1

Introduction: Economic History and

Economic Development
Why are somenations rich and others poor? This seemingly simple question is di -
rected at the heart of one of the world's most pressing contemporary problems, that
of uneven economic development. Only war and peace, population pressure, and en-
vironmental salubrityand thus thesurvival of the human raceare issues of sim-
ilar magnitude. Becauseof unequal economic development, revolutions and coups
d'tat have occurred; totalitarian governments and military dictatorships have de-
prived whole nations of political liberty, and many individuis of their personal free-
domand even their lives. Mi lli ons have died miserably and unnecessarily of starva-
tion, malnutrition, and diseasenot because food and other resources were
unavailable, but becausethey could not be delivered to those in need. The United
States and severa! other wealthy nations have expended bli ons of dollars in well-i n-
tentioned attempts to assist their less fortnate neighbors. I n spite of thesevaried ef-
forts, the income gap between therelativcly small number of affiuent nations and the
vast majority of impoverished ones not only persists but grows wider year by year.
The situation appears to be paradoxical. I f somenations arerich and others poor,
why do not the poor ones adopt the methods and poci es that have made the others
rich? I n fact, such attempts have been made but, in most instances, without strilcing
success. The probiemis far more complicated than it appears on the surface. I n the
first place, there is no general agreement on which methods were responsible for the
higher incomes of the wealthy nations. Second, even i f such agreement existed, it is
by no means certain that similar methods and policies would produce the sameresults
i n the different geographical, cultural, and histrica! circumstances of today's low-i n-
come nations. Finally, although much research has been devoted to the probiem,
scholars and scientists have not yet produced a theory of economic development that
is operationally useful and generally applicable.
There are various approaches to the study of economic developmentfortunately
not mutually exclusive. The historical approach employed in this book does not aim
at producing a general, universally applicable theory of economic development. I n-
stead, historical analysis can focus, as other approaches cannot, on theorigins of the
presently existing unequal levis of development. A correct diagnosis of the origins
of the probiemdoes not, in itself, guaranteean effectiveprescription, but without such
a diagnosis one can scarcely hope to remedy the probiem. Second, by focusing on i n-
4 A C O N C I S E E C O N O M I C H I S T O R Y O FT H E W O R L D
stancesof growth and declineinthepast, thehistorical approach isolates \& funda-
mentis of economic development, undistracted by arguments over theefficacy or de-
sirability of particular policies for specific current problems. Inother words, it is an
aid to objectivity and clarity of thought.
Policymakers and their staffs of experts, faced with theresponsibility of proposing
and implementing policies for development, frequently shrug off thepotential contri-
butions of historical analysis to thesolutionof their problemswith theobservationthat
thecontemporary situationis uniqueand thereforehistory is irrelevant to their concerns.
Such anattitudecontains adoublefallacy. Inthefirst place, thosewho areignorant of
thepast arenot qualified to generalizaabout it. Second, it implicitly deniestheunifor-
mity of nature, including humanbehavior and thebehavior of social institutionsan
assumptiononwhich all scientific inquiry is founded. Such attitudes reveal how easy
it is, without historical perspective, to mistakethesymptoms of aprobiemfor its causes,
This book is offered as anintroductionto thestudy of both economic history and
economic development. I t is not, however, intended to becomprehensive ineither
rea. Therearemany valid reasonsfor studying history apart from its potential con-
tribution to solving contemporary practical problems; for acomplete understanding
of theprobiemof economic development other methods of study and observation
must beemployed aswcll. Inthis general survey of theeconomic development of hu-
mankind fromprehistoric times to thepresent, certain "lessonsof history" arehigh-
lighted. Although somehistorians believetheir function is to "let thefacts speak for
themselves," "facts" respond only to specific questions posed by the analyst who
deals with them; posing such questions inevitably involves aprocess of selection,
conscious or unconscious, especially inso brief and synoptic avolumeas this.
Beforeweundertakethehistorical narrativeit is necessary to definecertainterms
and to formlate somebasic concepts to guidethesubsequent analysis.
