be expressed by left-
leaning historians such as Eric Hobsbawm and E.P. Thompson, the latter of
whom remained certain of “the truly catastrophic nature of the Industrial
Revolution,” a period marked by “intensified exploitation, greater insecurity
and increasing human misery” (Thompson, 1965, p. 198).
The pessimistic view received apparent support from many classical
economists. David Ricardo envisioned an “iron law of wages” that would in
the long run push the wages of workers back down to subsistence. Malthus
believed that only sexual restraint was capable of maintaining living
standards above subsistence. Even John Stuart Mill, writing in 1848, was
skeptical of the ability of machines and mechanization to achieve a sustained
increase in living standards (Berg, 1980, pp. 332–42).
In contrast, there were those who appreciated that something unique was
occurring. Thomas Macaulay (1830, pp. 560–1) painted this optimistic view
of the economic conditions of ordinary people in 1830s Britain in response
to Southey:
When this island was thinly peopled, it was barbarous; there was little
capital; and that little was insecure. It is now the richest and the most
highly civilized spot in the world; but the population is dense. Thus we
have never known that golden age which the lower orders in the United
States are now enjoying. We have never known an age of liberty, of
order, and of education, an age in which the mechanical sciences were
carried to a great height, yet in which the people were not sufficiently
numerous to cultivate even the most fertile valleys. But, when we
compare our own condition with that of our ancestors, we think it clear
that the advantages arising from the progress of civilization have far
more than counterbalanced the disadvantages arising from the progress
of population. While our numbers have increased tenfold, our wealth
has increased a hundredfold.
Macaulay’s assessment was certainly rose-tinted. However, it was Macaulay,
and not Southey, Smith, or Malthus, who correctly envisioned the
consequences of sustained economic growth:
If we were to prophesy that in the year 1930 a population of fifty
millions, better fed, clad, and lodged than the English of our time, will
cover these islands … that machines constructed on principles yet
undiscovered, will be in every house, that there will be no highways but
railroads, no travelling but by steam, that our debt, vast as it seems to
us, will appear to our great-grandchildren a trifling incumbrance, which
might easily be paid off in a year or two, many people would think us
insane. We prophesy nothing; but this we say: If any person had told the
Parliament which met in perplexity and terror after the crash in 1720
that in 1830 the wealth of England would surpass all their wildest
dreams, that the annual revenue would equal the principal of that debt
which they considered as an intolerable burden, that for one man of ten
thousand pounds then living there would be five men of fifty thousand
pounds, that London would be twice as large and twice as populous,
and that nevertheless the rate of mortality would have diminished to
one half of what it then was … our ancestors would have given as much
credit to the prediction as they gave to Gulliver’s Travels. Yet the
prediction would have been true. (Macaulay, 1830, pp. 563–4)
While economic historians have debated whether the pessimists or optimists
had the truth of it since the early 19th century, it is evident that in the long
run the optimists were correct. Macaulay’s predictions were remarkably
prescient.
The same forces responsible for the initial increase in inequality and wage
stagnation produced after 1840 an economy in which living standards rose in
a sustained fashion for all. Why did this change occur, and how did it lead to
greater living standards for most of the population? How did it spread
beyond Britain? We turn to these issues next.
The Second Industrial Revolution
When most of us think about world-changing technologies today, we tend to
think of “high-tech” technologies that have their basis in scientific
knowledge, such as robotics, computing, semiconductors, rocketry,
aeronautics, space flight, and nuclear technology. But this was not always
the case. As discussed in Chapter 8, many of the dominant technologies of
the First Industrial Revolution (c. 1750–1830) were not science-based. Most
of the breakthroughs in textile production, for instance, were mechanizations
of previously known methods.
In contrast, since the 1870s, most major technological advances have been
built on the scientific knowledge-base of humanity (Mokyr, 1990, 2002).
North (1981) called this seismic shift in the rate of technological change the
“marriage of science and technology.” It is often known as the Second
Industrial Revolution.
The Second Industrial Revolution, generally dated from 1870 to 1914,
differed from the first in its use of science. This was important because it
accelerated the rate of technological change. New inventions in medicine,
chemicals, and energy paved the way for more inventions as well as
improvements upon those inventions. They also enabled more scientific
discoveries. This period saw a feedback from science to technology that is
still the dominant paradigm today (Mokyr, 1998).
A number of world-changing technologies emerged in this period. They are
summarized in Table 9.1. A distinguishing feature of all of these
technologies is that they required what Mokyr (2002) calls “useful
knowledge.” This is knowledge about the deeper (generally scientific)
processes that make the invention work. Without a broad base of applicable,
useful knowledge, scientific advances are likely to peter out. Once the base
of useful knowledge is large enough, it can be applied with direct application
in mind. Although much discovery will always be done via trial and error,
directed trial and error using scientific principles makes success much more
likely.
The technologies of the Second Industrial Revolution affected nearly all
industries. They revolutionized transportation. Rail became much more
efficient and less costly due to cheaper and more durable steel. Bicycles,
automobiles, and airplanes came on the scene. Harnessing electricity
allowed for an improved telegraph, railway, and indoor lighting. Health
improved. Modern sewerage systems, disinfectants, and medicines like
aspirin became widespread.
Unlike the First Industrial Revolution, the onset of the Second Industrial
Revolution was not confined to Britain. Numerous other countries were at
the forefront of this movement. Germany led the way in chemistry. France
and the US were also leaders. Why did some countries catch up with Britain,
and in some cases take the lead? Why did other countries fail to do so? What
was different about the Second Industrial Revolution?
Table 9.1 Major inventions of the Second Industrial Revolution
Data source: Mokyr (1998).
Massively expanded or
Invented
improved
Cheap steel Electricity
– Used in construction, ships, railroad – Used in telegraph, railway, light
tracks bulb
Automobile Railroads and diesel engine
Airplane Telegraph (and networks)
Telephone Vulcanized rubber
Typewriter Anesthetics and antiseptics
Chemical dyes Sewerage systems
Internal combustion engine Sewing machine
Chemical fertilizers Food canning
Synthetic plastic Clean water supply
Dynamite Soda-making
Sulphuric acid Disinfectants
Aspirin
Bicycle
Barbed wire
Fungicides
Because science was so crucial to advancements in the Second Industrial
Revolution, education was key to its spread (Galor, 2005). To quote a classic
paper by Nelson and Phelps (1966, p. 70), “[E]ducated people make good
innovators, … [and] education speeds the process of technological
diffusion.” This had not been the case in the First Industrial Revolution
(Mitch, 1999), during which Britain had no lead in formal education (Mokyr,
1990, p. 240). Rather, the First Industrial Revolution occurred in Britain
because of the preconditions noted in Chapters 7 and 8.
There is a difference between having a large proportion of the population
capable of reading and writing and having a small proportion of the
population educated at a high level. Mokyr (2009) refers to the latter as
upper-tail human capital and notes that this may have been more important
in accelerating the rate of innovation in the late 18th and early 19th
centuries. In fact, upper-tail human capital in France predicts both city
growth and industrial innovation after the Industrial Revolution (Squicciarini
and Voigtländer, 2015). Yet, during the Second Industrial Revolution, having
a higher fraction of the population with at least basic education also became
increasingly economically valuable. Workers with basic literacy and
numeracy were better suited for working with machinery and submitting to
factory discipline.
The Second Industrial Revolution was the first period in which “capital–skill
complementarity” drove economic and technological development (Goldin
and Katz, 1998; Galor and Moav, 2006). It was not just that some places had
more scientists and inventors. The types of goods produced in this period,
such as those highlighted in Table 9.1, required highly educated workers for
their manufacture. Technology alone does not cause economic growth. It
must be transformed into something economically productive. The more
highly educated workers a society has – engineers, clerks, pharmacists, and
so on – the more these new technologies can be put to productive use.
Places that led in education were therefore the most capable of taking
advantage of the new economic opportunities afforded by the second wave
of industrialization. Prussia provides an important example. It was a
relatively late industrializer, but when it did industrialize in the 19th century,
it caught up fast and even surpassed the world’s leaders on many fronts. This
was in large part due to its initial lead in education (Becker, Hornung, and
Woessmann, 2011). After its defeat to Napoleon in the first decade of the
19th century, Prussia imposed a series of reforms emphasizing education.
This had the unforeseeable consequence of setting up Prussia to later adopt
and improve upon technologies flowing in from Britain and elsewhere.
Within Prussia, those places that were more highly educated in the early 19th
century ended up taking the industrial lead. Ultimately, Germany (which
unified in 1871) was a leader of the Second Industrial Revolution.
The proximate cause of success during the second wave of industrialization
was education. Places with a more highly educated workforce were more
likely to adopt and implement new technologies. Ultimately, they created the
technologies themselves. Those areas with lower rates of education –
particularly the type of “useful” education complementary to the new types
of capital – were not ready to adapt to the new world. But this is only part of
the story. Why did some parts of the world invest in education in the first
place? There are many answers to this question. They are all related to the
features discussed in the first six chapters.
The Demographic Transition
The Second Industrial Revolution was responsible for a sustained rise in
living standards wherever it took hold. We noted before that this was not the
case for the First Industrial Revolution. British living standards changed
remarkably little between 1750 and 1830 despite overall economic growth.
What made the Second Industrial Revolution different?
One of the most important factors holding back living standards during the
First Industrial Revolution was demography. Fertility, in particular, increased
in the first few decades of the First Industrial Revolution (see Figure 9.2).
This was largely due to better economic opportunities and urbanization.
Illegitimacy rates soared. The average age at first marriage fell. The result
was that the British population increased from around 6 million in 1750 to
10.5 million in 1801 and 27 million in 1851. The growing population put
downward pressure on wages, which did not rise despite increases in
productivity. For this reason, Malthus, writing in the early years of
industrialization, predicted that economic growth was incapable of staving
off demographic disaster.
Figure 9.2 Fertility and mortality in England, 1541–1839
Data source: Wrigley and Schofield (1981).

Malthus turned out to be wrong. In particular, he did not fully anticipate the
extent to which married couples would seek to limit their number of
children. This demographic transition was a critical turning point in
economic history. Families began to deliberately choose family size within
marriage. It began in France in the late 18th and early 19th centuries before
spreading across Northern Europe and the US in the late 19th century during
the second Industrial Revolution (see Figure 9.3). Prior to this transition,
married women might have eight or more births (Guinnane, 2011). Whether
or not a society was close to the feasible maximum birth rate of around forty
to fifty births per 1,000 people largely depended on practices that limited
marriage or involved infanticide.
The timing and nature of the fertility transition remain subject to debate.
Certain populations began restricting fertility earlier, including Jews in
Western and Central (though not Eastern) Europe. The first country to
experience the demographic transition was France (see Figure 9.3), where
the birth rate began falling even before the Revolution. The reasons for this
decline are not well understood. Spolaore and Wacziarg (2021) view the
demographic transition as being spread by cultural contact. They note that
specific parts of France experienced the demographic transition first, and
that it only spread to more culturally remote regions such as Brittany more
slowly. One point emphasized by Spolaore and Wacziarg is that modern
fertility norms diffused from France, the originator of European cultural
modernity, and not from England, the source of economic modernity.
Figure 9.3 Children born per woman in Western Europe and the US, 1800–
2000
Data source: Roser (2021a).

In Britain, the demographic transition only occurred in the 1880s. Although

marital fertility among the upper classes began to decline earlier before
spreading to the middle and working classes (Clark and Cummins, 2015),
this leaves the precise timing of the fertility transition unexplained.
Regardless of its timing, how should we think about the demographic
transition? From the perspective of the Malthusian model, it represents a
reversal of the birth rate–income relationship (see Chapter 5). After the mid-
19th century, higher incomes no longer resulted in more surviving children.
The demographic transition had various consequences for economic growth.
Most directly, it relieved Malthusian population pressure. But this is perhaps
less important than the accompanying increase in investment in human
capital.
The demographic transition and increased investment in human capital were
related. According to unified growth theory, which we introduced in Chapter
5, the latter caused the former. Technological progress caused the return to
human capital to rise. This induced parents to invest in human capital for
their children (see Galor, 2011). Hence, parents began to invest in the
“quality” of their children (that is, their education) instead of the quantity of
children. In England, this shift began in the mid-19th century (see Figure
9.4).
The Uneven Diffusion of Modern Economic
Growth
In this short book, we cannot examine how each part of the world became
rich. (If you are interested in the – mostly European – countries that
followed Britain’s path to industrialization in the 19th century, Cameron
[1993] gives a great overview.) But if we want to know how the world
became rich, we should know something about how other parts of the world
prospered. This includes the US – the world’s leading economy in the 20th
century. We also need to know something about how parts of the world
outside of Europe and its former colonies became rich. The next chapter
covers the spread of riches to East Asia’s first industrial nation, Japan, and
ultimately to the Asian Tigers and China.
Britain was the first industrial economy. By the end of the 19th century,
sustained economic growth had spread to other parts of the world. Most
notably, as we will shortly see, it spread to the US. Industrialization also
diffused throughout Western Europe, first to Belgium and then to Germany.
It did not, however, spread to all parts of the world. The question is why not?
The standard model which economists use to study modern economic
growth is the Solow model, named after Nobel laureate Robert Solow
(1956). In the Solow model, the ultimate driver of long-run economic
growth is innovation. While the model has little to say about the origins of
sustained economic growth, it provides insight for understanding the
diffusion of economic growth.
Figure 9.4 Human capital and the demographic transition in England, 1730–
1890
Data sources: Wrigley and Schofield (1981), Galor (2005), and Roser (2021b).

