Economic History and Development: A Concise Overview
1. What is Economic History?
Economic History is the study of past economies. It’s a branch of both Economics and History.
Studying the past allows a better understanding of the present, similar to medical history. It helps to check the limits of economic theories and explain the historical evolution of society, although it’s not the sole explanation (Historical Materialism). Non-economic variables can be more influential.
Economic History studies “economic change” in the long run, considering both economic and non-economic variables.
2. The Factors of Production
The “classical” factors of production are Land, Labor, and Capital. The Industrial Revolution accelerated economic change, leading intellectuals to question why.
Production Function: Y = F (L, K)
We can also include technological and managerial factors. Organization is also crucial as a factor of production.
Robert Solow, in his book “Technical Change and the Aggregate Production Function,” stated that classical factors explain 12% productivity increase in the USA (1910-1949).
3. Economic Development: Basic Concepts
Economic development is the increase in output per inhabitant (GDP per capita).
Measuring economic development requires two variables: GDP and population.
The “law of diminishing returns” explains recession.
“Given a fixed amount of Land and Capital, marginal productivity declines when labor reaches a certain level.”
Marginal productivity is the increase in output by each new worker.
An example is adding more workers to assemble a car. At some point, adding more workers leads to inefficiencies.
According to this law, population growth will decline marginal productivity, output per capita, and total output.
Overcoming Diminishing Returns
- Increasing the amount of land and/or capital (not always possible)
- Introducing innovation, such as unemployment (likely meant technological innovation)
Thomas Malthus argued that humanity is condemned to a subsistence standard of living due to population growth outpacing food supply.
“Positive checks” (war, famine, disease) would periodically reduce the population, balancing demand and supply.
Malthus was wrong, as he didn’t foresee the Industrial Revolution’s impact on food production.
With technology, capital, and land fixed, GDP and population have a ceiling. Innovation can raise this limit. Increased employment and productivity lead to higher wages and better income distribution, as seen in Europe since the Middle Ages. However, poverty persists in the developing world.
Population and the Future
Is population growth threatening the planet’s future?
Neo-Malthusianism argues that overpopulation negatively impacts the quality of life for the poor.
Economic development is linked to the “demographic transition.”
Developing countries have grown faster than developed countries in recent decades.
Ester Boserup argued that population determines agricultural methods. “Necessity is the mother of invention.”
However, low fertility rates can hinder agricultural development.
4. Economic Development and Progress
Is economic development the same as progress?
Progress often equates to wealth. The Myth of Indefinite Progress claims the future is always superior to the present.