Development and Underdevelopment
In 1999, theaverage(or per capita) annual incomeof residents of theUnited States
was nearly $30,000. InNorway, themost prosperous country inEurope, it amounted
to morethan $26,000. (These figures areadjusted to account for purchasing power
parity.) For westernEuropeas awhole, theaveragewas almost $23,000. TheUnited
Statesand westernEuropetogether containjust over 11 percent of theworld's popu-
lation but account for over 56 percent of theworld's measured economic output. I f
weadd Japan, Canad, Australia, and New Zealand to includeall theworld'shigh-
incomeindustrialized economies, thefigures riseto over 14 percent for population
and to nearly 77 percent of economic output (gross domestic product inpurchasing
power parity dollars). Thereareanequal number of other high-incomecountries, but
they arecomprised mainly of urbanenclavessuch as Hong Kong and Singapore, the
small Gulf oil states, or small islandsconcentrating onmoney laundering, all of which
cater to thedemandsof theindustrialized world.' Clearly, thekey to high per capita
' The niodern nation-state is used as the unit of analysis here because comparative data are collected
and presented in national terms, and the state is nsually the policy-niaking entity; but it is not the ideal unit
of analysis for all purposes.
Introduction: Economic History and Economic Development
T A B L E I - I . G N P P er Capita, Selected Countries, ca. 1 9 9 9 (in 1 9 9 9 Dollars)
(P urchasing P ower P arity)
High-Income Economies
Umer-Middle Income
United States
Canad
Japan
Germany
France
Israel
United Kingdom
Spain
Vpper-Middle Income
$29,605
$23,582
$23,257
$22,169
$21,175
$20,585
$20,906
$16,212
Russian Federation
Turkey
Colombia
Thailand
El Salvador
China
Egypt
Indonesia
Low-Income Economies
$6,271
$6,177
$5,954
$5,757
$4,069
$3,345
$3,263
$2,626
South Korea
Portugal
Greece
Hungary
Poland
B razil
$14,806
$14,701
$13,943
$10,814
$7,980
$6,524
B olivia
India
Ghana
B angladesh
Tanzania
Sierra Leone
$2,245
$2,217
$1,823
$1,430
$480
$425
Source: World Bank, Worid DevelopmenI Indicators, 2000 (New York, 2000).
incomeis to crateamodernindustrial economy or to find away to provideimpor-
tant Services to such economies.
At theother extreme, per capitaincomeinSierraLeone, currently theworld's
poorest economy, was about $425. Per capitaincomeinTanzaniawas about $480
(which is actually $ 100 lessthanin1993), $2,200 inIndia, and $ 1,430 inBangladesh.
I n thePeople'sRepublic of China, which contains morethanone-fifth of theworld's
population, per capitaincomeis believed to beabout $3,345. Per capitaincomein
South Americaranged from$ 11,524in Argentinawhich is nearly doublethe$6,524
in Brazilto $2,245 inBolivia. Table1-1 shows recent per capitaincomefor arep-
resentativesampleof nations.
I n 1998 therewas atotal of sixty-threenations inwhich per capitaincomes were
lower than$760, and anadditional ninety-threewheretheaverageincomewas be-
tween $760 and $9,360. Thenations in thesetwo latter categories arevariously re-
ferred to as "poor," "low income," and "underdeveloped" (or, euphemistically, "less
developed" or "developing"). I t is obvious that, becauseof their low incomes they are
poor, but why arethey underdeveloped?