In the Solow model, so long as innovations in leading economies become

available to less developed economies, poorer countries will grow faster than
richer countries. This is called catch-up growth or convergence. The
intuition is simple. For countries far away from the economic and
technological frontiers, the marginal productivity of capital is high. These
economies should attract high levels of investment and grow more rapidly
than those that are already capital-abundant.
Catch-up growth can help explain why from the late 19th century onwards
many European economies began to experience accelerated growth. Those
that caught up imported the technologies of the First and Second Industrial
Revolutions. Germany is a good example. Economic growth was
exceptionally fast from the 1840s onwards. Germany even became a leading
innovator in many technologies of the Second Industrial Revolution.
A different version of “catching up” was put forth in a classic work by
Gerschenkron (1962). He argued that there were certain economic
advantages for countries that embarked upon industrialization from a more
primitive starting point. Countries like Germany and later Japan and Russia
could move fairly quickly to the technological frontier in certain sectors of
the economy. They could skip intermediary steps, particularly in capital-
intensive sectors. Late industrializers often mobilized capital through
investment banks or state investment rather than relying on private capital
markets.
Many of the factors considered in previous chapters can account for why
some countries converged whereas others did not. Consider institutions.
Where there are few checks on autocratic political power, technology
adoption may not occur (Scheidel, 2019, ch. 12). As we will see in the next
chapter, inward turns in Tokugawa Japan and Ming and Qing China delayed
the adoption of Western technology by centuries. The Ottomans delayed the
adoption of the printing press by 250 years (Coşgel, Miceli, and Rubin,
2012). The benefits of these technologies were widespread. But the potential
downsides were narrowly targeted to the elite. Unconstrained rulers can
prevent the spread of such technologies. Constrained rulers have a much
harder time doing so.
Institutions were likewise critical to both convergence and divergence with
the rest of the world in the late 19th and early 20th centuries. In places that
converged with the world’s economic leaders, most notably Western Europe
and North America, the quality of political institutions improved
dramatically. An important reason why the economic growth that began in
the 19th century did not peter out was therefore institutional. Existing elites
or those who gained from the status quo were unable to block innovation. As
economic growth transformed societies, the political systems of the leading
economies were, in general, able to meet the challenge by introducing new
reforms and policies.
There were many paths of institutional development in the converging
countries. In 1800, the newly independent US was among the most
democratic societies on earth, as measured by the rights it granted white
men. But it was marred by the institution of slavery, which denied the most
basic rights to 17% of the population. As we saw in Chapter 8, Britain
entered the 19th century with a constitutional arrangement that protected
property rights, encouraged innovation, and was capable of heading off
revolutionary pressures. But it was also a deeply unequal society, where the
right to vote belonged to a minority, child labor was common, and the law
was highly inequitable in its implementation and effects. Needless to say, in
all these societies, the rights of women were highly restricted. Until the
French Revolution, most of continental Europe was governed by absolutist
monarchies that retarded economic growth via complex regulations, diverse
and confusing tax systems, and local monopolies.
Over the course of the 19th century, these societies moved in both a liberal
and democratic direction. In the terminology of North, Wallis, and Weingast
(2009), they became fully “open-access orders.” In continental Europe, the
French Revolution played an important role in dismantling feudal
institutions (Acemoglu, Cantoni, Johnson, and Robinson, 2011). In Britain,
revolutionary violence was largely avoided as elites pre-emptively
democratized in order to head off unrest (Acemoglu and Robinson, 2006).
Importantly, these moves towards more inclusive political institutions were
accompanied by the reform of various economic institutions. By the end of
the century, freedom of contract had been expanded in most Western
European countries, usury laws were abolished, child labor was increasingly
limited, workers gained the right to organize, and working men had the right
to vote.
Culture also played a role in shaping patterns of convergence and
divergence. In Chapter 4, we defined culture as the “lens” through which
people view the world. When this lens views Western industrial technologies
as inconsistent with long-held beliefs about Western inferiority, adoption is
unlikely. Cultural factors also interact with institutional factors. This may
help explain the slow uptake of industrial technologies in the Ottoman
Empire and China (Iyigun, Rubin, and Seror, 2021). Both were at one point
ahead of Europe on many dimensions. Accepting the (temporary) superiority
of Europe’s industrial technologies required a change in worldview. Such a
change does not happen overnight.
Yet, even when foreign technologies are desired, many conditions need to be
just right. Importantly, while the extent to which “war is the mother of
invention” is disputed, war can certainly be bad for the spread of technology.
Countries tend to not want their rival combatants acquiring cutting-edge
industrial technologies. During the Napoleonic Wars, British engineers were
prohibited from leaving the country and the export of machinery was
banned. The general European peace after 1815 was one reason why
technology spread as rapidly as it did. Relative to most of European history,
the period between the Napoleonic Wars and World War I was peaceful. This
was particularly true after 1870. The onset of a prolonged period of peace
between the Great Powers was favorable to the diffusion of economic
growth. This period is often called the First Era of Globalization. World
trade grew by more than 400%. The share of trade in world GDP would not
recover until the 21st century.
It was not just manufacturing technology that spread in this period. New
transportation and communication technologies diffused as well. As we
noted in Chapter 2, investments in these types of technologies can help
overcome the problems of “bad geography.” International freight rates
declined. Cheaper freight rates and improved transportation technologies
made it possible for land-abundant North America to export grain to Europe
(O’Rourke and Williamson, 1999). This grain invasion greatly benefited
workers in European cities, who saw their real wages rise. Investments such
as the Suez Canal were also crucial. Supply and demand expanded together.
Although maritime freight rates declined by 50%, the fall in freight costs
alone cannot explain the scale of the trade expansion (Jacks, Meissner, and
Novy, 2011). Transportation investments were driven by increased demand
for traded goods and by institutional improvements across the world.
Among the most important transportation improvements in this period was
the steamship. Prior to its invention, the costs of trade depended on how
accessible a given location was for sailing ships. After the invention of the
steamship, however, this was no longer the case. The new technology helped
spur a trade boom. But the benefits of increased trade and greater integration
into the global economy were dependent on institutions. It was only in
countries with strong constraints on executive power that increased exposure
to international trade led to economic development (Pascali, 2017).
Not all countries took the same path towards modern economic growth. It is
mistaken to suppose the only way a country can grow rich is through
industrialization. While this was true of Britain, the US, and Germany, there
were also countries that grew rich without industrializing. Foremost among
them were Denmark, the Netherlands, Australia, and New Zealand. These
economies were able to specialize in commercial food production or
processing, usually for export markets. This required international markets
and some degree of globalization.
For instance, Denmark developed a butter industry. This involved the
application of scientific ideas, but to food production rather than
manufacturing. The success of Denmark was predicated on particular
institutional and cultural developments. As documented by Lampe and Sharp
(2018), educated elites played a critical role in the introduction of new
scientific techniques and in providing capital; these techniques were then
adopted by smaller farmers and by the development of cooperative dairies.
These innovations, however, proved difficult to transfer to other countries. In
Ireland, for instance, political conflict limited the diffusion of both the
cooperative organizational form and new innovations (O’Rourke, 2007a,
2007b).
Globalization was also central for Australia’s economic development.
Initially founded as a penal colony, the country experienced rapid
immigration and rising real wages after the discovery of gold in the 1840s
and 1850s. Like that of other smaller economies, Australia’s prosperity
hinged on global trade and stable international conditions (McLean, 2013).
The first major Australian export was merino wool from New South Wales,
which became an important input into the British textile industry. The
Australian economy was correspondingly vulnerable to any downturn in the
international economy, as occurred in 1890 and during World War I. But
overall Australia prospered. As was the case with Denmark, the first wave of
globalization in the late 19th century was crucial to Australia becoming rich.
The First Era of Globalization saw the spread of sustained economic growth.
But it also saw tremendous economic divergence. While economies in
Western Europe and North America grew, per capita incomes stagnated
elsewhere, particularly in China, India, and the Middle East. There are many
reasons for this. Colonial institutions, as discussed in Chapter 6, provide one
reason. Rapid population growth, as discussed in Chapter 5, provide another.
Additionally, as the expansion of global trade knitted different parts of the
world together, poorer countries increasingly specialized in exporting
primary products. This could be a source of growth. Cash crops played an
important role in the economic development of West Africa in the early 20th
century. Yet, there were downsides. Above all, the prices of primary
products tended to be highly volatile (Williamson, 2006). This led to crashes
in countries dependent on the export of goods whose prices fell.
We will now turn to how the modern economy spread to what would become
the world’s largest economy: the US. This is not to ignore diffusion to other
follower countries, some of which we highlight above. Rather, we wish to
keep the book concise, and the US case is too central to the “world
becoming rich” for us to ignore.
How the US Became Rich
In the second half of the 19th century, the US became the fastest growing
major economy in the world. By the early 20th century, it had both the
largest economy and the highest standard of living in the world.
Understanding how economic growth and industrialization spread to the US
is therefore paramount for understanding how the world became rich. Why
did the US first catch up and then eventually overtake the UK as the world’s
economic leader?
America was initially a technological follower. Yet, it grew rapidly. Between
1790 and 1860, growth was not driven by efficiency so much as enormous
increases in effective land and natural resources per worker. Population
growth was rapid, but extra land and natural resources were added to the
economy at an even faster rate.
By the mid-19th century, American manufacturing achieved very high levels
of productivity (Broadberry, 1994, 1998). Yet, at that point, manufacturing
was only a small part of the economy. It was not until at least the 1880s that
it became the driving force behind American economic growth (see Figure
9.5). In what follows, we examine these developments. Where applicable,
we link them to the preconditions discussed in Chapters 7 and 8 that were
crucial for Britain’s industrial rise.
Following independence, US international trade grew considerably. There
was rapid population growth, and the population expanded westward. Two
aspects of this development deserve attention. The first was the emergence
of the US South as a major cotton exporter. The second was the rise of the
Northeast as a manufacturing center.
The invention of the cotton gin by Eli Whitney in 1793 enabled the Southern
states to specialize in this highly lucrative export crop. Prior to this, the
expansion of cotton had been limited by the fact that the cotton that grew in
inland areas – so-called “short-staple cotton” – required painstaking
cleaning. On average, a cotton picker might be able to clean only a pound of
short-staple cotton a day. The gin – an old-fashioned term for engine – was a
machine that passed cotton through a wooden drum to clean it, catching the
fibers in a mesh. Cotton gins were initially powered by hand or horse-power,
but over time they became mechanized. As North (1966, p. 68) noted, “It
was cotton which was the most important influence in the growth of market
size and the consequent expansion of the economy.” It also led to the spread
of slavery. Cotton picking was exhausting but easy to supervise work and
hence suited for coerced labor.

Figure 9.5 Shares of world industrial output, 1750–1938

Data source: Kennedy (1987, Tables 6, 18).

The rise of cotton impacted not only the economy of the US but also its
political economy. Demand for slaves rose. The booming cotton trade drove
the center of slavery south and west, away from Virginia and North Carolina
towards the “black belt” of Louisiana, Mississippi, and Alabama.
Slave-produced cotton was highly profitable and it made the fortunes of
many a planter in the South. It was an utterly brutal system, and it played a
central role in Southern society. Nevertheless, it is important to recognize
that cotton exports represented less than 6% of the economy. While this is
far from a trivial number, exaggerated claims have been made of the pivotal
importance of slavery and cotton to American economic growth.
In fact, the existence of slavery slowed Southern industrialization and
urbanization. Southern elites held their wealth primarily in the form of
slaves. Investing in slaves was profitable, and it took resources away from
other, industrial, pursuits (Ransom and Sutch, 1988). This limited local
market size, making industrial production all the less attractive. As
Majewski (2009, p. 17) notes, “[S]lavery severely limited the size of markets
for southern manufacturers. Cities such as Richmond, Norfolk, and
Charleston, serving sparsely populated hinterlands, lagged behind northern
rivals. The southern economy certainly generated substantial profits for the
region’s many planters and farmers, but the slower growth of cities, industry,
and population created a sense of relative decline.”
In any case, removing slavery did not mean no cotton. Absent slavery, cotton
manufacturers would have had to purchase cotton from non-slave sources.
And in the medium-run, cotton production could have expanded through
small-scale farming (Wright, 2020). Southern elites certainly would have
been poorer without slavery. Cotton prices would have been higher in the
absence of coerced slave labor. But there is little reason to suppose that this
would have been more than a temporary disruption to textile production.
Clegg (2015, p. 296) notes that when “Britain was briefly cut off from
American cotton imports by the War of 1812, the price of cotton rose less
than it did in the 1860s, suggesting less dependence in this earlier period.”
The other important development was in the Northeast, where the
technologies of the First Industrial Revolution spread earliest. The growth of
industrial production expanded 100-fold between 1790 and 1850. Factors
identified by both Allen and Mokyr in Chapter 8 help explain these
developments. Initially, the rapid spread of new ideas from Britain was
facilitated by a shared Anglo culture that linked Britain with the newly
independent US. “Culture” was clearly not the only cause of New England’s
industrialization, but it helped. Those cultural attributes emphasized by
Mokyr as crucial for Britain’s rise did not exist in many parts of the world.
This was a hurdle that likely delayed industrialization. This hurdle was
minimal in New England, given its shared heritage with Britain.
Moreover, Allen’s argument (centered on relative factor prices) has bite for
the US. Real wages were high in America prior to the Revolution – by some
estimates higher than in Britain (Lindert and Williamson, 2016). Energy was
cheap. Water power and other natural resources such as timber were
abundant. This created a strong incentive for labor-saving innovation.
Examples include the first automatic flour mill invented by Oliver Evans in
1782 and Whitney’s cotton gin. Allen (2011a, p. 83) writes: “[T]he success
of the American economy depended on the application of inventive
engineering across the full spectrum of industries. The incentive to
mechanize was provided by the high cost of labour. The successful response
required a large pool of potential inventors. The interplay between challenge
and response made the USA the world’s productivity leader.” Until 1880, the
relative price of unskilled labor compared to energy and capital was not
higher in the US than in Britain. However, after 1880, “the incentives to
invent higher productivity technology led to an American lead. The
incentives to use more power per worker in America increased significantly
in this period – without a corresponding change in Britain” (Allen, 2014, p.
332).
Another precondition highlighted in Chapter 7 was limited and
representative government. Like Britain, the US had this, although not for
everyone. In Britain, this mattered for public good provision, particularly
transport networks. This was also the case in the US, even if the
circumstances were different. Of particular importance was the Interstate
Commerce Clause, which prevented individual states from passing laws that
impeded inter-regional trade and prohibited the granting of transport
monopolies. For instance, this clause struck down New York State’s attempt
in 1824 to grant a steamboat monopoly to Robert Fulton.
Improvements in transport infrastructure began in earnest in the early 19th
century. Probably the most famous improvement was the Erie Canal,
completed in 1825, which connected New York City to the Great Lakes.
Improvements like this helped knit together different regions and different
markets. Inter-regional trade resulted, permitting greater specialization and
the rise of an integrated domestic market for manufactured goods (North,
1966). Such large domestic markets were another precondition found in
Chapter 7. Only after the US was connected was such a market available.
The largest investments were in railroads, which were funded with both
public and private funds. Chapter 2 reviewed the debate over the importance
of the railroads. Recent findings suggest that they had an enormous impact
on US economic growth, mainly because they improved market access
(Donaldson and Hornbeck, 2016). By 1890, US aggregate productivity
would have been some 25% lower had there been no railroads (Hornbeck
and Rotemberg, 2021). In short, the railroad contributed to integrating the
US into a large and homogeneous market, one of the preconditions for the
rise of American manufacturing.
A second way in which US political institutions played an important role
was through investment in education. Unlike Britain, whose human capital
advantage was based primarily on mechanical skills, the US invested in
formal public education. Most of this investment was at the local, municipal
level. Engerman and Sokoloff (2012) claim this was a consequence of its
political institutions. Local government in Colonial America was highly
decentralized, egalitarian, and democratic, particularly in the Northeast.
Meanwhile, in the South, large-scale landlords had incentive to keep their
labor force uneducated. Literacy was of little value in farming. Keeping the
masses (both slaves and poor whites) uneducated limited their outside
options, allowing the elite to keep wages low (Galor, Moav, and Vollrath,
2009). This was not the case in the North, where industrialists could gain
from a more productive workforce. As a result, Northern states had
relatively high literacy rates and basic education.
Literacy rates stagnated in the mid-19th century with industrialization and
rapid immigration. However, in the early 20th century, the high school
movement brought a dramatic expansion in secondary education (Goldin and
Katz, 2008). This rise in human capital was so central to American growth in
the 20th century that Goldin (2001) calls it the “human capital century.”
Other factors were distinct to the American experience. Some were
important for why the US became rich, others not. For instance, the US
employed protective tariffs. Proponents of tariffs saw them as protecting
“infant industries” from foreign competition. But was the tariff essential for
American industrialization? The answer given by most economic historians
is a qualified no. The tariff did speed the growth of manufacturing,
particularly in the New England textile industry (Harley, 1992a, 1992b;
Rosenbloom, 2004), but tariffs likely just sped up a process that would have
happened anyway (Irwin, 2000, 2002).
American culture was also unique. But it is hard to discern which aspects of
American culture were important for the acceleration of economic growth
that occurred in the 19th century. Recall our discussion of the Weber
hypothesis in Chapter 4. For Weber, the archetypical example of how
Calvinism could mutate into a set of values suitable for economic growth
was an American: Benjamin Franklin. But as we also saw in that chapter, the
evidence for a specific Protestant work ethic – independent of the effects that
operated via education and human capital – is weak. Perhaps more important
than Calvinism per se was the general attitude that commerce was a means
to social advancement (Appleby, 2010). As the US lacked a hereditary
aristocracy, it lacked the inhibiting social norms that penalized commerce
and encouraged successful merchants and entrepreneurs from buying land
and entering the nobility.
A long tradition, dating at least back to Frederick Jackson Turner (1893),
locates a unique American individualism in the frontier. While American
individualism has had a significant effect on the country’s politics, taxation,
and welfare state (Bazzi, Fiszbein, and Gebresilasse, 2020), it is unclear
whether this frontier culture played an important role in its industrialization.
Early industrialization tended to be far from the frontier: first in the
Northeast and later in the Midwest. Rather, it is more likely that the
willingness of Americans to move to the frontier – something that was
commented upon by 19th-century European observers such as Alexis de
Tocqueville (1958) – reflected a broader American cultural belief in the
possibility of economic improvement.
Another important feature of America’s growth experience was immigration.
The population of the US grew from less than 4 million in 1790 to more than
76 million by 1900. While much of this was due to natural growth (that is,
births exceeding deaths), immigration played a key role (see Figure 9.6).
This had multiple implications for economic growth and industrialization.
First, it contributed to the growth of domestic markets. Even by the 1850s,
outside experts commented on America’s large and deep domestic market
for manufactured goods. Second, it provided the large workforce needed for
the US to become a major manufacturing center. Third, immigrants brought
with them human capital. This contributed to American inventiveness – a
large share of US inventors were immigrants or second-generation
immigrants. In fact, counties with more immigration in this period had more
and larger manufacturing establishments, greater agricultural productivity,
and higher rates of innovation (Sequeira, Nunn, and Qian, 2020). Those
counties that had high levels of historical immigration still have significantly
higher incomes, less poverty, less unemployment, more urbanization, and
higher educational attainment today.
Figure 9.6 US population and immigrant share, 1850–2010
Data sources: Various US Censuses and Migration Policy Institute
(https://www.migrationpolicy.org/programs/data-hub/charts/immigrant-population-over-time).
The Soviet Detour
Another path to industrialization was pioneered in Russia. This path was
based on command and control rather than on markets. Why did this take
place? And why did it ultimately result in failure?
Recent empirical research has overturned conventional views about the pre-
Soviet Russian economy. In the mid-19th century, Imperial Russia was a
closed, backwards agrarian economy. But following a series of modernizing
reforms by the end of the 19th century, Russia had, with Meiji Japan, joined
the group of late industrializing economies. By the early 20th century, it was
one of the fastest growing economies in the world (Gregory, 1994).
Despite its rapid growth, Russia remained agrarian. Agriculture made up
almost 60% of the economy in 1913 (Gregory, 2004b, p. 185). Inefficient
serf-based agriculture had been a major drag on productivity in the Russian
economy during much of the 19th century, even after the formal abolition of
serfdom in 1861 (Markevich and Zhuravskaya, 2018). But agrarian reforms,
notably the Stolypin Reforms of 1906 and 1911, made peasants residual
claimants. This had the potential to unlock agricultural productivity
(Castañeda Dower and Markevich, 2018). This period of rapid growth,
however, ended with the collapse of the Russian economy following World
War I (1914–18), the Russian Revolution (1917), and the onset of the
Russian Civil War (1917–22).
In the midst of this, Lenin imposed a policy of War Communism. This
effectively abolished markets and private property and produced famine and
destitution. We lack the space to provide a full account of the Communist
era. Nonetheless, the following bare-bones outline is important for the story
of modern economic growth. From this catastrophic low point in the early
1920s, the Soviet economy began to recover under Lenin’s New Economic
Policy, which enabled a revival of market activity. Marxist theory had
assumed that the first socialist revolution would occur in a heavily
industrialized economy. The Russian economy, however, even though it had
been rapidly growing prior to World War I, was not industrialized. Stalin’s
“achievement” was to rapidly accelerate the process of industrialization
through the collectivization of agriculture and a series of Five-Year Plans.
This came at a catastrophic human cost. Collectivization saw agricultural
yields plummet and forced requisitioning produced mass famine. Between
5.5 and 10.8 million died of starvation, with the majority of them in Ukraine
(Markevich, Naumenko, and Qian, 2021; Naumenko, 2021).
The rapid pace of Soviet industrialization provided an alternative path to
other developing countries, particularly in the immediate post-war period.
The Soviet state succeeded in providing many basic public goods, most
notably excellent technical education and essential healthcare. The Soviet
Union also eradicated smallpox and other diseases earlier than the US
(Troesken, 2015).
This accelerated pace of industrialization could not be sustained, however.
Even during the early phase of rapid growth, inefficiencies and wastage were
legendary (Gregory and Harrison, 2005). Many problems were initially
disguised by the sheer amount of labor (much of it slave labor), physical
capital, and natural resources the Soviet economy could mobilize.
Ultimately, though, the centralization of all economic decisions in the hands
of a dictator produced chaos. Stalin spent his time making seemingly trivial
decisions, including setting the price of metro tickets and making detailed
managerial appointments (Gregory, 2004a, pp. 112–14). Corruption and
rent-seeking were endemic (Anderson and Boettke, 1997; Boettke, 2001).
There were reforms after the death of Stalin, but as the Soviet economy
developed in the 1950s and 1960s, it struggled to provide basic consumer
goods that people wished to purchase.
Economic growth is ultimately about producing economic value. Here, the
Soviet economy failed. Soviet elites had access to special stores where
Western products were available but to which ordinary Soviet citizens were
denied access. The Soviet economy came to depend more and more heavily
on exports of oil and natural gas. When the price of oil collapsed in the
1980s, pressure to reform the Soviet economy became impossible to stop.
And when Mikhail Gorbachev began the process of reform, this soon led to
the collapse of the Soviet economy and the Communist system (Boettke,
1993).
The story of Soviet industrialization has two lessons. First, Communism is
incompatible with long-run growth. The Soviet Union was unable to
implement its original economic blueprint. The actual Soviet economy relied
on black markets and was unable to suppress the profit motive. Over time, it
became more and more sclerotic. A second lesson is that autocratic
government can stifle growth in the long run. This certainly does not mean
that economic growth cannot happen under autocracy – we will discuss
recent Chinese economic growth in the next chapter. Nor is limited
governance sufficient to bring about modern, sustained growth. Yet, the
Soviet case remains an important reminder of the potentially devastating
economic consequences of unchecked political power.
Chapter Summary
While the modern economy first arose in Britain, it was not confined there.
We have seen in this chapter how it spread to parts of Western Europe and to
the US.
The US had several advantages in this respect. It shared a common language
and culture with Great Britain so that intellectual developments in one
country were rapidly transmitted to the other, even after the Revolutionary
War. It had high wages, abundant land, and natural resources. This made it
well suited to adopt labor-saving technologies. Similarly, while Britain had a
comparatively large internal market for a pre-industrial economy, the US had
a huge domestic market. This was particularly true as its population
expanded and spread west and its internal transport networks improved. All
of these factors worked in favor of the US becoming an industrial giant by
the late 19th century. Although many other factors contributed to the
continued economic growth of the US in the 20th century, that is material for
another book.
But what about the rest of the world? In the 20th century, the fruits of the
modern economy expanded well beyond Western Europe and its offshoots.
How did this happen? Were the factors highlighted in previous chapters
crucial? We turn to these issues next.
10
Industrialization and the World It
Created
This book is titled “How the World Became Rich.” So far, we have
discussed why parts of Western Europe and the US became rich. But that is
only around 10–15% of the world’s population! To understand how the
world became rich, we need to understand how parts of the rest of the world
obtained the fruits of the modern economy.
Before proceeding, let us circle back to something we said in the first
chapter. We are well aware that the entire world is not actually rich. Over a
billion people still live in abject poverty. Eradicating such poverty should be
among the chief goals of civilization. We believe humanity is well on the
way to achieving this daunting task.
The world as a whole has certainly become much richer in the last 200 years.
In the last century or so, the fruits of these riches have finally spread well
beyond Europe and the US. They have also spread well beyond small groups
of elites. This is seen most starkly in Asia. As recently as 1960, most of the
continent was extremely poor – though no poorer than most civilizations
have been in world history (see Figure 10.1). After all, the condition for
nearly every human being living before 1800 was poverty or near-poverty.
This changed over the course of the 20th century, and it continues to change
in the present. Asia is becoming richer, and as such the world is becoming
richer. This chapter is dedicated to how this happened.
Sure, there is a long way to go. And sure, the path is even more fraught in
sub-Saharan Africa, parts of Latin America, and parts of Central and South
Asia. But this is real, tangible progress. The world is becoming richer.
Delayed Catch-up: The Shadow of Colonization
(and Other Factors)
One important reason that some countries have taken so long to catch up is
the shadow cast by colonization. It is highly unlikely, as we discussed in
Chapter 6, that colonization explains why the colonized world did not
industrialize first. However, in many parts of the world, colonization
undoubtedly played a role in delayed convergence.
Figure 10.1 Per capita GDP in select Asian countries, 1960–2019
Data source: World Bank (2019).

