Most economic historians would agree with the statement that exponential economic growth is a rather recent phenomenon, given the relatively long history of mankind. Indeed, only with the onset of the Industrial Revolution did many European nations start to experience the long-lasting and irreversible increases in per capita income that are nowadays a common feature of the industrialized world. We take it now for granted that every generation is materially better off than the previous generation, as rising living standards have become the norm in Western societies. However, economic growth as we experience it today was by large an unknown phenomenon in most pre-industrial economies. This does not mean that societies before the Industrial Revolution did not experience any increases in living standards at all, but periods in which economic progress occurred were often followed by lengthy eras of stagnation. Moreover, major economic disruptions, such as wars and famines, were extremely common, leading in many cases to very sudden and pronounced reversals in the standard of living, thereby eliminating all the advances that were made by previous generations within a short span of time.
In what follows I will focus primarily on the different types of economic growth that commonly occurred before the Industrial Revolution. The main interest here is to address the question why economic growth in most pre-industrial societies was quickly running out of steam before long-lasting and pronounced increases in per capita income started to materialize. I will also briefly elaborate on the set of factors that eventually allowed Western economies to escape the pre-industrial growth regime. I will mostly restrict my attention to European societies. Nevertheless, the occasional comparative analysis with other major economies, most importantly China and Japan, helps to put some of the economic developments into context. For the sake of brevity, I focus exclusively on the time period stretching from the Middle Ages to the onset of the Industrial Revolution.
2. Economic growth in pre-industrial societies
For the following discussion it is of crucial importance to define the concept of economic growth. The term commonly refers to an economy displaying a long-run rise in the level of per capita income, which usually exhibits a high degree of correlation with the standard of living. That is, of course, because higher per capita incomes allow for an expansion of the consumption bundle of the average individual, thus increasing his or her material wellbeing.
Economic growth is obviously an extremely complex phenomenon because there are a great many factors that can lead to increases in the average income per person. According to Mokyr (1990), one can in general distinguish between four different types of economic growth that can occur within an economy: Solovian growth, Smithian growth, the scale effect, and Schumpeterian growth.
Solovian growth, named after Nobel prize winner Robert Solow, simply refers to the accumulation of capital. Holding all other factors of production constant (e.g. labor and land), an increase in the capital stock raises the labor productivity and can thus lead to income gains. However, additional units of capital are increasingly less productive as more and more capital gets accumulated. This is the concept of diminishing returns. Accordingly, Solovian growth must always be transitory in nature since the effect of an increase in the investment rate eventually phases out (Mokyr, 1990).
Smithian growth is based on Adam Smith’s well-known principle of the division of labor. The basic idea is that individuals are more productive if they specialize into one single occupation instead of producing a variety of goods at the household level (home production). A market-based economy allows individuals to trade their produce or service for money so that they can in turn purchase all the goods and services they desire themselves. One should note that these gains from trade can materialize at different scales. Specialization can occur within smaller geographical units, e.g. cities or counties, but also between regions or even countries (Smith, 1776).
The scale effect refers to externalities, such as productivity spillovers, which can arise from increased agglomeration (Mokyr, 1990). Urbanization tends to be in general highly correlated with income per capita. The direction of causality is obviously hard to interpret. However, most infrastructure investments, for example, only pass a cost-benefit analysis at a certain population size because of high fixed costs that should be spread out over as many individuals as possible. This “economies of scale” aspect of infrastructure investments means that the initial economic gains from increased urbanization are potentially quite large.
Finally, Schumpeterian growth is based on the idea of “creative destruction”. The invention of new technologies and innovations for the production process allows for increased efficiency, i.e. producing the same amount of output with fewer inputs. Productivity increases as new production units replace outdated ones. Economists mostly agree that this process of technological progress is the only reliable source of long-run increases in per capita income (Mokyr, 1990).