Statistics of per capitaincomeare, at best, crude measuresof thelevel of eco-
nomic development. Inthefirst place, they areonly approximations. Moreover, for a
number of technical reasons, International comparisons of incomeareespecially un-
reable. But thereareother measuresof development and underdevelopment that, al-
though lessglobal or comprehensive, aremoregraphic. Table1-2 presentsanumber
of these, ranging fromhow long atypical citizen might expect to liveto how easy it
is to communicatewith others or travel to another place. As aconsequenceof high
death rates, life expectancy rangesfromforty to sixty-nineyearsintheunderdevel-
T A B L E 1 - 2. Indicators of E conomic Development, Selected Countries
Crude Birth Crude Death
Rate (1998)" Rate (1998)"
High-Income Economies
United States 14 9
Switzerland 11 9
United Kingdom 12 11
Spain 9 9
Japan 10 7
Middle-Income Economies
B olivia 32 9
Costa Rica 22 4
B elarus 9 13
Hungary 10 14
Indonesia 23 8
Mxico 28 5
Low-Income Economies
Chad 45 16
China 16 8
E thiopia 45 20
India 27 9
Honduras 33 5
Life Expectancy Physicians per Energy Consumption
at Birth (1998) 1,000 Population (1997) per Capita''
77 2.70 8,076
79 - 3,699
77 3,863
78 _ 2,729
81 4,084
62 1.30 548
77 1.44 769
68 2,449
71 3.50 2,492
65 693
72 1.30 1,501
48 _ _
70 1.99 907
43 287
63 479
69 0.79 532
icontinued)
Distribution ofGross Domestic Product by Sector (%)
Agriculture Industry Services
Urban
Population,
%of
Total
(1998)
Tele-
phones
(1998)" TVs"
Adult
Illiteracy,
(1990)
Per 1.000population.
Sources. World B ank. World Development Indicators 2000 (New York, 2000); World B ank, The Human Development Statistical Datbase 1999 (New York, 2000).
Educational
Expenditure,
% ofGDP
High-Income Economies
United States 2 26 72 77 644 847 22
Switzerland
68 661 535 28
United Kingdom
89 542 642
3
39
Spain
Japan
77 403 506 3
Spain
Japan 2 37 61 78 503 707
Middle-Income Economies
B olivia 17 28 55 61 69 116 16 22
Costa Rica 15 24 61 47 161 387 5
B elarus 14 44 42 70 227 314 1 35
Hungary 6 34 60 63 304 437 1 43
Indonesia 16 44 40 38 25 134 15 18
Mxico 5 26 69 74 97 254 10 16
Low-Income Economies
Chad 38 15 46 23 I 1 62
China 19 50 31 31 56 272 18 8
E thiopia 56 7 38 16 3 5 65
Honduras 27 26 46 27 19 69 45 15
India 23 30 47 50 37 90 27
8 A C O N C I S E E C O N O MI C HI S T OR Y O FT H E WO R L D
oped nations of Africa, Asia, and Latin America, wiiereas it is wel l over seventy years
in western Europe and Nortii America. Most of the difference is explained by much
higher rates of infant mortality in poor countries. In thel ight of thesefigures it is not
surprising that heahh carefacihties are moreplentiful in the wealthy nations: in the
United States there are approximately 370 people per physician, and in Austria this
ratio is 345. Compare this with 769 in Bol ivia, 1,818 in Iraq, 25,000 in Nepal, and
over 33,000 in Niger! In even more materialistic terms, for every 1,000 people in the
United States there are 767 passenger automobiles, 530 in France, but only 9 on av-
eragefor the 63 l ow-incomc economies and 116 for theworid as a whole.
Growth, Development, and Progress
In ordinary discourse the terms growth, development, and progress are frequently
used as though they were synonymous. For scientific purposes, however, it is neces-
sary to distinguish among them, even i f the distinctions are somewhat arbitrary. Eco-
nomic growth is defined in this book as a sustained increase in the total output of
goods and services produced by a given society. In recent decades this total output
has been measured as gross domestic product (GDP), thetotal of all goods and ser-
vices produced within theterritory of a country. In today's global economy, it is in-
creasingly difficul t for statistical authorities to keep track of income payments be-
tween countries, especially when goods and services are produced by their citizens in
other countries. Thesepayments have to be netted out to measurenational income and
gross national product (GNP). For most discussions in this book, the difference in
theseconcepts can be ignored becausethe three aggregates almost always move to-
gether in the same direction. Al though no national income data exist for eariier
epochs, they can in some cases be estimated; in any case, even without specific quan-
titative data, one can usually determine, on the basis of indirect evidence, whether
total product increased, decreased, or remained roughly constant during any given
period.