As we discussed in Chapter 6, the kinds of institutions that colonial rulers

established had persistent effects on subsequent development. Labor-scarce,
land-abundant colonies in North America, Australia, New Zealand, and, to a
degree, Argentina flourished in the late 19th century. Their institutional
development followed that of their parent countries, and they attracted large
amounts of migrants and capital. Australia, for instance, though founded as a
penal colony in which convicts were treated harshly, developed a system of
regional self-government that culminated in the establishment of the country
as a constitutional monarchy in 1900. Elsewhere, however, much more
extractive economic and political institutions were put in place.
Many parts of the formerly colonized world that were subject to extractive
institutions still languished behind the world’s leading economies. This
includes much of sub-Saharan Africa, South Asia, and parts of Latin
America. In some of these countries, the extractive institutions put in place
by colonizers remained after independence.
But the institutions put in place by colonial rulers were not the only relevant
factor. Prior conditions also mattered. Pre-colonial Nigeria, for example, was
highly fragmented, and most people lived close to subsistence. A large-scale,
centralized state never emerged. Nigeria was also heavily affected by the
slave trades, which, as we saw in Chapter 6, left a negative legacy on state
formation, trust, and social capital. The structures the British put in place to
govern such a heterogeneous and fractured society left a problematic
inheritance for the post-colonial state. The colonial regime “failed to
centralize authority, to develop an effective civil service, and, relatedly, to
develop the capacity to tax the population directly” (Kohli, 2004, p. 292).
Following independence, Nigeria was beset by civil conflict and the
economy has remained dependent on the export of primary products, notably
oil. Sharp ethnic and religious divides prevented any post-independence
Nigerian government from even attempting the types of developmental
programs implemented by East Asian states from the 1960s onwards.
Indeed, ongoing violence and endemic governance problems continue to
limit economic growth.
Policy choices also mattered. For instance, following independence, urban
elites in countries like Kenya took control of marketing boards established
by colonial governments during the Great Depression to stabilize
agricultural prices. They used the boards to extract resources from farmers
and redistribute them to the cities. In Senegal, Bates (1981, p. 111) observed
that “by conferring privileged access to subsidized inputs upon the
Makebouts [the leaders of an Islamic sect], the government thus enhanced
their power over the rural masses, and by so doing, it helped build its own
political machine in the countryside.” These policies were politically
expedient but costly economically.
India, the largest of the former colonies (British India also included modern-
day Pakistan and Bangladesh), likewise remained poor, though its growth
has improved in recent decades. This is hardly something inherent in the
region. Historically, India was a major textile producer, and at the height of
its prosperity around 1600, per capita incomes were around 60% of British
per capita incomes. During the 17th and 18th centuries, however, the Indian
economy declined. The urban share of the population was perhaps 15% in
1600. It fell during the subsequent centuries to only 8.7% by 1870. Per
capita GDP fell by about 30% in the same period (Broadberry, Custodis, and
Gupta, 2015, p. 67). Broadberry, Custodis and Gupta (2015, p. 71) conclude
that India was relatively “prosperous … at the height of the Mughal Empire
during the time of Akbar [but] much of this prosperity had disappeared by
the eighteenth century.”
A confluence of factors were responsible for India’s economic decline.
These factors included worsening climatic conditions, multiple invasions,
and endemic warfare (Clingingsmith and Williamson, 2008). The sack of
Delhi by Nadir Shah of Persia (1739) ravaged the capital of the Mughal
Empire, leaving tens of thousands dead. The subsequent conquest of much
of the sub-continent by the British East India Company also involved
protracted warfare and pillaging that furthered economic dislocation and
decline. Following decades of decline, the Indian textile industry, which was
reliant on skilled labor and low wages, was then hit hard by the introduction
of manufactured cotton exports from industrializing Britain. This was largely
the consequence of technological innovation, not British commercial policy
(Gupta, 2019, p. 808).
The establishment of the British Raj (after the brutal suppression of the
Indian Mutiny) could have brought an opportunity for growth. Total GDP
did in fact increase, but per capita incomes stagnated. There are many
reasons for this. While there was capital investment from Britain, it was
concentrated on the construction of the railway system. Other infrastructure
was largely neglected, although the early 20th century did see large-scale
improvements in irrigation and fertilizers. Attempts to institute a system of
property rights had the unintended consequence of creating a class of
absentee landlords. Factor markets, particularly credit markets, remained
undeveloped and local farmers remained reliant on moneylenders.
Demography also mattered. The Indian economy remained Malthusian.
Increases in productivity translated into faster population growth rather than
rising living standards. This was partly a reflection of the trading regime
imposed by the British. India remained a producer of primary products and
an importer of British manufactured goods (Galor and Mountford, 2008).
Investment in agriculture stalled. And there was very little improvement in
education. At independence, only 17% of the population had basic literacy
(Gupta, 2019, p. 805). On this front, India lagged far behind countries like
Brazil or Japan.
Upon independence in 1947, opportunities for economic growth in India
were thus circumscribed. As was the case elsewhere in the developing
world, Indian economic policy was influenced by the example of the Soviet
Union and the popularity of economic planning. Indian politicians such as
Jawaharlal Nehru (Prime Minister, 1947–64) pursued state-led
industrialization and aimed at industrial self-sufficiency. For critics of this
system such as Lal (2005, pp. 263–4), the technocratic appeal of planning
was combined with a deep distrust of commerce rooted in the caste system.
These policies were loudly supported by Western economic advisors such as
John Kenneth Galbraith and Joan Robinson and backed by generous
developmental aid (White, 2012, pp. 250–9). Galbraith advised that “what is
not in doubt is the need for planning by the less developed country…. [T]he
market cannot reach forward to take great strides when these are necessary”
(quoted in White, 2012, p. 253).
These policies had very disappointing results. There was some catch-up
growth, but overall performance lagged. India’s per capita GDP growth
averaged 1.2% per year between 1950 and 1980, falling far short of the
leading East Asian economies. As we will see, this was largely because
those East Asian countries remained more open to international trade and
were less protectionist. The “License Raj” created incentives for endemic
rent-seeking and corruption. By the 1980s, the consequences of import
substitution and central planning were evident for all to see. In response, the
government began to deregulate the economy in the 1990s. Only after this
happened did India finally turn a corner.
Along with China, which we will discuss shortly, alleviating poverty in
South Asia is of utmost importance for eliminating abject poverty
worldwide. As of 2015, 731 million people in the world were living in
extreme poverty (less than $1.90/day). Of these, 216 million live in South
Asia (another 413 million live in sub-Saharan Africa) (World Bank, 2020a).
The trends are encouraging, though. The liberalizing reforms that began in
the 1990s have brought economic growth to India.
Figure 10.2 Percentage of Indians living in extreme poverty, 1977–2011
Data source: World Bank (2019).

Growth has brought with it increased inequality and environmental

degradation. According to the World Health Organization, ten of the eleven
most polluted cities in the world are in India (WHO, 2018). But growth has
also delivered on poverty reduction. And the future holds hope. The
percentage of Indians living in abject poverty declined from 61.6% in 1977
to 21.2% in 2011 (see Figure 10.2). The number of Indians making a slightly
higher income ($5.50/day) also increased from 3% in 1977 to 13.2% in
2011. While there is a long way to go for India to become rich, the trends are
pointing in the right direction.
How Japan Became Rich
The first non-Western country to achieve sustained economic growth was
Japan. Following the Meiji Restoration in 1868, which deposed the Shogun,
Japan implemented a rapid program of state-building and industrialization.
These reforms focused on creating a modern army and navy that could resist
Western imperialism. But they went beyond military affairs and ended up
reshaping the whole of Japanese society. The success of these efforts was
confirmed when the Japanese defeated China in the First Sino-Japanese War
of 1894–5 and then Russia in 1904–5. What enabled Japan to successfully
pursue this policy of industrialization and state-building?
Many observers at the time of the Meiji Restoration viewed Japan as a
backwards and highly repressive society. This description had some merit.
Tokugawa Japanese (1603–1868) society was organized into four rigid and
hereditary classes comprising samurai, farmers, artisans, and merchants.
There was no unified state. The shogun, the most powerful lord in Japan,
ruled only 15% of the country. The remaining territory was divided into
some 260 domains, each headed by a local lord (daimyo), which maintained
their own armed forces (Koyama, Moriguchi, and Sng, 2018). As a result,
currencies and taxes varied from place to place. Trade with the outside world
was highly restricted. The Dutch trading post at Dejima in Nagasaki harbor
was the sole point of contact permitted with the West.
The latest estimates of per capita GDP and real wages suggest that the
average Japanese person was considerably poorer than his or her
counterparts in 19th-century Europe or North America (Figure 10.3).
Nonetheless, recent research suggests that in many respects Tokugawa Japan
was a successful pre-industrial economy.
Figure 10.3 Per capita GDP in England/Great Britain and Japan, 1280–1850
Data source: Broadberry, Guan, and Li (2018): 2021 international dollars converted from 1990
international dollars at a rate of $2.03:1.