During the longest part of human history technological progress seems to have been extremely slow-paced or even entirely absent so that advances in living standards were stalling as well. In what follows, I will discuss how most of the increases in per capita income in Western Europe before 1800 were based on the first three types of economic growth just mentioned above. However, the common characteristic inherent to all of them is that they face the binding constraint of diminishing returns. The positive effects of increasing capital accumulation, greater specialization of labor, and higher urbanization quickly die out once certain threshold values are attained. Furthermore, other dynamics, such as rapid population increases, exert a strong countervailing force against these economic growth factors. Productivity gains must at least attain population growth rates in order to ensure a stable level of per capita income, a condition that was not always satisfied before the 1800s. Indeed, North and Thomas (1973) note that real wages fell significantly during the 13th century in Western Europe, for example, since a fixed supply of agricultural land had to accommodate a quickly growing population. The lack of innovation in agriculture, by far the largest sector of the economy back then, led to falling levels of output per worker, thus explaining the general decline in wages. Moreover, other “Malthusian checks”, such as wars, plagues, and famines, also were a constant threat to pre-industrial societies. Entire regions or even countries were frequently exposed to such large-scale exogenous shocks, which had the potential to disrupt the economic system for years or even decades to come. Most parts of Europe, for example, suffered immensely from reoccurring outbreaks of the plague during the entire 14th century. Some estimates suggest that the population in Western Europe fell from about 75 million in 1300 to only 45 million in 1400, a decline of almost 40 percent. Interestingly enough, real wages actually rose during that century because the wipeout of a significant part of the population led to a scarcity of labor, which prevailed for more than a century (North and Thomas, 1973). Nevertheless, rising labor compensations did not necessarily translate into an increase in living standards during such a time of social and economic turmoil. It is extremely plausible that the negative effects stemming from the disruption in trade and economic activity in general as a result of the massive population losses outweighed the positive effect from somewhat higher wages. Moreover, that century was also characterized by frequent plundering and warfare. It is thus hard to see how economic welfare could have actually increased during a century in which Western Europe suffered a series of large-scale economic disruptions (North and Thomas, 1973).
One should be aware that Europe did experience the occasional period of economic stability, sometimes accompanied by measurable income gains for large parts of the population. However, my subsequent discussion of the Middle Ages exemplifies how any such progress before the Industrial Revolution was usually short-lived. That is because economic growth in pre-industrial societies primarily rested upon factors that would quickly run into diminishing returns. Increasing specialization and the associated gains from trade, for example, could definitely provide an upward push to the average level of income in society. The long-term growth rate, on the other hand, would largely remain unchanged at a constant rate barely higher than zero. The crucial ingredient missing in pre-industrial economies was the long-lasting stream of innovations and technological progress that industrialized countries have grown accustomed to in the modern era. With the absence of Schumpeterian creative destruction, societies managed to achieve the occasional leap forward, only to get pushed back again once Malthusian constraints started to become binding. Malthus himself obviously referred to the fixed supply of land and considered this to be the factor of production that would eventually hold back economic progress in the long-run. The subsequent era of modern economic growth characterized by rising living standards despite rapidly growing populations obviously proved him wrong (Malthus, 1809).
Interestingly enough, some modern scholars argue that the most binding constraint to economic growth is the availability of cheap and efficient energy sources. Wrigley (2010) makes a strong case for coal being the most important factor leading to Europe’s economic take-off in the 19th century. He correctly points out that the organic economies of the pre-industrial era, where all products are ultimately based on raw materials, could have never reached the production of goods and services on a scale such as it exists in industrialized economies today. According to this view, modern economic growth is reliant on the use of efficient energy sources. Large-scale industrial production is simply impossible without access to electricity, which is still generated for the most part by fossil fuels, e.g. coal, oil and natural gas. Wrigley (2010) thus asserts that it is the intensive use of coal as an energy source that made the British Industrial Revolution possible and thus eventually cleared the path for the modern era of exponential economic growth.
3. The Middle Ages
The Middle Ages cover the extremely long period from the 5th to the 15th century. This epoch is in general regarded as the “Dark Ages” since it was dominated by lengthy periods of extreme political and economic turmoil. This view has been commonly accepted, but is somewhat unjustified. Scholars often like to contrast the Middle Ages to the preceding centuries, which were a period of relative stability in most of Europe thanks to the Roman rule. This, however, neglects the fact that the “Pax Romana” (Roman Peace) was mostly imposed by military force. In fact, Roman rulers resorted quite often to warfare to expand their area of influence, often oppressing or enslaving the local populations in the newly conquered areas. Prolonged military conflicts occurred rather frequently in certain parts of Europe in the late Antiquity, mostly on the periphery of the Roman Empire.