Growth in total output may occur either becausethe inputs of the factors of pro-
duction (land, labor, and capital) increase or becauseequivalent quantities of the in-
puts are being used moreefficientiy. I f population is increasing, there may begrowth
in total output but not in output per capita; indeed, the latter may even decreasei f the
rate of population growth exceeds that of output. For welfare comparisons, economic
growth is meaningful onl y i f it is measured in terms of output per capita.
Difficul ties also arise in comparing the outputs of two different societies or out-
puts within the samesociety at widel y different points in time, for two main reasons.
As a rule, national income and similar measures are given in monetary units, but val -
es of monetary units are notoriously unstable and frequently difficul t to compare. In
principie, what is wanted is a measureof "real " incomethat is, income measured
in units of constant real val u. We are not concerned herewith the practical obstacles
to obtaining such a measure, but assumethat the reader wi l l bear themin mind in eval-
uating the comparisons made hereafter. A second difficul ty is that of comparing the
val es of outputs of two different economies when the composition of the two out-
puts differs greatl yfor example, when one consists mainl y of vegetable products
Introduction: Economic History and Economic Development 9
umed directly or with negligible processing and the other consists largely of
l y processed manufactured goods. This probiemhas no clearcut, definitive solu-
but normal l y its quantitative dimensions do not hinder fruitful analysis.
Economic development, as the termis used in this book, means economic growth
mpanied by a substantial structural or organizational change in the economy,
. as ashift from alocal subsistenceeconomy to markets and trade or the growth
manufacturing and service outputs relative to agriculture. The structural or orga-
ational changemay be the "cause" of growth but not necessarily; sometimes the
sal sequencemoves in the oppositedirection, or the two changes may be thej oint
uct of stil l other changes within or outside the economy. The concepts of eco-
mic structure and structural changeare discussed in somewhat greater detall later
this chapter.
Economic growth, as defined here, is a reversible processthat is, it may be fol -
lowed by decline. Logical l y, economic development is equally reversible, although
'zations or structures rarely revert to precisely the sameforms as existed eariier.
ore often, during or fol l owing a prolonged period of economic decline some form
economic retrogression takes placea reversin to simpler forms of organization,
igh not usually identical with thosethat formerl y existed.
Al though they are widel y regarded as "good things," both growth and develop-
'i^pai are, in principie, value-free terms in that they can be measured and described
mt reference to ethical norms. Such is clearly not the casewith the termeco-
mic progress, unless it be given ahighl y restrictivedefinition. I n modern secular
ics, growth and development are frequently equated with progress, but no con-
tion necessarily exists between them. By someethical standards an increase in ma-
wel l -being might be regarded as harmful to the spiritual nature of human be-
Even by contemporary standards the increased production of the means of
ical , biol ogical , and nuclear warfare and the use of production processes that
n the environment, although manifestations of economic growth, can scarcely
regarded as signs of progress.
Another reason economic growth and development cannot be automatically
ited with progress is that an increase in per capita income tells us nothing about
distribution of that income. What constitutes a "good" or "bad" distribution of i n-
is a normative question about which economies has very l ittl e to say. I t can say
it kind of incomedistribution is more favorable to growth in certain situations,
from an ethical point of view, that amounts to circular reasoning. Given certain
ical assumptions, it is possible to arge that lower per capita incomes, more
lally distributed, are preferable to high averageincomes that are very unequally
ibuted. Such arguments, however, lie outside the range of this book. In the fol -
ing, growth and development are described and analyzed without reference to the
progress.
Determinants of Economic Development
sical economies evolved the tripartite classification of the "factors of produc-
"land, labor, and capital. (Sometimes a fourth factor is includedentrepre-
10 A C O N C I S E E C O N O MI C HI S T O R Y O F T H E WO R L D
neurship, theeffort or talent involved in combining or organjzing the other three.) At
any given time, subject to certain assumptions that wi l l be specified later, an econ-
omy's total output is determined by the quantity of the production factors employed.
This classification and various formulas that can be derived from it, such as the fa-
mous law of diminishing retums (see more on this later), are indispensable to mod-
ern economic analysis and extremely useful in the study of economic history as well.