Several aspects of economic development in the Tokugawa period stand out.

First, urbanization levels were comparatively high. In 1800, 13% of the
population lived in towns of more than 10,000 inhabitants compared to 3–
4% in China (Vries, 2020, p. 68). Second, over the course of the Tokugawa
period, Japan experienced Smithian growth based on the expansion of
markets and internal trade (Sugihara, 2004). Peasants became increasingly
engaged with, and connected to, markets. Pressure on scarce land led to an
intensification of labor inputs in agriculture, evident in the practice of double
cropping (Saito, 2005). Peasants often worked in handicraft production for
the market. This process of proto-industrialization paralleled developments
in parts of early modern Europe.
We saw in Chapter 7 that functioning factor markets were a likely
precondition for sustained economic growth in Europe. They were also
present in Tokugawa Japan. Even though formal property rights were not
granted, peasants had de facto rights over their land. Permanent sales of land
were forbidden in theory, but in practice a market for land existed and
functioned through mortgage contracts that enabled peasants to transfer
property for limited periods (Saito, 2009).
Relative factor prices were, however, different than those in northwestern
Europe. Japanese real wages were low by European standards. As a result,
the Japanese path of development was not favorable to the development of
labor-saving technologies like the spinning jenny. Rather, following Allen’s
framework (reviewed in Chapter 8), there was little incentive to innovate
labor-intensive technological improvements designed to economize on
scarce land, energy, and capital. Fortunately for Japan, it did not need to
reinvent the wheel. As we noted in Chapter 9, catch-up growth can happen
quickly by adopting technology from the leading countries. To be in a
position to do so, a country needs a certain set of institutional and cultural
preconditions. Were these present in Tokugawa Japan?
One such precondition is human capital. Investment in human capital is
affected both by institutions (it requires funding) and by culture (it helps if
education is valued). These were not impediments in Tokugawa Japan. Even
prior to the Meiji Restoration, levels of human capital were high for a pre-
industrial society. Literacy and numeracy may have been comparable to
Western European levels. Platt (2004, p. 4) writes of “the establishment of
tens of thousands of commoner schools, 276 domain schools, and around
1,500 private academies” in the Tokugawa era. This would facilitate the
adoption of the technologies of the Second Industrial Revolution.
Why were human capital levels so high in Japan prior to industrialization?
Although the Japanese state was highly decentralized prior to the Meiji
Restoration, at the local level it was comparatively effective in providing
public goods. Per capita tax revenues were higher in the lands ruled by the
Shogun than in Qing China, and this difference grew over time (Sng and
Moriguchi, 2014). Local lords in Tokugawa Japan invested in local public
goods such as road infrastructure and drainage projects. Local civil
engineering projects also enabled new land to be brought into cultivation
(Kanzaka, 2019).
Overall, the Tokugawa legacy was one of relatively high taxes and
involvement of the local government in economic life. These institutional
and cultural factors meant that the coalition that replaced the Tokugawa
Shogunate in 1868 was in a relatively strong position to implement a
program of successful state-building. However, this required a political
revolution at the national level (Koyama, Moriguchi, and Sng, 2018).
The reforms implemented in the wake of the Meiji Restoration were radical.
The Japanese state reforged itself in a matter of decades. It was one of the
most remarkable examples of state modernization. The Meiji government
established a system of compulsory education and raised taxes significantly,
prompting revolts and uprisings which were suppressed with considerable
violence. The new regime also abolished the samurai class, but was able to
do so without resistance in the vast majority of cases by granting them bonds
in lieu of their previous legal privileges.
Vries (2020) describes the Meiji regime “a capitalist state.” By this he means
a state in which guilds and local monopolies were abolished so as to create a
single, unified labor market. It was also a state that favored business in both
its fiscal policy and its regulatory policies. This included supporting the
formation of large industrial conglomerates known as zabatsu.
Even though it was pro-business, the Meiji government was not
protectionist. Indeed, it could not have protected industry had it wanted to.
Owing to treaties signed in the late Tokugawa period, Meiji Japan could not
impose high tariffs on foreign imports (tariffs averaged less than 4%). It
became highly integrated into the world economy, moving from producing a
wide range of products domestically to importing what was expensive to
produce and exporting what could be produced cheaply. This brought about
sizable benefits to Japanese consumers. Bernhofen and Brown (2005)
estimate that relative to the counterfactual world in which Japan remained
autarkic, free trade raised GDP by 8–9%.
This export-led growth was predicated on the growth of a manufacturing
sector. By the beginning of the 20th century, the structure of the Japanese
economy already resembled that of the industrial leaders. The share of
manufacturing in total output matched the US, even though Japan was far
poorer (Perkins and Tang, 2017, p. 173).
This creation of an industrial economy required both high levels of
investment and the mobilization of an industrial workforce. As in Industrial
Revolution Britain, workers from the countryside were subjected to factory
discipline and long working hours. Large numbers of women entered the
labor force to work in textile factories, often living and working in harsh
conditions (Hunter, 2003).
Another factor was education. As we have seen, education is an important
factor in labor productivity. Japan already had relatively high levels of
literacy prior to the Meiji Restoration, but tertiary education was lacking. As
early as 1864, the Shogunate had sent students to study at Western
universities, including University College London and the University of
Cambridge. This continued during the Meiji period (Koyama, 2004), which
saw the introduction of a three-tier educational system based on Western
models. Vries (2020, p. 212) notes that “between 1880 and 1940, there was a
fortyfold increase in the number of students enrolled in higher scientific and
technical education and an eighty-fold increase in the number of students in
further technical and commercial education.”
The Japanese educational advantage ultimately contributed to its
convergence with the world leaders. One important challenge that Japan had
to overcome, like other late developers, was that factor prices remained
different from those in the leading Western economies. Wages were much
higher in Europe than in Japan. This was an obstacle for Japanese
industrialization, because it meant that Western technology was often not
worth adopting. Cheaper labor could just do what expensive Western
technology could do. But this is where the Japanese educational advantage
mattered. Allen (2011a, p. 122) notes: “Some [low wage] countries limped
along with inappropriate technology, but the Japanese response was far more
creative: they redesigned Western technology to make it cost-effective in
their low-wage economy.” Over time, the Japanese modified Western
technologies to make them more appropriate for Japanese factor prices. This
made Japan become the lowest-cost cotton producer in the world by the
early 20th century. Similar developments occurred in other industries, as Ma
(2004) demonstrates for the silk industry.
While growth was impressive in the post-1867 period, it was not fast enough
to fully catch up with the leading economies of Western Europe and North
America. The Japanese economy that emerged in the Meiji period was
shaped by the global economy that developed in the late 19th century. That
economy, as we have seen, was based on the free-flowing movement of
goods, capital, and people. Japan lacked natural resources – in particular it
lacked coal, oil, and gas. In order for its manufacturing to develop, it needed
access to international markets. Japanese textile exports did well during
World War I, driving British producers out of many traditional markets. But
they were severely hit by the Great Depression and the worldwide
movement towards protectionism that rapidly followed.
This economic crisis fueled Japanese hardliners who sought to insulate the
country from global economic shocks through the pursuit of empire in
mainland Asia. This strategy bore catastrophic results in World War II and it
was only in the 1950s and 1960s that the Japanese economy began to grow
again.
Initially, post-war growth seemed to follow the path laid out in the Meiji
period. Over time, the Japanese economy was able to enter new high-tech
industries, where it had a comparative advantage due to its skilled
workforce. By the 1980s, Japan was one of the world’s leading economies. It
had truly become rich.
How the East Asian Tigers Became Rich
Many other parts of the world became rich in the 20th century. Chief among
these were the “East Asian Tigers”: Hong Kong, Singapore, South Korea,
and Taiwan. Figures 10.4 and 10.5 put East Asian growth in context. Figure
10.4 compares per capita GDP in South Korea to Nigeria. Both countries had
similarly low levels of income in the early 1960s. The divergence began in
the late 1960s and early 1970s when Nigeria, like many countries in sub-
Saharan Africa, entered into a period of civil war and military rule. Nigeria
was also adversely affected by the general growth slowdown that occurred
following the Oil Shock of 1973. In contrast, South Korea continued to
register high rates of economic growth throughout the 1970s and 1980s. And
as we discussed in Chapter 1, the secret to modern economic growth is that it
is sustained.
Figure 10.5 paints a more general picture. It compares the growth of the tiger
economies to growth in sub-Saharan Africa and Latin America. While sub-
Saharan Africa as a whole experienced stagnation, many countries within the
region actually experienced growth reversals in the 1970s and 1980s.
Growth only resumed (slowly) in the 1990s. Latin American countries began
the period richer than East Asian societies but they grew more slowly. As a
result, by 2019, per capita incomes in Latin America and the Caribbean were
only 28.6% of those in South Korea, Singapore, and Hong Kong ($10,826
vs. $37,841).
Figure 10.4 Per capita GDP in South Korea and Nigeria, 1960–2019
Data source: World Bank (2019)
Figure 10.5 Per capita GDP in various parts of the world, 1960–2019
Data source: World Bank (2019).

Why did the East Asian Tigers become rich? Their success was not predicted
by many economists ahead of time. In 1961, Paul Rosenstein-Rodan
published a series of forecasts about growth in developing countries. He
envisioned that countries in South Asia and sub-Saharan Africa would grow
much faster than their East Asian counterparts. He particularly
underestimated the growth of Taiwan and South Korea, predicting average
growth rates of 0.96% and 1.4%, respectively, between 1961 and 1976 as
compared to actual average growth rates of 4.8% and 7.3% (Acemoglu and
Robinson, 2012a). Why was this success story so hard to foretell?
Like Japan, these countries did not need to reinvent the wheel. Countries that
are poor and far from the technological frontier should in theory be able to
achieve rapid economic growth by importing new ideas and technologies. As
technology advances in rich countries, the catch-up potential of poor
countries should be even greater (Parente and Prescott, 2002). In one sense,
this economic “catch-up” helps explain much of the rise of the four East
Asian Tigers. In another sense, it simply pushes back the puzzle and raises a
further question: why were these countries able to catch up while many other
parts of the world remained poor? We will address this shortly. We first need
a better understanding of why some countries have the prerequisites for
catch-up growth.
In general, “catch-up” is not simply a matter of poor countries importing
technologies from rich countries. This of course does happen to some extent.
Cellular phones and later smartphones spread rapidly across the developing
world in the early 2000s. But in many cases, this is insufficient to ensure
catch-up growth. Pritchett (1997) characterized the dominant trend between
1950 and the 1990s as “divergence big time” between the wealthy and poor
world.
Given the dominant themes of this book, it should come as no surprise that
catch-up is not simply a matter of importing technology. Institutions matter.
So does culture. So do geography, demography, and a society’s colonial past.
Which of these were important in allowing East Asia to buck the trend?
In many respects, the geography of East Asia was not promising for modern
economic growth. Taiwan, Singapore, and South Korea lack natural
resources, especially oil and gas. But as we discussed in Chapter 2, it is often
economic geography that matters more than the presence of natural
resources. By economic geography we mean the presence of manmade
economic hubs and agglomerations. One of the most robust findings in
economics is that countries close to one another are more likely to trade with
one another (the so-called “gravity model” of trade).
Geographic features were hardly the only critical factors. But the emergence
of a cluster of densely populated manufacturing and consumption hubs in
East Asia was an important precondition for both the initial and continuing
successes of the economies of the region. Had Taiwan been located off the
coast of West Africa, it is hard to imagine it being as successful.
As we just saw, Japan was the first country to industrialize in Asia. South
Korea, Taiwan, Singapore, and Hong Kong are not only geographically
proximate to Japan, but had also been ruled or occupied by it (the former
two for a substantial period of time earlier in the 20th century). As a result,
these East Asian economies were well placed to follow the path pioneered
by Japan. Moreover, as the East Asian economies began their rapid growth
later than Japan, they were further from the economic frontier and had a
larger “backlog” of modern technologies to import. This gave them greater
potential for rapid growth.
Geography mattered in another way. The East Asian economies were all
relatively small. They were therefore forced to rely on international markets.
They did not fall into the trap that many larger developing countries did of
relying on protective tariffs and subsidies to support domestic manufacturing
firms. It also helped that the world moved towards freer trade after 1945
with the establishment of GATT (the General Agreement on Tariffs and
Trade). Protective tariffs and subsidies appeared plausible in countries with
large domestic markets like Brazil and India. Such policies could work (as in
19th-century America), but in practice they often freed domestic
manufacturers from the threat of international competition and encouraged
rent-seeking and corruption.
The poster child for these failures was Hindustan Motors, based in Kolkata,
India. From 1957 onwards, protected by a complex system of import permits
and government subsidies, Hindustan Motors produced the Ambassador
motor car. There was nothing wrong per se with this car. Yet, trade
protections allowed Hindustan Motors to keep producing and selling the
same, largely unchanged, vehicle for decades. It was not until the
liberalization of the Indian economy in the 1980s, which allowed Japanese
cars to be sold in India, that it became evident how far behind Indian
automobiles had fallen. Small and medium-sized countries like Hong Kong,
Singapore, South Korea, and Taiwan were insulated from making such
mistakes. Simply by virtue of their size, they had to rely on international
markets.
What role did institutions play in East Asian development? In Chapters 3
and 9, we noted that institutions which constrain executive power have been
important in the story of economic growth. In Western Europe, the US,
Canada, and Australia, constraints on executive power tended to come
through democratic institutions. Yet, the East Asian Tigers were not initially
democratic. South Korea and Taiwan remained dictatorships until the 1980s.
Democratization followed economic growth rather than preceding it. Does
this speak against the “preconditions” we highlighted in earlier chapters?
As we discussed in Chapter 3, institutions are context-specific. A range of
different institutional arrangements can evolve to constrain rulers, solve
collective action problems, or enable credible commitments. Democracy is
one solution. Others exist. As Haggard (2004, p. 53) writes, “[T]he search
for a single institutional ‘taproot’ of growth is likely to be a misguided
exercise.” In fact, there was no single set of policies pursued by all of the
tiger economies, nor did they share the same institutions.
As each country had different political constituencies to satisfy and different
traditions and histories, they pursued a range of different policies. Hong
Kong, as a British colony, was the most reliant on markets and the most open
to trade – though even here there was a substantial role for government in
the provision of public housing. Singapore, also an ex-British colony, relied
on a pragmatic combination of the market and government.
In South Korea, formal constraints on executive power were weak at best in
the early years of industrialization. As a result, industrial policy was more
heavily directed by the government. But the South Korean economy was
also subject to discipline by worldwide markets. The key players were
chaebols, large industrial conglomerates that obtained government support
and guaranteed bank loans. The success of the chaebols rested ultimately on
their ability to enter export markets. The South Korean economy at the time
was simply too small and poor to provide a sufficiently large consumer base
to support large-scale manufacturing. These factors allowed South Korean
industrialization to succeed, perhaps in spite of the heavy role played by the
state. Export reliance provided much-needed market discipline and mitigated
some of the problems of corruption and non-transparency that otherwise
afflicted large firms. Reliance on exports is thus one feature that unifies the
experiences of the four Asian tiger economies.
In the absence of democratic institutions, the East Asian Tigers found ways
to constrain executive power. They did this by working in conjunction with
business elites in the private sector. In the post-war period, Haggard (2004,
p. 60) notes that “political leaderships in all of these countries faced the
problem of how to mobilize resources under political circumstances that
were highly uncertain.” Institutions like chaebols can be viewed as resolving
commitment problems between the state and the private sector. These
institutions diverged from those in the West and opened the tiger economies
up to charges of cronyism and corruption. But they also served an important
function by restraining predatory instincts of rulers.
To appreciate the importance of institutions in the East Asian success story,
it is informative to contrast it with the ultimate failure of the Eastern Bloc
economies in the same period. Eastern Bloc economies were able to achieve
fairly rapid growth initially. The state played a key role in mobilizing
resources; it forced savings to rise rapidly and encouraged industrialization.
The problems began once this initial period of recovery from World War II
passed (Eichengreen, 2007). Without a developed market, producers lacked
the incentives to produce goods that consumers wanted to buy. Inefficiencies
within the system accumulated. Incentive problems within firms’
bureaucracies grew worse over time, creating more opportunities for rent-
seeking.
Other factors mattered as well. In East Asia, cultural norms influenced by
the Chinese Confucian ideal of an educated ruling class favored investment
in human capital. Demographic factors also mattered. As they invested
heavily in human capital, East Asian societies rapidly underwent a
demographic transition. Average annual population growth in South Korea
slowed from 2.6% in the 1960s to 1.1% in the 1980s. In Hong Kong it fell
from 2.5% to 1.4% in the same period. This gave a one-off boost to recorded
growth rates – though it also means that these societies may run into adverse
demographic headwinds in the future. Meanwhile, population growth was
stable in South America and growing rapidly in sub-Saharan Africa. In the
Asian tiger economies, family sizes shrank as households moved from large
families to small households with highly educated children.
To what extent is the East Asian Tigers’ success replicable? China was able
to replicate many aspects of the East Asian economic model after its
disastrous experience with Communism, albeit on a much larger scale.
However, for countries in other parts of the world with different histories,
cultures, and geographies, the lessons from the East Asian miracle may be
more limited.
How China Is Becoming Rich
One enduring puzzle in the history of economic growth is why China did not
industrialize first. During the height of the Song dynasty (960–1279), China
was much richer than even the wealthiest parts of Europe. Yet by 1850,
Chinese per capita GDP was one-fifth that of England (Broadberry, Guan,
and Li, 2018). This gap would greatly expand over the subsequent century.
What happened? Why did China not undergo an Industrial Revolution first?
These are not the only questions that must be answered. In the past forty
years, the Chinese economy has grown at a break-neck speed. After decades
of mismanagement, famine, and persecution by Communist rule produced
mass impoverishment, the growth of the last four decades has lifted around
one billion Chinese citizens out of dire poverty. As recently as 1990, 66.2%
of Chinese were earning less than $1.90 per day, and 98.3% of the
population made less than $5.50 per day (World Bank, 2020b). In a country
of around 1.5 billion people, these numbers are staggering.
China has become much wealthier in the last few decades. As of 2016, only
0.5% of the population made less than $1.90 per day and 23.9% made less
than $5.50 per day (World Bank, 2020b). Per capita GDP has risen from $71
in 1962 (around $0.20 per day) to $10,262 in 2019 (see Figure 10.6). This is
one of the great human triumphs of our lifetime. Over one billion people
have been lifted out of the most extreme poverty in China alone. There is
still work to be done, of course. But this should not make us lose sight of
what an achievement this is. How did it happen?
First, we need to tackle the mystery of why China did not become rich first.
While there is much evidence that the economic peak of the pre-modern
Chinese empire was in the Song dynasty, recent scholarship focuses on the
last imperial Chinese dynasty – the Qing dynasty – who ruled China from
1644 to 1912. During the first 150 years of Qing rule, China reached its
greatest geographic extent and experienced a remarkable boom in
population. According to Glahn (2016, p. 322) this “boom of the eighteenth
century rested on a foundation of steady growth in population and
agricultural output” and represented “the maturation of the market
economy.”
Figure 10.6 Chinese per capita GDP, 1960–2019
Data source: World Bank (2020b).