Nevertheless, the eventual collapse of Rome brought along a lengthy era of economic and political instability. The demise of the Roman Empire was ultimately caused by a combination of internal weaknesses as well as external pressures. The period from the 5th to the 8th century was characterized by large-scale migration movements, also known as the Barbarian Invasions (“Völkerwanderung”), which caused major disruptions in large parts of Europe. Barbarian tribes from Northern Europe and Asia invaded Roman space, often laying waste to the existing villages and towns, as a weakened Roman Empire was unable to fight off the continuous stream of invasions that occurred over several centuries.
The large-scale migratory movements quickly ebbed away after 700, giving rise to a period of economic expansion that lasted for several centuries. Western and Northern Europe during the early Middle Ages (500-1000) was more or less an area that one can describe as vast wilderness. The region was very sparsely populated. Feudalism was the dominant political system that asserted itself with the collapse of the Roman Empire (North and Thomas, 1973). A large part of the population consisted of villeins who were living in small feudal villages, usually concentrated around a manor. The main function of the lord was to provide the villeins with public goods, mostly military protection, as well as land in exchange for labor services. This economic system was thus quite primitive since it was mostly reliant on barter exchanges. Trade between regions was quite limited, mainly a result of extremely low population density, so that feudal villages were for the most part autonomous when it comes to the production of goods and services (North and Thomas, 1973).
North and Thomas (1973) describe the subsequent period, the High Middle Ages (1000-1300), as an era of rapid economic expansion. They assert that Europe’s centre of economic gravity started to shift North during that time. Northern Europe suddenly experienced an increase in the population growth rate, partly because of migration inflows. As diminishing returns and falling productivity in the agricultural sector started to kick in in the more densely populated European core, labor had an incentive to escape this unfavorable dynamic and exploit new arable land at the “economic frontier”.
The increase in the population size led to the formation of towns and the process of urbanization brought along an expansion of trade between formerly more or less autonomous regions. The economy started to shift towards a market system as individuals now favored money-based exchanges over barter (North ad Thomas, 1973). This period was characterized by a modest increase in the standard of living for two reasons. First, the increase in the population size and the resulting growth of towns allowed for a better division of labor. The move away from barter is simply the logical follow-up from increased specialization. A money-based system largely facilitates the exchange of goods and services and thus increases efficiency. Second, the rapid expansion of trade allowed consumers to enjoy a broader variety of goods than previously possible. North and Thomas (1973) note that commerce between Northern and Southern Europe expanded despite significant barriers to trade. Both the Baltic commodity trade (wood products, amber, fur, etc.) and the Italian spice trade (and other “exotic” goods) with the Middle East were mostly executed by shipping, the most efficient mode of transportation. Commercial exchanges between Northern and Southern Europe, on the other hand, were mostly reliant on land routes, implying quite significant transportation costs, especially for more bulky goods.
The expansion of economic activity in Europe during the High Middle Ages was thus mostly the consequence of a greater division of labor as well as an increase in commercial exchanges between regions and countries. The rising living standards were thus for the largest part driven by Smithian gains of trade and agglomeration effects, which would eventually run into rapidly diminishing returns. This does not imply that technological change was completely absent. Mokyr (1990), for example, notes that Northern Europe experienced a widespread adoption of water- and windmills. Furthermore, the introduction of the three-field system allowed for productivity gains in the agricultural sector because it decreased the amount of fallow land thanks to a better crop rotation system. However, the pace of technological change was extremely slow and uneven. Despite its obvious advantage, it took more than a few centuries until the three-field system had spread throughout Europe (North and Thomas, 1973). This example illustrates that not only the invention of new technologies, but also the diffusion of already existing production techniques faced significant barriers during that time period.
The Late Middle Ages (1300-1500) marked a severe break with the previous era of economic expansion. This period was characterized by the aforementioned Malthusian checks. The European population was exposed to wars, famines, and plagues on an unprecedented scale, leading to a general decline in economic activity and the standard of living. The effects were obviously not uniformly spread across the continent as certain countries were more affected than others. There was a general decline in the wage level during the 13th century because a rapidly rising population started to exert downward pressure on productivity in the agricultural sector (North and Thomas, 1973). Absent technological change and given a fixed supply of arable land, an increase in the supply of labor depresses output per person. This produces a ripple effect throughout the entire economy because of the sheer size of the agricultural sector.