As a framework for the analysis of economic development, however, the classifica-
tion is much too limited. I t assumes that tastes, technology, and social institutions
(e.g., the forms of economic, social, and political organization, the legal system, and
even religin) are given and fixed or, what amounts to the samething, have no bear-
ing on the process of production. I n historical fact, of course, all of these bear strongly
on the process of production, and all are subject to change. Indeed, changes in tech-
nology and in social institutions are the most dynamic sources of change in the whole
economy. They are thus the deep wellsprings of economic development.
To put the matter another way, in analyzing an economy at a given time (economic
statics), or even at successive points in time, provided the intervals are not great (com-
parative statics or dynamics), it is permissible to regard such factors as tastes, tech-
nology, and social institutions as parameters (i.e., constants) of a systemwithin which
the quantities and pnces of conventional production factors are the principal vari-
ables. I n moving fromshort-termeconomic analysis to the study of economic devel-
opment, however, the parameters become the major variables. A broader classifica-
tion of the determinants of output is therefore necessary for analyzing economic
change in historical time.
One such classification envisages thetotal outpqt at any point in time, and its rate
of change through time, as functions of the "mi x" of population, resources, technol-
ogy, and social institutions.^Of course, thesefour factors are not single variables;
each one is a cluster of variables. I t is not sufficient to think of population in terms of
numbers alone; the age and sex distribution, the biological characteristics (size,
strength, health, etc., of the members), thelevel of acquired skills (see more, later, on
the concept of "human capital"), and the rate of labor forc participation, among other
features, have a bearing on a population's economic performance.
Resources is the "land" of classical economies writ large. The termembraces not
merely the amount of land, thefertility of thesoil, and conventional natural resources,
but also climate, topography, availability of water, and other features of the natural
environment, including location.
I n recent centuries technological innovation has been the most dynamic source of
economic change and development. L ittle more than a century ago the automobile,
airplane, radio, and televisin, not to mention computers and numerous Instruments
of destruction, did not exist; today, according to some social critics, they threaten to
dom nate our lives. But technological change has not always been so rapid. Stone-
age technology endured for hundreds of thousands of years wi th little change. Even
today methods of agricultura! production in some parts of the worid remain essen-
tially unchanged frombiblical times. Wi th a given technologywhether that of me-
^ See the appendix to this chapter for a simple mathematical model of this classification.
Introduction: Economic History and Economic Development 11
dieval Europeor of pre-Columbian Americathe resources available to a society set
the effective upper limits to its economic achievements. Technological change, how-
ever, allows thoselimits to be expanded, both through the discovery of new resources
and by moreefficient use of the conventional factors of production, especially human
labor. The continental United States today supports a population of more than 270
mi l l i on at one of the highest material standards of living ever achieved. Before the
Europeans came the samerea, whose inhabitants employed a stone-agetechnology,
could support only a few mi l l i on with difficulty. The population of medieval Europe,
with a far more advanced technology than that of the pre-Columbian Americans, grew
to amxi mum of perhaps 80 mi l l i on at the beginning of the fourteenth century be-
fore declining to 50 million or fewer as the result of a disastrous demographic crisis.
Four hundred years later, after along period of steady but undramatic technological
and organizational change, the population had grownto approximately 150 mi l l i on.
Today, after a mere two centuries of economic growth based on modern technology,
the population of Europe is more than 500 mi l l i on, and its members are far more af-
fluent than their ancestors of the fourteenthor even the nineteenth century could have
imagined.
The interrelationshipof population, resources, and technology in the economy is
conditioned by social institutions, including vales and attitudes. (This complex of
variables is sometimes also called the "sociocultural context," or the "institutional
matrix" of economic activity.) At the level of national economies and other similar
aggregates, the most frequently relevant institutions are the social structure (number,
relative size, economic basis, and fluidity of social classes), the nature of the stateor
other political regime, and the religiousor ideological proclivities of the dominant
groups or classes and (if different) of the masses. I n addition, a host of lesser institu-
tions may need to be taken into account, such as voluntary associations (business
firms, labor unions, farmers' groups), the educational system, and even family struc-
ture (extended or nuclear) and other value-forming agencies.