Pomeranz (2000) suggested that around 1750 there was little to distinguish
the economy of Europe from that of China. According to this argument, the
divergence between China and the West has to be explained in terms of
factors that became relevant after 1750. Subsequent scholarship does not
support this claim, as we shall see, but it was indeed the case that in many
respects Qing China had institutions that looked favorable for economic
growth.
Consider Adam Smith’s statement that little else is required for economic
growth “but peace, easy taxes, and a tolerable administration of justice; all
the rest being brought about by the natural course of things” (Stewart,
1793/1980, p. 322). China in the 18th century certainly had the first two
ingredients for growth and arguably had the third ingredient too.
First, China was a large unified state. Though it has been divided on many
occasions, its longevity as a centralized state is in fact unique (Ko and Sng,
2013; Ko, Koyama, and Sng, 2018). From 1683 to 1796, Qing China
enjoyed a long period of internal peace. The only wars were on the frontiers
against nomadic peoples. In contrast, European states were frequently at war,
as we discussed in Chapter 3. The sheer size of China and high degree of
political centralization also facilitated market integration. As we noted in
Chapter 2, Northern and Southern China were connected via the Grand
Canal over 1,000 years ago. This connected markets for grain and other
goods. By the 18th century, the Grand Canal was supplying Beijing with
almost 1 million tonnes of rice annually (Glahn, 2016, p. 332). And as we
saw in Chapter 8, China and parts of Western Europe had comparable levels
of market integration around 1750 (Shiue and Keller, 2007), although
Chinese market integration appears to have declined thereafter (Bernhofen,
Li, Eberhardt, and Morgan, 2020).
Second, taxes were low in Qing China. In contrast to Europe, which saw a
dramatic rise in fiscal extractions by the state between 1500 and 1800, in
China the tax burden fell over time. The Qing imposed lower taxes than
previous Chinese dynasties, and the per capita tax rate fell further during the
18th century (Sng, 2014). The central state did not regulate the economy.
Merchants, organized through guilds, regulated commercial affairs at a local
level.
On Smith’s final point (the importance of a tolerable administration of
justice), China was governed by a large, meritocratic bureaucracy.
Contemporaries in 18th- and early 19th-century Europe saw this institution
as ensuring fair and impartial government. They contrasted it to European
governments, which were staffed with individuals appointed through
patronage or through the sale of offices. Voltaire, for instance, celebrated the
examination system as a form of impartial and benign government (yü Têng,
1943). In fact, the Chinese examination system was the model for the
introduction of professional bureaucracies in England and later the US.
Overall, the Chinese state provided more public goods and was less intrusive
than its European counterparts (Wong, 1997, 2012). Certainly, by pre-
modern standards, Chinese institutions provided something approximating a
tolerable administration of justice. Over time, however, there is evidence of
increasing corruption (Sng, 2014).
Despite these apparent advantages, rather than experiencing sustained
economic growth after 1750, China went into decline. A series of peasant
rebellions, culminating in the Taiping Rebellion of 1850–64, left millions
dead. Defeated by Britain in the Opium Wars (1839–42 and 1856–60), China
was forced to cede Hong Kong and to allow Western colonial powers to
establish trading posts within the empire.
There are numerous proximate causes of this collapse. These include
political failure by Qing elites and a Malthusian crisis brought about by a
rapidly growing population and limited ecological resources. But the deeper
cause was the absence of sustained innovation. The reasons for this were
institutional and cultural. As documented by Needham (1995), China had
been the most technologically innovative part of the world for centuries prior
to 1500. But this was no longer the case by the 18th century.
One reason for this was China’s political institutions. The emperor was
relatively unconstrained in contrast to Western Europe, where cities had
autonomy and parliaments contested the sovereign’s rule. More important
still was Europe’s fragmentation. Although it meant costly barriers to trade
and frequent conflict, fragmentation ensured that there was a considerable
degree of competition in the system (Scheidel, 2019). As we discussed in
Chapter 8, it was this fragmentation that allowed goods and people to
relocate to more favorable environments. Such freedoms were absent in
imperial China.
Moreover, while the imperial bureaucracy was meritocratic, it was subject to
imperial discretion (Brandt, Ma, and Rawski, 2014, p. 74). This meant that
bureaucratic agents were disincentivized to do their jobs “too well.” If they
did, the central government could crack down on them at any moment. It
would be all the more likely to do so if the bureaucrat were wealthy or
independent (Ma and Rubin, 2019). China was governed by a centralized,
hierarchical, hub-and-spoke network with the emperor at the center. This
hub-and-spoke structure was an efficient way of organizing a large and far-
flung empire, but it impeded the flow of information between different
nodes, discouraged innovation, and made the entire empire vulnerable to
system-wide collapse (Root, 2020).
These centralizing and autocratic tendencies were strengthened in the 17th
and 18th centuries, at a time when representative institutions were on the rise
in Western Europe. Unsure of their own political legitimacy, the Qing rulers
of China governed more autocratically. One particularly pernicious set of
policies they implemented were the “literary inquisitions,” which cracked
down on possible sources of dissent while promoting a narrow and
traditional understanding of China’s intellectual history (Xue, 2021).
For these reasons, the Qing institutional and cultural environment was not
conducive to innovation. While the imperial examination system encouraged
investment in human capital, it tended to reproduce existing knowledge. The
brightest students had an incentive to pursue Confucian education, which
had little practical application to science or technology (Huff, 1993; Lin,
1995). Such cultural norms may not have been as big of an issue under the
Song, who actively encouraged innovation, but they became a binding
constraint under the Qing dynasty. The importance of these norms meant that
even when the central government attempted reforms akin to the Meiji
Reforms – the so-called Self-Strengthening Movement (1860–94) – they did
so in a Confucian context. Practical education was largely eschewed in favor
of the old classics. This is summarized by the famous formula: “Chinese
learning as the basis; Western learning for practical use” (Wright, 1957, p.
1).
The lack of competition or a forum that encouraged innovation ultimately
impeded anything like the Scientific Revolution or Enlightenment from
occurring in China. As Mokyr (2016, p. 318) puts it, despite being highly
centralized and sharing a single written language and literary culture, “China
paradoxically lacked a single unifying coordinating mechanism such as a
competitive market in which new ideas were tested.” Hence, a combination
of centralized political institutions and a culture favoring the Confucian
classics over what Mokyr (2002) calls “useful knowledge” were jointly
responsible for stifling Chinese innovation in the centuries prior to the
Industrial Revolution. Nevertheless, to speak of a Chinese failure here is
misguided. As Mokyr (2016, p. 338) notes, “[W]hat is exceptional, indeed
unique, is what happened in eighteenth-century Europe.”
It is important to recognize that these factors did not act in isolation. They
interacted with one another. For instance, consider the clan-based nature of
Chinese families. As we discussed in Chapter 4, kin-based cultures have
certain advantages and disadvantages over individualistic cultures. On the
one hand, kin-based cultures have a larger safety net. The “clan” tends to
provide such insurance. However, this comes at the cost of institutional
development. In medieval Western Europe, societies were forced to form
corporations that provided mutual aid. These included guilds, communes,
and business associations. Such institutions were unnecessary in China,
where the clan provided mutual aid (Greif and Tabellini, 2017). A similar
logic explains why banking and finance first emerged in the West. In the
absence of the clan, there was a greater need for interpersonal risk sharing
and resource pooling. Such needs were much less pronounced in China,
since the clan mitigated these risks. As a result, there was less need for
banking and finance (Chen, Ma, and Sinclair, forthcoming).
The clan-based nature of Chinese families also played a role in the country’s
demography. Until the one-child policy was introduced in 1979, China had a
high birth rate. Early marriage and a multi-generational family system in
which newly married couples moved into the paternal home allowed women
to marry early and kept fertility rates high. Much of Chinese history is
consistent with a Malthusian perspective, as discussed in Chapter 5. The
dominant features were high birth rates, high death rates, and little long-run
change in per capita income. This framework helps explain why China
remained poor despite being a world technological leader for most of the
medieval period. All of those advancements resulted in more people, not
more wealth per person. For instance, while the total amount of cultivated
land more than tripled between 1400 and 1913, the total population more
than quintupled from 65 to 80 million in 1400 to 430 million in 1913
(Brandt, Ma, and Rawski, 2014, p. 52).
If institutions, culture, and demography are in part responsible for China
never fulfilling its technological promise, what role did these factors play in
explaining why the country has been able to grow rapidly in the past four
decades? It is this important question we turn to next. The Chinese miracle is
remarkable: nearly one billion people have been taken out of extreme
poverty within the span of our lifetime. How did this happen? Do the factors
highlighted in this book shed any light on China’s rise?
China has remained an autocracy despite the vicissitudes that it experienced
following its defeat in the Opium Wars and the fall of the Qing dynasty. The
Republican period (1912–49) saw the first sustained local efforts at state-
building and industrialization. Between 1912 and 1936, Chinese industrial
output grew at a faster rate than Japan, India, or Russia/the USSR (Brandt,
Ma, and Rawski, 2017, p. 198). One achievement of the Communist period
(1949– ) was to build on this and to successfully construct a modern
centralized state. But this came at a tremendous human cost. The Communist
period saw forced collectivization of agriculture and a series of Five-Year
Plans culminating in the disastrous Great Leap Forward (1958–62). The
resulting famine was the direct consequence of Communist policies.
What happened next illustrates one of the costs of moving away from a
market economy. In a market economy, the pace of industrialization was
constrained by the productivity of agriculture. If too many workers were
drawn into the cities to work in factories, demand for foodstuffs would
increase and grain in the fields would go unharvested. The scissors of supply
and demand would drive prices up, slowing the pace of industrialization.
Mao and his advisors believed they could accelerate this process by
bypassing the market mechanism. Specifically, they thought that peasants
were inefficiently cultivating small plots of land or not using the latest
fertilizers. They also suspected that peasants were hoarding grain in the hope
of profit. Collectivization was thus seen as a means both to greatly increase
production and to render the resulting food surplus legible to the state, which
could easily collect and transport it to feed the urban population. The Great
Leap Forward was thus a misguided attempt to jump-start industrialization.
Regardless of the personal culpability of Mao, it was the broader political
system, one characterized by a lack of checks and balances, that was crucial
in magnifying the scale of the tragedy. At the heart of the famine were
overoptimistic estimates of grain production. This was in large part due to
local bureaucrats having a systematic incentive to inflate estimates. On top
of this, highly inflexible procurement and an unwillingness of political elites
to recognize the problem led to disaster. Local cadres used extreme violence
to enforce their quotas. Peasants accused of hiding food or of shirking were
beaten and sometimes killed. Collectivization saw productivity plummet as
the tacit knowledge peasant farmers had of their local soils was lost when
they were herded into collective farms. In fact, the famine was most severe
in areas where agricultural productivity had been the highest (Meng, Qian,
and Yared, 2015). Meanwhile, news of mass starvation was covered up. The
numbers who died during the Great Famine are debated. Plausible estimates
range from around 15 to 45 million (Ó Gráda, 2015, pp. 130–73). Even at
the more conservative estimates of 20–30 million dead, this manmade
famine ranks among the most destructive episodes in human history.
An important lesson of this book is that political institutions are a key reason
why economically beneficial policies are often ignored while economically
destructive policies are pursued. The fact that China was ruled by an
autocratic and highly centralized state made these policy disasters not only
possible but also likely. The disasters of the Great Leap Forward and the
Great Famine were followed by the Cultural Revolution, during which
(according to conservative estimates) 750,000–1,500,000 people died. While
the Chinese Communist Party had been successful in unifying the country
and investing in basic education and healthcare, the result of the Great Leap
Forward and the Great Famine was that by the 1970s China was one of the
poorest places on the earth. Yet, the autocratic and highly centralized nature
of Communist rule also enabled the country to successfully reverse course
under Deng Xiaoping, the Chinese leader who initiated market-oriented
reforms in 1979.
We have highlighted in this book the importance of constraints on executive
power in promoting growth. In the case of the East Asian Tigers, constraints
were not formally part of the political system. The Tigers benefited from
being small. This meant that private enterprise was able to constrain the
government’s autocratic tendencies. But this was not the case for China. The
Chinese central government remained exceedingly powerful relative to other
important organizations and people. Yet, China still modernized its economy
and escaped poverty. Can the features we have highlighted in this book
account for this feat?
Much like Japan and the East Asian Tigers, China did not need to reinvent
the wheel of industrialization or the modern economy. It could borrow
industrial inputs and managerial know-how from abroad via opening up to
foreign direct investment. Tremendous under-utilized economic potential
had clearly been there for decades prior to the reforms of the late 1970s.
With over one billion people languishing in subsistence farming, China was
an obvious source of low-wage labor. But a large labor force was hardly the
only or most important factor in Chinese growth. After all, such a labor force
existed prior to the 1980s, and surplus labor has long been a characteristic of
developing economies.
China’s economic reforms can be divided into two periods: early reforms
between 1978 and 1995 and post-1995 reforms (Brandt, Ma, and Rawski,
2017). The first set of reforms dismantled many aspects of the command
economy. Agriculture had been gravely damaged by collectivization and the
misguided attempt to industrialize rural areas. In the late 1970s, these
policies began to be reversed. Among the first reforms was the revival of
household farming. Grain output rose by nearly one-third between 1978 and
1984 (Brandt, Ma, and Rawski, 2014, p. 96). Importantly, these increases in
agricultural productivity freed up hundreds of millions of workers to move
into industrial labor.
The post-1995 reforms involved widespread privatization. The state’s share
of industrial output declined from almost 50% in 1995 to 24% in 2008.
There was also an expansion in legal protection for private enterprise. There
was no rule of law in pre-reform China. As a market economy was
introduced, a corresponding legal system had to be developed. One
important development was the adoption of elements of German civil law
such as the right for private citizens to sue the government (Fukuyama,
2014, p. 364). Despite Communist opposition to private property rights,
reforms were able to create
a set of usufructuary (usage) rights that could be bought, sold,
mortgaged, or transferred, in which the state nonetheless retained
formal ownership. Thus, in China’s booming real estate market, no one
technically “owns” an apartment or house. One owns the equivalent of
a lease whose term extends up to seventy years, which is acquired in
exchange for land-use fees. (Fukuyama, 2014, p. 366)
China did not adopt Western institutions wholesale. Rather, relatively minor
moves towards greater rule of law were sufficient to induce a radical
transformation of its economy and society.
As with other East Asian economies, another aspect of China’s rise was its
increased openness to global trade. The establishment of economic zones
encouraged foreign direct investment into the country. Given how far behind
China was from the world’s economic frontier and how low its wages were,
there were tremendous opportunities for catch-up growth. Once China
rejoined the global economy, its trade ratio rose from 9.7% to 31.9%
between 1978 and 1993 (Brandt, Ma, and Rawski, 2014, p. 98). Foreign
investment poured in and state enterprises were made more efficient. Growth
accelerated in the 1990s and 2000s, driven by reforms that restructured the
bloated public sector. Chinese growth has slowed since the early 2000s
(when growth was around 10% per year; it is now around 6–7%), but this is
precisely what a model of catch-up growth would predict.
That is what happened. But how did it happen? How did such rapid growth
occur under an autocratic government? Two features of China’s history are
important for understanding its modern growth. The first is institutional.
Although the Chinese emperor historically faced few constraints, one
difference between the way that the Chinese and Europeans legitimated
political rule was that, for the Chinese, good rule meant legitimate rule. A
good Chinese emperor was viewed as having the “Mandate of Heaven.” If
he were overthrown or responded poorly to a crisis, it was a sign that he did
not have the Mandate.
This principle continues to hold influence for legitimating Communist rule
today, even if in a different guise. After the death of Mao in 1976, whose
legitimacy was tied to his role as the founding father of the People’s
Republic of China, the Chinese leadership faced a legitimacy deficit. Not
only did none of the potential successors to Mao have a personal history like
his, but there was internal turmoil over who would lead. Given this
legitimacy deficit, Deng Xiaoping, who led China from 1978 to 1989, turned
to “good rule means legitimate rule.” This helped solve many of the issues
associated with unconstrained governance. Even though the state could have
infringed on the rights of its citizens at any time – and it certainly did, and
continues to today, especially its ethnic and religious minorities – doing so in
a way that would have undermined economic growth would have also
undermined the legitimacy of the ruling Communist Party. As China has
remained highly centralized and autocratic, there is always a possibility of
the current economic policies being reversed. And indeed, under Xi
Jinping’s presidency since 2013 there has been both a strengthening of
autocracy and a move away from the market. China has not escaped from the
“bad emperor problem.”
Another historical feature that has contributed to China’s growth has to do
with its culture. Like Japan and other East Asian countries, literacy was
relatively high in pre-modern China. This was a product of a culture that
viewed education as a means of rising economically and socially. Although
historically education was confined to the Confucian classics, this type of
education became less important after the dismantling of the old Chinese
bureaucracy in 1905. But the emphasis on education remained, especially in
those places where it was important in the past. In fact, places that produced
more top-level bureaucrats in the imperial period still have much higher
levels of educational attainment today (Chen, Kung, and Ma, 2020). This
legacy of high educational attainment is likely one reason that Chinese
economic success has not petered out (Brandt, Ma, and Rawski, 2014).
This section glosses over numerous aspects of Chinese history and its recent
rise. Yet, much like the other cases considered in this chapter, it reveals both
the potential and the limits of using lessons from history to understand why
poor parts of the world can become rich. China has become relatively rich
without having many of the attributes of 18th-century England or the 19th-
century US. Above all, it has had few constraints on governance. Yet, those
histories point us to what might matter for economic growth to occur.
Institutions are of critical importance. But we also are limited in our
knowledge of which institutions matter. When China abandoned command
and control, it also defied the policy consensus of the 1990s (known as the
Washington Consensus) which emphasized privatization and deregulation
(Weber, 2021). Yet, China’s pace of economic growth was faster than those
countries that adopted what were perceived to be best-practice policies.
The appropriate institutional reforms will always be context-dependent and
politically constrained. This is one of the key takeaways from this book.
What worked to make some parts of the world rich worked in a certain
cultural, historical, and institutional context. We can learn from this past, but
we should not be wedded to it.
Chapter Summary
The advent of modern economic growth created tremendous opportunities
for catch-up growth. But these opportunities were difficult to grasp. Not all
societies were able to benefit from them.
Some were colonies and hence unable to implement independent economic
policies. Others had factor endowments that were unsuited for the labor-
saving, capital-intensive technologies produced by countries on the
technological frontier. Still others had institutions that repressed
entrepreneurship and markets. The kinds of political institutions that had for
centuries governed the agrarian empires of Eurasia were not suited for the
new environment in which rapid technological change was possible.
For these reasons, while the global economy greatly expanded after 1800
and technological innovations diffused across the world, the pace of growth
was uneven. India and much of Africa remained Malthusian economies.
Total GDP increased tremendously in these countries, but it was almost all
absorbed into population growth. Per capita income remained close to
subsistence.
Outside Europe or settler colonies like Argentina, Australia, and New
Zealand that were land- and resource-abundant and underpopulated, in the
middle of the 19th century there was little sign of sustained growth in per
capita income. The first non-Western country to achieve rapid economic
growth was Japan. This was predicated on a change in political institutions
and, in the absence of natural resources or abundant farmland, was initially
based on Japan’s successful entry into international textile markets. Later,
Japanese firms moved into iron, steel, and manufacturing. The path
pioneered by Japan could be followed by other East Asian countries with
similar factor endowments such as South Korea, Taiwan, Singapore, and
Hong Kong. Later, following an experiment with Communist central
planning, a version of it could implemented on a much larger scale (and with
a much greater role of government and state-owned firms) by China.
In many respects, these developments have contributed more to the world
becoming rich than anything that happened in England or the US. The
countries that became rich first hold a relatively small share of the world’s
population. For the world to become rich, it was necessary for those riches to
spread to more populated places. First and foremost this meant Asia, which
holds around 60% of the world’s population. There is still a long way to go.
But the developments summarized in this chapter give reason for optimism
that soon the whole world will indeed be rich.
11
The World Is Rich
The world is richer than it has ever been. It is likely to continue to become
richer for the foreseeable future. The world becoming richer means that
more and more of humanity can be lifted from dire poverty. Riches free
human minds to concentrate on pursuits besides acquiring the basic
necessities of life. Riches allow us to live longer and healthier lives and
provide us with material comforts that our ancestors could have only
dreamed of. In the 2020s, we will reach a point where basic comforts are
available to a large fraction of the world’s population – although certainly
not everyone. This achievement deserves to both be celebrated and
understood.
We still have a long way to go. While over a billion people have been lifted
out of poverty just in our lifetime, around a billion people still live in abject
poverty. Many of these people live in sub-Saharan Africa, although many
others live in Latin America, Central Asia, South Asia, and Southeast Asia.
Lifting these people out of poverty is one of the most important things the
next generation of humans can do. But how can this be achieved?
Understanding where wealth comes from helps us lift more people out of
poverty. This is why we wrote this book. The literature in economics and
economic history has provided many answers to these questions in recent
years, but until now there has not been one place where interested readers
could go to get an understanding of these various theories. Nor do most
existing accounts seriously consider the interactions between their proposed
explanation and other theories. The goal of this book is to do both. In the
first part of the book, we provided an overview of the primary explanations
for “how the world became rich.” We discussed theories focusing on
geography, institutions, culture, demography, and colonization. As we were
writing these chapters, we realized just how hard it is to discuss these
theories in isolation. How do you talk about institutions without considering
the effect of culture, or how they are shaped by geography? Is demography
really independent of institutions? Can we really silo off colonization as if it
existed independent of the various attributes of the colonizing and colonized
countries?
This is why, in the second part of the book, we drew these theories together
to explain why the first place to achieve sustained economic growth –
Britain – did so. Of course, this required explaining some of the peculiarities
of British history. But we were also able to use this history to understand
what preconditions mattered for Britain’s industrialization and why they
mattered. Both of these are important. The “what” matters because it
provides insights into the preconditions that might generally be necessary for
sustained economic growth. The “why” matters because it gives insight into
what might have been particular about Britain and thus not necessary in
other contexts.
Going beyond Britain, as we do in Chapters 9 and 10, has led us to a few key
insights. Once the initial breakthrough to sustained economic growth had
taken place, the path was open for other countries to achieve catch-up
growth. Certain institutions, particularly those that encouraged innovation
and entrepreneurship and allowed for the free-flowing of ideas, may have
been less important for countries catching up to the frontier (as opposed to
those on the frontier).
Markets are also crucial for sustained economic growth. Textbook
economics often focuses on the efficiency properties of markets: the
principle that in a competitive market, prices will be bid down to marginal
cost so that there is no deadweight loss. But from a long-run perspective,
what matters more is that markets provide incentives for innovation. Growth
episodes like the Industrial Revolution were not planned by policy-makers.
They resulted from an untold number of decisions by private individuals to
experiment with new production methods or to build new factories or to
mechanize production. Command economies are also capable of growth. In
the short run, they can grow faster than market economies because policy-
makers can use coercion to mobilize resources. This occurred in the Soviet
Union under Stalin and in Eastern Europe after World War II. But sheer
labor power and investment eventually run into diminishing returns if there
is no innovation and there are no markets to coordinate investment decisions.
And while command economies like the Soviet Union excelled at military
innovation, they were abysmal at providing new goods that consumers
actually wanted to buy.
Market do not operate in a vacuum. As Adam Smith understood, the
proposition that self-interest or market forces have beneficial outcomes is
conditional on the appropriate institutional environment. For this reason, we
have placed considerable emphasis on institutions throughout this book. But
institutions cannot be viewed in isolation. A society’s institutional
environment interacts with other variables. This means that the outcomes
associated with certain institutional environments will be context-specific.
For example, the institutional reforms that led China to escape extreme
poverty in the 1980s were quite minor: they involved restoring private
production in agriculture, the creation of special economic zones, and the
abandonment of central planning. At no time did the Chinese Communist
Party contemplate the introduction of genuine representative institutions or
formal constraints on the state. The important point is that this liberalization
occurred at a point in time when rapid convergence to the economic frontier
was possible. Even relatively minor institutional changes had huge payoffs
as China was able to become the world’s low-cost producer of manufactured
goods.
Institutions also interact with culture. By culture, recall that we mean the
conceptual lens or heuristics individuals in a society use to interpret the
world. Sustained economic growth may have been possible in the ancient
world. Certainly, the Roman Empire at its height had an integrated and
sophisticated market economy. Yet, one reason it never achieved anything
close to an “industrial revolution” appears to have been cultural. Successful
individuals in the Roman Empire aspired to a life of leisure. In contrast,
consider the case of Britain that we surveyed in Chapters 7 and 8. Britain
had many of the institutional prerequisites needed for take-off by the mid-
18th century: relatively limited government, an apprenticeship system that
honed the skills of craftsmen, and institutions favoring investment in public
goods. But it also had cultural attributes that complemented these
institutions. Hard work did not place someone at the bottom of the social
scale. Among the intellectual elite, the idea of continued progress seemed
like a realistic and worthwhile goal. These cultural attributes were not
unique to Britain. They were shared with parts of continental Europe, and
many non-European societies had some of these attributes at some point in
their history. But no society, at least prior to the mid-18th century, had the
combination of these cultural attributes and institutional characteristics.
Once the key elements of sustained growth emerged, first during Britain’s
Industrial Revolution, and then more decisively after 1850, elements of the
blueprint provided by the early developers could be used elsewhere, even if
it looked a bit different depending on the location. In Chapter 10, we showed
how different parts of the world took pieces of that blueprint and adapted
them to their own institutional and cultural characteristics. In some cases,
such as Meiji Japan, this required a wholesale institutional change. In other
cases, such as late 20th-century China, pieces of the blueprint were adapted
to the local institutional and cultural context.
This is what makes the problem of economic development in the poorest
parts of the world so vexing. There is no silver bullet. We know what has
worked in various historical contexts. But merely transplanting what worked
elsewhere to poverty-stricken societies isn’t the solution. Context matters.
Culture and the historical past matter. So do demography and geography.
Of course, this does not mean that bringing wealth to the world’s poorest is a
lost cause. Knowing what did work and why it worked matters precisely
because it allows us to build a cumulative body of knowledge. This, in turn,
helps provide a framework for understanding what economic policies are
likely to succeed. It will take substantial local knowledge to know how to
apply this framework to a given society. Which parts can be used and which
can be discarded? While the answer is always “it depends,” this knowledge
is still vital to even know where to begin.
Although this book has almost exclusively focused on the positive side of
the world becoming rich (with the obvious exception of colonization), we
are aware of the downsides. Foremost among these is climate change.
Industrialization saw a massive rise in the use of fossil fuels, which polluted
many parts of the world and contributed to the heating of the earth. If the
current pace of global warming continues (or even continues to rise at a
slower pace), all of the economic advancements highlighted in this book
might have been for naught. We cannot enjoy the fruits of prosperity if we
have killed the ecosystems necessary for human life on earth.
But there is reason for hope on this front too, and it is related to global
prosperity. On the one hand, as countries industrialize and consumption
rises, they initially tend to pollute more. Not only do these countries have
more factories, but people drive more automobiles and eat more meat (which
contributes much more to environmental degradation than plant agriculture).
On the other hand, they also have more resources to combat deforestation
and to invest in mitigation. Many of the richest countries today have reduced
their levels of pollution in recent decades.
Moreover, if humanity is going to survive a changing climate, the answer
will likely lie in technological progress. Whether this means technologies
that allow for clean energy production, carbon capture, or something else,
we cannot say. And it is not just that we are not experts. In reality, it is likely
that nobody knows what yet-to-be discovered technologies will help
alleviate climate change. But this is one of the most important reasons why
prosperity is so important. When human brain power can be used for solving
the most pressing issues of the day rather than focusing on where one’s next
meal is coming from, the odds of technological progress are much greater.
Freeing up a few billion minds to help solve these problems is probably our
best hope. So, while modern economic growth may have been a leading
cause of climate change, it is also at the center of the solution.
We hope this book has given you some insight into how the world became
rich. We also hope it gives you a better appreciation of just how important
understanding history is for modern problems. It is not so much that history
repeats itself. It is that we can learn so much from history – what worked,
why it worked, and in what context it worked. The blueprints of the past
contain much valuable information. While it is not always obvious how to
use that information – if it can be used at all – it is one of the most valuable
resources we have for making the world a better place.
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Index
Page numbers in italics refer to figures and tables.
A