The decline in wages was mostly reversed during the 14th century. However, this was by large the result of the plague as well as wars and famines, which eradicated a significant portion of the European population within one century. Britain’s population, for example, fell from about 3.75 million in 1348 to 2.1 million in 1400, a decline of about 44 percent over a period of 150 years. Moreover, it took until 1600, another 200 years, until Britain reached its previous level of about 3.8 million inhabitants again (North and Thomas, 1973). The rapid decline of the British population during the 14th century led to a temporary surge of real wages as labor became all of the sudden the increasingly scarce factor of production. However, the negative welfare effects stemming from the general decline in economic activity as a result of Malthusian checks certainly dominated the positive effect arising from higher labor compensation. It is thus highly plausible that living standards actually stagnated or even declined during that period.
3. The Renaissance and Europe’s eventual economic take-off
The Renaissance (from the 15th to the 17th century) was a highly transformative epoch characterized by rapid economic expansion. European populations recovered from the tragedies of the Late Middle Ages and many scholars assert that Europe started to pull ahead from the rest of the world during this particular time period. Mokyr (1990) notes that there were a multitude of small innovations, so-called microinventions, which led to incremental yet highly consequential changes for later economic development. The diffusion of technical know-how reached unprecedented levels thanks to the invention of the printing press and the ensuing mass production of books. There was significant progress in certain skilled crafts and trades. The emergence of the clock-making industry was of particular importance and contributed to spillover effects in the manufacturing sector.
Pomeranz (2009) emphasizes that various technologies that spread throughout Europe during the Renaissance period were already known in other cultures well before they became widely adopted in Western societies. The Chinese, for example, invented printing and gunpowder centuries before these technologies were first introduced in Europe. They also produced elaborate clocks and other complex mechanical toys that were comparable in quality to the finest Western products. China’s Great Armada of the 15th century was much larger in size and also technologically superior to its European counterparts during that era. The country could have easily monopolized commercial activities in South-East Asia had emperors in the following century not taken the decision to cease naval exploratory activities altogether and prohibit merchants to engage in foreign trade. The decision to move to an extremely inward-looking foreign policy in the 16th century allowed European nations to dominate commerce in South-East Asia and to expand their colonial activities within that region.
A comparative analysis reveals that the two largest Asian economies, China and Japan, had standards of living that were comparable to the most advanced European nations during the greater part of the 18th century. The Chinese population was at least as well-nourished and enjoyed levels of calorie intake and per capita meat consumption similar to what one could observe in Western societies. Some Chinese regions had access to coal deposits, which were exploited on a relatively large scale. Pomeranz (2009) asserts that Chinese per capita energy consumption, agricultural productivity and even average wages were roughly equal to Britain’s on the eve of the Industrial Revolution. A similar story can be told for Japan where life expectancy was higher and urbanization was more pronounced than in 18th-century continental Europe.
The Europe of the Renaissance epoch thus had not reached its status of economic and political superiority it would eventually attain by the end of the Industrial Revolution. Indeed, European living standards, as measured by various economic indicators, did not significantly exceed those of China and Japan by the end of the 18th century. While Europe experienced some far-reaching technological breakthroughs in certain sectors, especially in clock-making and weaponry, Southeast Asia actually did not considerably lag behind Western societies in terms of technological know-how, broadly speaking (Pomeranz, 2009).
North and Thomas (1973), however, emphasize that certain parts of Europe already enjoyed a significant institutional advantage during the Renaissance period. The Netherlands of the 17th century saw the emergence of modern capital markets, which naturally developed as a consequence of the rise of large commercial centers. The Dutch economy experienced the formation of deposit banking, insurance markets, and joint stock enterprises. Financiers were thus already involved in the business of trading IOUs and discounting bills of exchange centuries ago. North and Thomas (1973) assert that financial innovation led to more risk-spreading in society. This was a crucial development that facilitated and enabled the organization of large-scale enterprises, such as long-distance trade, which are commonly way too risky for individual merchants who face more severe capital constraints.