One social function that institutions performis to provide elements of continuity
and stability, without which societies would disintegrate; but in performing this func-
tion they may serve as barriers to economic development by fettering human labor,
withholding resources from rational exploitation (e.g., India's sacred cows), or in-
hibiting innovation and the diffusion of technology. But institutional innovationis
also a possibility, wi th consequences not unlike those of technological innovation,
permitting a moreefficient or intensive use of both material resources and human en-
ergy and ingenuity. Some historical examples are theinstitutional innovations of or-
ganized markets, coined money, patents, Insurance, and the various forms of business
enterprisc, such as the modern Corporation. Many other innovations are highlighted
in the chapters that follow.
A complete list of all the social institutions of relevance to the economy would
cover many pages, and the analysis of their interactions wi th other relevant variables
is the most difficult and frustrating aspect of the study of economic history. But any
attempt to comprehend the nature and modalitiesof economic development without
reference to themis foredoomed to failure. Wi th the present stateof knowledge there
is no systematic apriori approach that can be used to study themin their relation to
12 A C O N C I S E E C O N O MI C HI S T OR Y O FT H E WO R L D
economic activity. Instead, thestudent or investigator must determine, in thecontext
of a specific probiemor episode, therelevant institutions and then seek to analyze the
nature of their interactions with morepurely economic variables.
Marxist scholars claimto havefound thekey to not only theprocess of economic
development but also the evolution of humanity. According to them, the "mode of
production" (roughly equivalent to technology in theschema outlined previously) is
thekey element; all therestsocial structure, natureof thestate, dominant ideology,
and so onis mere"superstructure." Thedynamic element is furnished by thestrug-
glebetween social classes for control of the means of production. While someaspects
of theMarxist analysis areuseful in understanding economic history, thesystemas a
whole is oversimplified and, in thehands of its practitioners, overly dogmatic. One
of its weakest points, inview of its emphasis on mode of production, is that it fur-
nishes no satisfactory explanation of theprocess of technological change. It also errs
in regarding social institutions as being determined exclusively by theeconomic sub-
structure.
A somewhat similar but less ideological theory views economic development as
theproduct of a permanent tensin or strugglebetween technological changeand so-
cial institutions. According to this theory, sometimes called theinstitutionalist theory,
technology is the dynamic, progressive element, whereas institutions uniformly re-
sist change.-'' This theory offers a number of brilliant insights into theprocess of his-
torical change, but it, too, regards technological changeas an automatic or quasi-au-
tomatic process and oversimplifies the relationship between institutions and
technology. Like the Marxist theory, it also regards the ultmate outcome as pre-
dictable. I n fact, as thefollowing chaptersdemnstrate, therelationship between in-
stitutions, technology, resources, and population is complex, interdependent, and by
no meanswholly predictable.
Production and Productivity
Production is theprocess by which thefactors of production arecombined to produce
thegoods and services desired by human populations. Production can bemeasured in
physical units (or units of identical services) or invaluthat is, monetaryterms.
One can compare the output of, say, two apple orchards in terms of the number of
bushels produced by each; comparing the output of an apple orchard and an orange
grovein theseterms is much less meaningful. To get a useful comparison in that case,
it is necessary to convert thephysical measureinto valu terms, that is, to multiply the
number of bushels of eachby therespective prices to arriveat their aggregatevales.
Productivity is theratio of theuseful output of a production process to theinputs
of thefactors of production. As in the caseof production, it can bemeasured in phys-
ical unitsX bushels of wheat per acre, y widgets per man-houror invalu terms.
To measuretotal factor productivitythat is, the combinedproductivity of all fac-
torsvalu terms are necessary.
^ For a forceful and compreiiensive exposition, see Clarence Ayres, The Theory of Economic Progress
(Chapel Hill,NC, 1944, 1978).