Acemoglu, D.
and Johnson, S., Robinson, J.A. 11, 33, 40, 41, 114, 115, 139
and Robinson, J.A. 50–1, 52, 187, 208
and Wolitzky, A. 95–6
Africa
colonization 108, 114, 116, 117–19, 120, 122–3
and independence 199–200
cultural norms 84–5
geographic factors 20–2
ruggedness of terrain 11, 12
Jewish traders, North Africa 53, 80–2
slave trades 109–13
trust 11, 111
agriculture
Black Death, impact of 93–4, 95–6
capitalism 95, 153–4
China 216–17, 218
climate and geography 25–6
Dutch Cultivation System, Java, Indonesia 121–2
England/Britain
capitalist agriculture 153–4
crop yields (18th century) 107
labor force 177
gender norms 85, 86
 India 117, 118
and Malthusian model of population 92
potato, introduction of 107
Soviet Russia 195–6
and technology 6, 22–4
Alesina, A., Giuliano, P., and Nunn, N. 85, 86
Allen, R.C. 8–9, 34, 151, 154, 166, 168–71, 174, 175, 178–9, 192, 206
and Weisdorf, J.L. 153
Americas/New World and European Empires 104–5, 107, 116
Atlantic trade route 32–3, 137–8, 139, 140
amoral familism 79–80
Anderson, R.W., Johnson, N.D., and Koyama, M. 26, 27
Anne of England 88
Appleby, J. 194
apprenticeships 164
Arkwright, R.: water frame 166, 167, 168
Arrow, K.J. 83
Arteaga, F., Desierto. D, and Koyama M. 140
Ashraf, Q. and Galor, O. 92
Asia
East Asian Tigers 207–11
per capita GDP 199
trade routes and colonization 104–5
Athenian democracy 50, 56, 59
Atlantic economy and Industrial Revolution, Britain 156–8
Atlantic trade 32–3, 137–8, 139
slave 108, 109, 110, 158–60
Australia 189
autocracy and democracy 48–9
B