Pomeranz (2009), on the other hand, argues that Europe’s eventual economic take-off was essentially based on a combination of skill in a few crucial activities as well as sheer luck. More specifically, European nation states enjoyed a comparative advantage in armed trade, military conflict and coercion. Europe forcefully pushed for colonization in a veritable race to the top while China showed little interest in expanding its sphere of influence in Southeast Asia. A large part of later European riches would be derived, either directly or indirectly, from the exploitation of indigenous populations and the extraction of natural resources from European colonies in various parts of the world. The infamous “Triangular trade” of the North Atlantic was of particular importance. European merchants shipped slaves from Africa to the Americas where they were mostly utilized on large-scale plantations (sugar, tobacco, etc.). These commodities, in turn, where then shipped across the Atlantic to be consumed by Europe’s growing consumer society. Pomeranz (2009) argues that it is the colonization of the land-abundant colonies in the Americas, which gave European nations a sizeable advantage. More specifically, both China and Western Europe faced severe ecological bottlenecks by the end of the Renaissance period. Growing populations had led to severe deforestation in both regions and Europe in particular faced a severe timber shortage. Higher population densities also increased the pressure on the agricultural sector. A more intensive use of agricultural land led to declines in soil quality, which ultimately translated into lower yields. However, Europe was able to overcome its supply-side problems thanks to the colonization of the Americas and other parts of the world. The land-abundant colonies in the New World were in a sense complementary to an increasingly industrial and densely populated European continent (Pomeranz, 2009). Industrial goods were shipped to America in exchange for primary products so desperately needed in Europe where they were in relatively short supply. Europeans also exploited their colonies by extracting precious metals on a large-scale, creating huge windfall gains for the colonizing nations. The export of precious metals to South East Asia paid for various exotic products and luxury items, which also were in high demand in Western consumer societies. Pomeranz (2009) thus argues that Europe’s advantage was based on its colonial activities as well as its favorable geographic location in the North Atlantic. European economies could rely on their colonies to free themselves from the severe ecological bottlenecks they were facing while no such opportunity was available to the Chinese or Japanese.
Even though the Renaissance was a transformative period characterized by rapid economic change, modern economic growth as we know it was still absent. That is because most of the gains were again Smithian and thus transitory in nature. The development of modern financial markets allowed for a more efficient organization of the economy, facilitating the exchange of goods and services. Colonization of the Americas led to a massive expansion of trade and increased the supply and the variety of goods available to European consumers. However, both these effects would eventually face rapidly diminishing returns. Modern economic growth eventually took off once industrialized countries started to exploit more efficient energy sources (fossil fuels) on a larger scale. The increased use of coal during the Industrial Revolution coincided with the emergence of macroinventions, innovations that affect the structure of the entire economy in a profound way (Mokyr, 1990). The steam engine, the railway and other technologies from that era set in motion the continuous and cumulative process of creative destruction. Pre-industrial societies did not achieve sizeable income gains over prolonged periods because they lacked such a continuous stream of macro- and microinnovations, which is a necessary condition for the mechanism of modern economic growth (Mokyr, 1990).
This essay has elaborated on economic growth, or rather the lack thereof, in pre-industrial societies with a particular focus on Europe. Any reasonable guesstimate shows that living standards in 17th century Britain were not significantly higher than those in Ancient Rome. This, of course, implies that yearly economic growth only averaged about a few hundredth of a percentage point for more than 2000 years compared to modern economic growth of about 2 percent in today’s industrialized economies, an increase by a factor of a hundred. Pre-industrial societies mainly relied on economic growth factors that would eventually face rapidly diminishing returns, such as gains from trade or increased specialization of labor. Technological change was extremely slow-paced and Malthusian checks frequently reversed previous income gains. The Industrial Revolution was the transformative era, which allowed a large subset of the world economy to break free from economic stagnation and eventually cleared the path for modern economic growth. The use of more efficient energy sources (fossil fuels), the emergence of highly transformative macroinventions (the steam engine and railways), and the continuous stream of innovations thanks to the Schumpeterian process of creative destruction have allowed industrialized economies to achieve sizeable income gains for their populations decade after decade. The process of modern economic growth implies that every generation is materially better off than the previous generation, a phenomenon that was largely unknown in pre-industrial societies.
- Malthus, Thomas Robert. An essay on the principle of population, as it affects the future improvement of society. Vol. 2. 1809.
- Mokyr, Joel. The lever of riches: Technological creativity and economic progress. Oxford University Press, 1990.
- North, Douglass C., and Robert Paul Thomas. The rise of the western world: A new economic history. Cambridge University Press, 1973.
- Pomeranz, Kenneth. The Great Divergence: China, Europe, and the Making of the Modern World Economy. Princeton University Press, 2009.
- Smith, Adam. The wealth of nations. 1776.
- Wrigley, Edward Anthony. Energy and the English industrial revolution. Cambridge University Press, 2010.