Economic History: Growth, Development, and Progress
1. The Task of Economic History
The task of economic history is to explain the structure, functioning, and performance of economies over time.
Structure
This refers to the characteristics of societies considered key determinants of economic and political outcomes. These include:
- Economic and political institutions
- Technology
- Population
- Ideologies
Economic history studies how these structures change over time. For example, it examines how population growth, technological advancements, evolving institutions, and shifting ideologies influence economic development.
Functioning and Performance
Economists typically focus on:
- The quantity of production (GDP)
- The distribution of costs and benefits
- The stability of production
When analyzing performance, the primary issues are total production, per capita production (GDP/population), and income distribution.
Standard of Living
A key measure of economic performance is the standard of living, which reflects how well people can satisfy their consumption desires. Factors influencing the standard of living include wages, diet, housing, purchasing power, and leisure time. A crucial indicator is the real wage, which measures a worker’s purchasing power:
Real Wage = (Nominal Wage / Cost of Living Index) * 100
2. Key Concepts
Growth, Development, and Progress
- Economic Growth: A sustained increase in the total output of goods and services in a society, typically measured by GDP.
- Economic Development: Economic growth accompanied by significant changes in the structure or organization of the economy. This involves transformations that advance or modernize society.
- Progress: While often equated with growth and development, progress is distinct. It relates to the distribution of income and overall societal well-being.
Factors of Production
The major factors of production are land, labor, and capital (investment). Technological and institutional changes also play significant roles.
Production and Productivity
- Production: The process of combining factors of production to create goods and services.
- Productivity: The relationship between the output produced and the factors of production used, including costs. It reflects efficiency.
- Total Factor Productivity: The improvement in efficiency and the extent to which an economy grows due to better utilization of its factors of production.
Other Important Concepts
- Human Capital: Investment in knowledge, skills, and training.
- Law of Diminishing Returns: A concept relevant to pre-industrial economies, where continuous cultivation of the same land eventually leads to reduced output.
- Economic Structure: The relationship between different sectors of the economy, primarily the primary (agriculture), secondary (manufacturing), and tertiary (services) sectors.
3. Long-Term Economic Growth
During the first millennium CE, population and per capita income remained largely stagnant. The second millennium witnessed significant increases in both population and GDP. Until 1820, growth was primarily extensive, meaning that output increased proportionally with population. Life expectancy doubled, but productivity remained limited. Resources grew arithmetically, while population grew geometrically.
Starting in England, structural changes and technological advancements led to an acceleration of growth, overcoming the Malthusian trap. Industrialization shifted the focus from increasing the quantity of factors of production to improving their overall productivity.
4. Causes of Long-Term Growth
Immediate Causes
Before industrialization, growth primarily depended on increasing the supply of labor and natural resources. With industrialization, the emphasis shifted to improving the overall productivity of these factors.
Ultimate Causes
Two major economic revolutions shaped long-term growth:
- The Neolithic Revolution: The transition to agriculture and settled life, which allowed for increased production and accumulation of wealth.
- The Industrial Revolution: The transformative period marked by technological advancements, particularly in Britain. Trade and colonialism played key roles in the divergent paths of Atlantic and Western European countries. Overseas expansion enabled Britain to import resource-intensive goods, crucial for its industrialization. British naval and military power secured its dominance, contributing to the growth of its empire.
5. Growth and Inequality
In 2001, OECD countries (primarily former colonial powers) accounted for 52% of global GDP with only 14% of the world’s population, highlighting significant global inequalities.