Bai, Y. and Kung, J. 124, 133

Bailey, M. 95
Balla, E. and Johnson, N. 155
Banerjee, A. and Iyer, L. 117, 118
Banfield, E.C. 79–80
Barro, R. and McCleary, R. 73
Bates, R.H. 200
Becker, G.S.
and Lewis, H.G. 100
Becker, S.O.
and Boeckh, K., Hainz, C., Woessmann, L. 84
and Hornung, E., Woessmann, L. 73–4, 182
and Woessmann, L. 73, 74
Beckert, S. 160, 161
Belgian Congo 114, 116
Benedictow, O. 92
Berg, M. 158, 179
Berman, H. 46, 76
Bernhofen, D.
and Brown, J. 205
and Eberhardt, M, Li, J., Morgan S. 134 213
birth rates/fertility see demographic transition; European Marriage
Pattern (EMP); Malthusian model
Black Death 6, 92–6, 99, 103, 135–6, 152, 153
Blake, W. 179
Blaydes, L. and Chaney, E. 78, 79
Boettke, P. 196
Bogart, D. 146, 151
and Alvarez-Palau, E.J., Dunn, O., Satchell, M., Taylor, L.S. 29,
32
and Richardson, G. 42, 146
and Satchell, M., Alvarez-Palau, E.J., You, X., Taylor, L.S. 29, 30–
1
Bolt, J. and van Zanden, J., 112, 115
Botticini, M. and Eckstein, Z. 74
Brandt, L., Ma, D., and Rawski, T.G. 14, 214, 216, 218–19
Brenner, R. 95, 154
Britain/England 1, 2, 14, 15–16, 223, 224
Black Death, impact of 94, 95, 97
bourgeois pursuit of profit 69–70
Civil Wars 144
common law 46–7
and Dutch Republic/Netherlands 75–6, 152–3, 162–3, 164
European Marriage Pattern (EMP) 98, 99–100
and France 32, 33, 42, 46, 94, 95, 122
and Japan, per capita GDP (1280–1850) 203
monarchy and Parliament 56–8, 60–1, 143–7
natural resources and industrialization 33–5
property rights 41–2
state formation, capital and coercive hybrid model of 62
total GDP, population, and GDP per capita (1270–1870) 149, 150
transport infrastructure 29, 30–2, 146, 151
see also Industrial Revolution, Britain
British colonization 106, 107, 108, 120, 122–3
Hong Kong 214
transatlantic slave trade 108, 109, 158–60
see also India, British Raj
Broadberry, S. 190
and Custodis, J., Gupta, B. 200, 203, 211–12
and Guan, H., Li, D. 203, 211–12
and Wallis, J. 7
Bruhn, M. and Gallego, F. 116
C

Cagé, J. and Rueda, V., 123

Calvinism 71–3, 141, 194
Campbell, B. 93–4
Cantoni, D. Dittmar, J. and Yuchtman, N. 75
capital-intensive paths to state formation 61–2
capitalism
agriculture 95, 153–4
primitive accumulation and colonization 106
Protestant work ethic and 71–3, 194
Caribbean islands 108, 116, 156, 158–9, 208
Carmichael, S.G., de Pleijt, A., van Zanden, J.L., and de Moor, T. 100,
101
Cartwright, E. 174
catch-up growth 186–7, 198–202, 223
China 218
East Asian Tigers 208–9
Japan 204
Catholicism
Jesuit missions, South America 123, 124
marriage policies 80, 81, 134–5
medieval Europe 134–5
Central Europe 95–6, 100
Chaney, E. 19, 78
Charles I of England 144
Charles I of Spain (Charles V of the Holy Roman Empire) 33, 139, 141,
155
China 211–20, 223–4
adoption of industrial technologies 188
Eurasian steppe and state formation 132–4
fertility restrictions 101
gender norms and cotton textile production 85–7
Grand Canal and economic development 29, 213
vs. Europe
clan-based vs. individualistic cultures 82, 215–16
science and technology 70–1
war 62–3
Christianity see Catholicism; Protestantism
Cipolla, C.M. 52
cities
Industrial Revolution, Britain/England 156–8
Roman and medieval Britain and France 32, 33
city-states 62
Italy 62, 80–2, 135–6, 137
and territorial states, interest rates 63
clan-/kin-based cultures 80–2, 215–16
Clark, G. 8, 40, 72, 90, 91, 97, 153
and Cummins, N. 185
and Jacks, D. 35
Clegg, J.J. 192
climate change 5, 225
historical variations 25–7
climate and geography 19, 25–6
coal/coal mining 33–5, 168–9, 170
Code of Hammurabi 44–5
coercive-intensive paths to state formation 61–2
Cohn, S. 94
colonization 104–5, 107, 125
benefits for colonizers 105–9
delayed industrialization 198–202
legal systems 46–7
resource grab 113–19
silver linings for colonized 119–24
Columbus, C. 104
Commercial Revolution 26, 52–4, 56, 134–5
guilds 54–6, 101, 164
communism
China 216–20, 223–4
Soviet Russia 195–7, 223
vs. market-based institutions, North and South Korea 40, 41
Confucianism 68, 71, 82, 211, 215, 219
Congo
Belgian 114, 116
Kuba Kingdom 84–5
Consumer Revolution, Britain 151–3, 158
consumption baskets, historical estimation of income 8–9
continents, vertical and horizontal alignment of 22–4
convergence
political institutional development 187–8
 see also catch-up growth
Coşgel, M., Miceli, T. and Rubin, J. 78, 187
cotton textile production and trade
Britain 160–1, 165–6, 167, 168, 171
import ban (1721) 146
China 85–7
India 200
Japan 206
US 190–2
Cox, G.W. 42
craft guilds 54–5
Crafts, N. 174, 176–7
Crompton, S.: spinning mule 166, 167
Crosby, A.W. 22–3
culture
adoption of industrial technologies 188
Africa, impact of slave trade 111–13
definitions, differences and effects of 66–8
and European take-off 68–71
and institutions 38–9, 41, 67, 224
long-term persistence of 79–87
religion and economic growth 71–9
US 194
D

da Gama, V. 104
Darity, W. 160
“Dark Ages” 26, 134
Davis, D.R. and Weinstein, D.E. 19–20
de la Croix, D., Doepke, M., and Mokyr, J. 55
de Vries, J. 152, 158
and van der Woude, A. 147, 152–3, 162–3
death/mortality rates
and birth rates, Malthusian model 90–2
colonial settlers 114, 115
impact of Black Death 92–4, 96
infant 21, 88
Dell, M. 116
and Olken, B.A. 121–2
democracy
Athenian 50, 56, 59
and autocracy 48–9
cultural beliefs and norms 67
education and Protestant missionaries 123
demographic transition 101–2, 183–5
Deng Xiaoping 217, 219
Denmark: butter industry 189
Dennison, T. and Ogilvie, S. 100–1
Derenoncourt, E. 159
Desierto, D. and Koyama, M. 45
Desmet, K. and Parente, S. 162
Diamond, J. 19, 22, 23, 32, 132
Dias, B. 104
Dippel, C. 117
disease
Africa 21, 114
among rich (18th century) 88
animal–human interactions 23–4
Black Death 6, 92–6, 99, 135, 152, 153
Dittmar, J,
and Meisenzahl, R. 74
and Yuchtman, N. 75
Donaldson, D. 32, 120–1
and Hornbeck, R. 31, 193
Drelichman, M. and Voth, H.-J. 60, 140
Dutch Cultivation System, Java, Indonesia 121–2
Dutch Republic/Netherlands 140–3, 147–8, 152–3, 162–3, 164
Protestantism 75–6
Dutch Revolt 141
E

East Asian Tigers 207–11

East India Company (British) 108, 142, 200
East India Company (Dutch) 147
economic freedom and rule of law 39–40
economic growth 3–8
uneven diffusion of modern 185–90
see also catch-up growth
economic and political institutions 49–52
education
China 215, 219
colonial investment/legacy 116–17, 122
Islamic vs. secular and scientific 78
Japan 204, 205–6
and missionaries 123–4
and Protestantism 73–4
Second Industrial Revolution 182–3
and unified growth theory 102, 103
US 193
see also human capital investment
Edward I of England 57–8, 143
Eltis, D. and Engerman, S. 159–60
Engels, F. 178–9
Engerman, S. and Sokoloff, K. 193
England see Britain/England
Enlightenment: Republic of Letters 171–4
Epstein, S.R. 55
equal rights 49–52
ethnic factionalism/partition and colonization 111–13, 119
Eurasian steppe and state formation 130, 132–3
Europe 129–31
and Atlantic trade 32–3, 137–8, 139
divergence within 137–40
geography and institutional development 131–4
medieval period 134–7
parliaments and rise of limited government 56–8, 59, 140–7
post-Roman invasions and political fragmentation 133–4
see also colonization
European and Islamic rulers, duration of rule 78, 79
European Marriage Pattern (EMP) 97–101, 138
European take-off and culture 68–71
extractive institutions
colonial 113–17, 121–2
and inclusive institutions 50–1
extreme poverty see poverty/extreme poverty
F

famine
China 216, 217
pre-Black Death 93–4
Soviet Russia 196
Feinstein, C.H. 8, 177
Fernández, R. and Fogli, A. 85
Fernández-Villaverde, J., 46
and Koyama, M., Lin, Y., Sng, T.-H. 132
fertility/birth rates see demographic transition; European Marriage
Pattern (EMP); Malthusian model
Finley, M., 69
fiscal capacity 58–64
Florence, Italy 50, 62, 94, 136
Floud, R. 9
Fogel, R.W. 9, 31
Foreman-Peck, J. 100
“fractured land” hypothesis 132
France
birth rate 184–5
and England 32, 33, 42, 46, 94, 95, 122
legal system 46, 47
parlements 58
property rights 42, 43
Frankema, E.H.P. 122
and van Waijenburg, M. 120
Franklin, B. 71, 194
Friedman, B.M. 5
Fukuyama, F. 134–5, 218
G

Galbraith, J.K. 201

Galor, O. 97, 98, 102, 182, 185–6
GDP measurement 4, 5–6, 7, 8–9
gender norms 85–7
Gennaioli, N. and Voth, J.-H. 64
geography 19–20, 35–6
East Asian Tigers 209
Eurasian steppe 132–3
and industrialization 32–5
and institutional development 131–4
and modern development 20–2
topography and climate 24–7
and transport infrastructure 27–32
Germany
catch-up growth 181, 186–7
European Marriage Pattern (EMP) 97, 101
Hansa guild 55
legal system 46, 47
Protestantism 71, 73, 75–6
Glahn, R. von 213
globalization, first era of 189–90
Goldin, C. 193
and Katz, L. 182, 193
Glorious Revolution (1688) 61, 144–5, 146
“Golden Age of Islam” (7–10th centuries) 76–7
Goldstone, J.A. 6, 147
Gorbachev, M. 196
Great Divergence debate 14, 34–5, 106–7
Great Enrichment 129
Great Leap Forward, China 216–17
Gregory, P. 195–6
Greif, A. 38–9, 40–1, 53–4, 67, 80–2, 83
and Milgrom, P., Weingast, B.R. 55
and Rubin, J. 45, 143–4
and Tabellini, G. 82
growth reversals 7
former colonies 11, 13, 114, 116
guilds 54–6, 101, 143, 164
Guinnane, T.W. 184
Gulick, S. 68
Gupta, B. 108, 200–1
H

Habsburg monarchy 84, 138, 139–40, 141

Haggard, S. 210, 211
Hajnal, J. 97, 98
Hargreaves, J.: spinning jenny 165–166, 168
Harley, C.K. 161, 194
Harper, K. 25, 103
Hayek, F.A. 66
height
historical estimation of wealth 9
and length of continents 22–3
Heldring, L., Robinson, J.A., and Vollmer, S. 154
Henrich, J. 66, 80, 102, 135
Henry II of England 143, 144
Henry III of England 57
Henry V of England 2
Henry VII of England 143, 144
Henry VIII of England 75, 143, 144
Henry, Prince of Portugal 104
Hobsbawm, E.J. 160, 179
Hoffman, P.T. 62
Hong Kong
as British colony 210, 214
see also East Asian Tigers
Hornbeck, R. and Rotemberg, M. 32, 193
household formation and European Marriage Pattern (EMP) 96–101
Huillery, E. 122
human capital investment
demographic transition in Britain/England 185, 186
East Asian Tigers 211
and European Marriage Pattern (EMP) 100
Imperial China 215
Japan 204–6
and Second Industrial Revolution 180–3
and unified growth theory 101–2, 103
US 194
see also education
I

immigration, US 194, 195

inclusive and extractive political institutions 50–2
India 200–2
British Raj 201
economy 108, 201
and Princely States 117
railroads 32, 120–1
taxation institutions 117, 118
extreme poverty 202
independence and economic planning 201
protectionist policy 209–10
war 63
individualism
US 194
vs. kin-based cultures 79–82, 215–16
Industrial Revolution, Britain 9, 14, 129, 149–51, 174–5, 224
and agrarian capitalism 95
capitalist agriculture 153–4
consumer revolution 151–3, 158
cotton textiles 160–1, 165–6, 167, 168, 171
demography 99–100
enlightened economy 171–4
and fruits of 176–80
geography 20, 33–5
innovative economy 165–6, 167
 market size 161–2
mercantilism and Empire 156–8
political institutions 154–5
skilled mechanical workers 163–5
state capacity 162–3
transatlantic slave trade 108, 109, 110, 158–60
and unified growth theory 102
wages and innovation 168–71
see also Second Industrial Revolution
industrialization
and climate change 5, 225
and geography 32–5
and Protestantism 73–4
see also catch-up growth; modern economy, rise of
“industrious revolution” 152–3
infant mortality 21, 88, 100
infanticide, East Asia 101
inheritances laws
Europe 99
Islamic 77
Inikori, J.E. 108, 159–60
innovation see technological innovation
institutions 11, 37, 64–5, 130–1, 187–90, 223–4
colonial 113–17, 121–2, 199–200
and culture 38–9, 41, 67, 223–4
definitions and frameworks 38–41
economic and political 47–52
and European Marriage Pattern (EMP) 100–1
 geography and development of 131–4
guilds 54–6, 101, 164
individualistic vs. kin-based cultures 82
legal systems 43–7
parliaments and limited government 56–8, 59, 140–7
property rights 41–3
war and state finances 58–64
see also Commercial Revolution; political institutions
intellectual elites 171–4
intellectual property rights 155
Irwin, D. 194
Islam, influence of 72, 76–9
Italy
city-states 62, 80–2, 135–6, 137
merchants 53–4, 62
North–South cultural divide 79–82
Iyer, S. 117
Iyigun, M., Nunn, N., Qian, N. 27
J

James I of England 144

James II of England 144
Japan 202–6, 220, 224
Eurocentric perspective on culture 68
fertility restrictions 101
geography 19–20, 25
Java, Indonesia: Dutch Cultivation System 121–2
Jedwab, R.
and Johnson, N., Koyama, M. 94–5
and Moradi, A. 121
Jesuit missions, South America 123, 124
Jews 27, 45, 57, 74
traders in North Africa 53, 80–2
John of England 2, 56–7
Johnson, N. and Koyama, M. 45, 147, 161
Jones, E. 132
K

Kamen, H. 96
Karaman, K. and Pamuk, S. 61
Kaufmann, D., Kraay, A., Mastruzzi, M. 41, 42
Kelly, M.
and Mokyr, J., Ó Gráda, C. 156, 162–4, 177
and Ó Gráda, C. 156, 166, 171
kin-/clan-based cultures 79–82, 134–5, 215–16
Ko, C., Koyama, M, and Sng, T.-H. 133
Kohli, A. 200
Koyama, M. 152
and Moriguchi, C., Sng, T.-H. 203–5, 213
Kuba Kingdom, Congo 84–5
Kuran, T. 47, 77, 108, 131
and Rubin, J. 37
L

La Porta, R., de Silanes, F.L., Shleifer, A., Vishny, R.W. 46

labor
Britain/England
agriculture 153–4, 177
Black Death, impact of 94, 95–6
Industrial Revolution 163–5, 174, 178–9
education 182
European Marriage Pattern (EMP) 98–9
forced 114, 116, 158, 160
“industrious revolution” 152–3
slave trade and 158–60, 191–2
women 85–7, 99, 101, 138, 205
see also wages
Lamoraux, N. 43
Lampe, M. and Sharp, P. 189
Landes, D.S. 70, 71
Lankina, T. and Getachew, L. 123
legal systems 37, 43–7
see also Islam
Lemire, B. 152
Lenin, V. 196
Leopold II of Belgium 116
life expectancy 88, 89
as measure of living standards 9
Little Ice Age 26–7
Low Countries 24–5, 62, 139, 141
Lowes, S.
and Montero, E. 116
and Nunn, N., Robinson, J., Weigel, J. 84
Luther, M. 73
M

Ma, D. 206
and Rubin, J. 155
Macartney, G. 70
Macaulay, T. 179–80
McCloskey, D.N. 69, 129, 134, 153, 160
Maddison, A. 8
Magna Carta 56–7
Majewski, J. 191–2
malaria 21, 114
Malthus, T. 88–9, 96–7, 179, 184
Malthusian model 89–92, 96–7, 101–2, 178, 185, 216
and Black Death 92–6
Mann, C. 24
manufacturing see Industrial Revolution, Britain; modern economy, rise
of
Mao Zedong 216–17, 219
market access 31–2, 136, 193
market economy 151–2, 213, 216
market exchange 151
markets
and competition 38, 215, 223
expansion of 28
and geography 24
and growth 223
and immigration 194
 and innovation 162, 223
integration of 29, 121, 156, 162, 213
size, Britain: Industrial Revolution 161–2, 191
marriage 80, 81, 135, 183, 184
see also European Marriage Pattern (EMP)
Marshall, M.G. and Elzinga-Marshall, G. 48
Marx, K. 106, 154
and Engels, F. 178–9
McLean, I. 189
measurement of wealth 1–2, 4, 5–6, 7, 8–10
medieval period 134–7
see also Commercial Revolution
mercantilism and Empire, Britain: Industrial Revolution 156–8
merchant guilds 55–6
Michalopoulos, S. and Papaioannou, E. 117–19
Middle East 137
Arab Spring 67
capital investment 42–3
European colonization 108
Islam, influence of 76–9
Mill, J.S. 179
mining
coal 168–9, 170
precious metals 114, 116, 139
missionaries 70, 122–4
modern economy, rise of 9, 129–30
and colonialism 106
 demographic transition 101–2, 183–5
East Asian Tigers 207–11
European Marriage Pattern (EMP) 99–100
Industrial Revolution and fruits of 176–80
Japan 202–6
Second Industrial Revolution 180–3
Soviet Russia 195–7
uneven diffusion of modern economic growth 185–90
US 190–4, 195
Mokyr, J. 35, 155, 160, 171–4, 175, 180, 181, 182, 192, 215
and Nye, J.V.C. 146
and Sarid, A., van der Beek, K. 163
monarchy
disease and life expectancy 88
England 143–6
Habsburg 84, 138, 139, 140, 141
and parliaments 56–8, 60–1, 143–7
Montesquieu, C. de 19, 25, 134
mortality see death/mortality rates
mountains 132
coasts, and climate 24–7
ruggedness of terrain 11, 12, 25
N

Native Americans 117

natural experiments 41, 83–4
natural resources see resources
natural state and open-access order systems 51–2, 57, 187
Needham, J. 70, 214
Nef, J.U. 33–4
Nehru, J. 201
Nelson, R.R. and Phelps, E.S. 182
Netherlands see Dutch Republic/Netherlands
Newcomen, T.: steam engine 168–9
Nigeria 199–200
and South Korea, per capita GDP 207
norms
cultural beliefs and 38–9, 41, 66–7
gender 85–7
persistence 79–87
trust 82–5
North, D.C. 38, 139–40, 180, 190–1, 193
and Thomas, R.P. 38
and Wallis, J.J., Weingast, B.R. 51, 52, 57, 187
and Weingast, B.R. 145
North–South cultural divide, Italy 79–82
Nunn, N. 110, 111, 112, 113
and Puga, D. 11, 12, 25
and Qian, N. 27, 107
and Wantchekon, L. 11, 111
O

Ober, J., 50
Ogilvie, S. 55–6, 101
open-access order and natural state systems 51–2, 187
Ottoman Empire 37, 78, 84, 105, 155, 187, 188
P

Pamuk, S. 94
parliaments
and limited government 56–8, 59, 140–7
and Protestantism 75
Pascali, L. 189
patent system, Britain 155
Pavlik, J.B. and Young, A.T. 24
Peel, R. 70, 168
Philip II of Spain 33, 60, 139, 141, 155
plagues see Black Death
Platt, B. 204
Platt, S.R. 70
political fragmentation
and cultural unity, Europe 173, 214
and topography 130, 132, 133–4
political institutions 47–9
Britain: Industrial Revolution 154–5
China 214–15, 217–20
East Asian Tigers 210–11
and catch-up economic growth 187–8
and economic institutions 49–52
Soviet 196–7
US 192–3
see also parliaments
political legitimacy
 China 214, 219
Islamic societies 77–9
Protestant societies 75–6, 141, 143–5
Pomeranz, K. 14, 34–5, 85–7, 213
population 88–9, 102–3, 138
Black Death 92–6
change and transition to modern economic growth 101–2, 183–5
China 215–16
East Asian Tigers 211
England 149, 150, 156, 157, 178, 179, 183–4, 186
household formation and European Marriage Pattern (EMP) 96–
101
pre-industrial Malthusian pressure 89–92
US 190, 194, 195
Portugal: colonialism 104, 106, 107, 108, 109
poverty/extreme poverty 198, 201–2, 222
Africa 111, 112
China 212, 216
decline of 2–3, 4, 15
India 201–2
and pre-industrial population pressure 89–92
primitive accumulation and colonization 106
printing presses 78, 123, 136–7, 187
property rights 41–3, 46, 139–40, 145–6, 201, 204
intellectual 155
protectionist policies
India 201, 209–10
 US 193–4
Protestantism
education 73–4
missionaries 123, 124
as source of political legitimacy 75–6
Spanish Habsburgs and Dutch Revolt 141
work ethic and capitalism 71–3, 194
Prussia 61, 73–4, 182
public goods and colonization 120–2
Q

Qianlong Emperor of China 70, 71

R

railroads
Britain 29
British India 32, 120–1
US 31–2, 193
religion 71–9
missionaries 122–4
see also Catholicism; Islam; Protestantism
rents 51
craft guilds 54, 55
elites 136, 146, 196, 201
monopoly 57, 140
Republic of Letters, Europe 171–4
resources
and colonization 106–7, 113–19
and industrialization 33–5
resource curse 132, 140
“reversal of fortunes”: former colonies 11, 13, 114, 116
Ricardo, D. 179
Richardson, G. 54
Richerson, P.J. and Boyd, R. 66
Roman Climatic Optimum 25–6
Roman Empire 103, 109
elites 69, 105, 224
and post-Roman invasions 133
transport infrastructure, impacts of 27–9, 32, 33
Roman law 46
Rosenthal, J.-L. 43
and Wong, R.B. 62–3
rubber extraction, Belgian Congo 114, 116
Rubin, J. 72, 75–6, 77–8
ruggedness of terrain 11, 12, 25
see also mountains
rule of law 39–40, 41, 42, 54, 57, 65, 218
autocracies vs. democracies 49
vs. rule by law 45
Russia 61, 84
Soviet 195–7, 223
S

Sā’id, Abū-Qāsim 19, 25

Sachs, J.
and Maloney, P. 21
and Warner, A. 132
Saito, O. 204
Scheidel, W. 29, 64, 134
science and technology
China vs. Europe 70–1
Dutch Republic 147–8
Republic of Letters 171–4
Second Industrial Revolution 180–3
see also technological innovation
Second Industrial Revolution 180–3
serfdom, feudal system and Black Death 95–6
Shiue, C. 161
and Keller, W. 133, 213
Singapore see East Asian Tigers
skilled mechanical workers, Britain: Industrial Revolution 163–5, 174
slave armies, Middle East 78
slave trades 109–13
and slave labor 158–60, 191–2
Smith, A. 28–9, 140, 162, 213, 223
Solow, B.L. 158–9, 160
Solow model of economic growth 185–6
South American colonies see Portugal; Spain
South Korea
and Bolivia 39–40
and Nigeria 207
and North Korea 40–1
see also East Asian Tigers
Southey, R. 179
Soviet Russia 195–7, 223
Spain
decline of 139–40
Dutch Revolt 141
parliaments 56, 59
Philip II 60
South American colonies 33, 104, 106, 107, 114, 118, 138, 140
spinning jenny 165–6, 168
spinning mule 166, 167
Spolaore, E. and Wacziarg, R. 184–5
Stalin, J. 196
Stasavage, D. 59, 62, 63, 135
state finances and war 58–64
state formation
China 132–3
paths to 61–2
steam engine 168–70
steamships 188–9
sugar 121–2
and other luxury goods 108, 158–9
sustained economic growth 6–8, 9, 69, 129, 138, 149, 179, 223, 224
T

Taiwan see East Asian Tigers

tariffs, US 193–4
taxes/revenues 57–8, 59–62, 141
Britain 163
China, Qing dynasty 213
European colonies 116–17
Japan 204–5
technological innovation
and agriculture 6, 22–4
climate change mitigation 225
Industrial Revolution 155, 165–71, 174, 178–9
Middle Ages 136–7
Second Industrial Revolution 180–3
transportation 30–2
uneven diffusion of modern economic growth and 185–90
unified growth theory 102
US 192–3
war 62, 188
see also science and technology
Thompson, E.P. 179
Tilly, C. 61–2
transatlantic trade see Atlantic trade
transport infrastructure 27–32, 33, 188–9
US 31–2, 192–3
trust
Africa 11, 111
cultural differences 79–82
persistence of 82–5
U

unified growth theory 102, 103

urban and rural effects of war 62–3
urbanization 8, 107
Black Death, impact of 96
and industrialization, Britain 156–8
reversal of fortunes in former colonies 13
Western Eurasia 76–7
US 1, 7, 31–2, 50
Native Americans 117
regional subcultures 66–7
rise of modern economy 190–4, 195
V

Valencia Caicedo, F. 123–4

van Bavel, B. 43
and Buringh, E., Dijkman, J. 42–3
van Zanden, J.L. 164
and Buringh E., Bosker, M. 56, 61
and Prak, M. 135
Venice 24–5, 62, 136
Voigtländer, N. and Voth, H.-J. 96, 99–100
Voltaire 172, 214
Voth, H.-J. 153
Vries, P. 163, 204–6
W

wages
Black Death, impact of 94–5, 96, 97, 152
European Marriage Pattern (EMP) 138
Industrial Revolution, Britain 168–71
and prices, historical estimation of wealth 8–9
real, and GDP per capita income 177–9, 203
Wallis, P. 164
war
and climate 27
English Civil Wars 144
and industrial technologies 188
Napoleonic 178, 188
and state finances 58–64
and wages 96
Wars of the Roses 143
World War II 19–20, 206, 211
water frame 166, 167, 168
water transport 24–5
steamships 188–9
Watt, J.: steam engine 169, 170, 179
Weber, M. 71–3, 76, 194
Whatley, W.C. and Gillezeau, R. 111, 113
White, L. 201
William of Orange 141
and Mary 144–5
Williams, E. 108, 158, 159
Williamson, O. 43
Wong, B. 214
Woodberry, R. 123
Wooten, D. 168
World Bank 199, 202, 207, 208, 212
World Bank Governance Index (WBGI) 41, 42
Wrigley, E.A. 34
and Davies, R.S., Oeppen, J.E., Schofield, R.S. 98
and Schofield, R.S. 183, 186
Wright, G. 192
Wright, M. 215
X

Xi Jinping 219
Xue, M.M. 85–7, 214–15
POLITY END USER LICENSE AGREEMENT
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 Table of Contents
Dedication
Title Page
Copyright
Preface
1 Why, When, and How Did the World Become Rich?
What Is Economic Growth?
Measuring the Past
What Will You Learn from This Book?
What This Book Does Not Do
Part I Theories of How the World Became Rich
2 Did Some Societies Win the Geography Lottery?
Geography and Modern Development
Mountains, Coasts, and Climate
Geography and Transport Infrastructure
Geography and Industrialization
Chapter Summary
3 Is It All Just Institutions?
What Are Institutions?
Property Rights
The Legal System
Political Institutions
More Equal Rights for All
Institutions and the Commercial Revolution
Between the State and the Market: Guilds
Parliaments and Limited Government
War and State Finances
Chapter Summary
4 Did Culture Make Some Rich and Others Poor?
What Is Culture and Why Does It Matter?
Can Culture Explain the European Take-off?
Does Religion Affect Economic Growth?
The Protestant Work Ethic and the “Spirit” of
Capitalism
 If Not a Work Ethic, Why Did Protestant
Countries Grow Faster?
The Reformation and Religion as a Source of
Political Legitimacy
Is Islam the Cause of Middle Eastern
Economic Stagnation?
The Long-Term Persistence of Culture
The North–South Italy Divide
The Persistence of Trust Norms
Gender Norms
Chapter Summary
5 Fewer Babies?
Malthusian Pressures
The Black Death
Household Formation and the European
Marriage Pattern
Did the EMP Spur Economic Growth?
Reasons for Skepticism
Demographic Change and the Transition to
Modern Economic Growth
Chapter Summary
6 Was It Just a Matter of Colonization and Exploitation?
How Did the Colonizers Benefit?
The Slave Trades
The Resource Grab
Some Silver Linings of Colonialism?
Public Goods and Education
Missionaries
Chapter Summary
Part II Why Some Parts of the World Became Rich First, Why Other Parts
Followed, and Why Some Are Not There Yet
7 Why Did Northwestern Europe Become Rich First?
How Geography Shaped Institutional
Development
Why Was There No Medieval European Take-
off?
 Divergence within Europe Just before the
Take-off
Parliaments and the Rise of Limited,
Representative Government
Chapter Summary
8 Britain’s Industrial Revolution
A Consumer Revolution
Capitalist Agriculture
Do Political Institutions Explain Britain’s
Industrialization?
Mercantilism and Empire
Does the Transatlantic Slave Trade Explain
Britain’s Industrialization?
Was It Cotton?
Was It Market Size?
How About State Capacity?
Maybe It Was Skilled Mechanical Workers?
An Innovative Economy
High Wages and Induced Innovation
An Enlightened Economy
Chapter Summary
9 The Rise of the Modern Economy
The Fruits of Industrialization
The Second Industrial Revolution
The Demographic Transition
The Uneven Diffusion of Modern Economic
Growth
How the US Became Rich
The Soviet Detour
Chapter Summary
10 Industrialization and the World It Created
Delayed Catch-up: The Shadow of
Colonization (and Other Factors)
How Japan Became Rich
How the East Asian Tigers Became Rich
How China Is Becoming Rich
Chapter Summary
 11 The World Is Rich
References
Index
End User License Agreement