Introduction: Economic History and Economic Development 13
Theproductivity of thefactors of production depends on a host of elements. Some
land is naturally morefertilethan other land. Someworkers arestronger or moreskill-
ful than others. Theproductivity of capital is in part a function of thetechnology it
embodies; a mechanical tractor (in proper working order) is moreproductivethan an
equivalent valu of ox-drawnplow teams, and a hydroelectric generator is morepro-
ductivethan an equivalent valu of simplewaterwheels. Moreover, certain combina-
tions of thefactors of production increaseproductivity. For example, thefertility of
thesoil is increased by theaddition of fertilizerthat is, capital. Workers furnished
with appropriate machines aremoreproductivethan thosewho work with their bare
hands or with simpletools. In most instances literateworkers are more productive
thanilliterate ones.
That consideration brings us to a most important special combination of the fac-
tors of production, namely, theconcept of human capital. Human capital {not slaves,
although they wereonceregarded as capital) results frominvestments in knowledge
andability or skill. Theinvestment can taketheformof formal schooling or training
(a collegeeducation is a considerable investment), an apprenticeship, or "learning on
theJ ob" (i.e., practice). However human capital is acquired, thedifferences inlevis
of human capital per capita between the most and least advanced economies are
among themost striking and important to be observed.
Empirical measurements in recent decades show unambiguously that increased
inputs of the conventional factors of production account only in small part for in-
creasedoutput in advanced economies. I n other words, theproductivity of all factors
of production has increased greatly. What accounts for thoseincreases? Various an-
swers to that question havebeenadvanced; it is clear that among themost important
determinants are advances in technology, improvements in organization at both the
macro and micro levis (including so-called "economies of scale"), and especially in-
creasedinvestments in human capital. The increases inproductivity have been par-
ticularly striking in thelast hundred years or so, but as later chapters show, they have
beenimportant throughout recorded history, and even before.
At this point it is useful to consider in somewhat greater detall the so-called law
of diminishing returns, which might moreaccurately be stated as the law of dimin-
ishing marginal productivity. A simplehypothetical example wi l l illustrateits signif-
icance. Imaginea cultivatedfield of 100 acres. (Theexact size is irrelevant.) A sin-
gle worker employing a given technology, whether simple or complex, is able to
producesome outputlet us say 10 bushels of grain. Theaddition of a second worker
permits a simpledivisin of labor, which morethan doubles production to perhaps 25
bushels; that is, themarginal product is 15. A Ihird worker may raiseoutput still more,
to 45 bushels, for a marginal product of 20; and so on. In other words, as more work-
ers are added, up to a point, themarginal product increases. Eventually, however, as
moreand moreworkers areadded they get in eachother's way, trampleon thecrop,
and so on, and themarginal product declines: that is theconcept of thelaw of dimin-
ishing returns.
Now let U S transfer thelesson of this simplistic exampleto the caseof a wholeso-
ciety. Remember that theexample assumedfixed resources (100 acres) and a given
technology (no productivity-enhancing innovations). If, at somepoint in time, theso-
ciety is underpopulated relativeto its resources, its population and per capita income
14 A C O N C I S E E C O N O MI C HI S T OR Y O F T H E WO R L D
wi l l be able to grow even wi thout techni cal or i nsti tuti onal changefor ati me. Even-
tual l y, however, as i t ful l y uses i ts resources, the increase i n numbers wi l l resul t i n di -
mi ni shi ng margi nal producti vi ty, heneedecl i ni ng real i ncomes. In thi s si tuati on onl y
a si gni fi cant producti vi ty-enhanci ng i nnovati on (techni cal or i nsti tuti onal , or both)
coul d rel i eve the di l emma.
In 1798 the Reverend Thomas R. Mal thus, an Engl i sh cl ergyman turned econo-
mi st, publ i shed hi s famous Principie of Population. In i t he assumed that "the pas-
si on between the sexes" woul d causepopul ati ons to grow at a "geometri c rati o" (2,
4, 8, . . .) but that food suppl y woul d grow i n an "ari thmeti c rati o" (1, 2, 3, . . .). In
the absenceof "moral restrai nt" such as cel i bacy and l ate marri age (he di d not fore-
see arti fi ci al contracepti on), he concl uded, the l aw of di mi ni shi ng returns and the
"posi ti ve checks" on popul ati on of war, fami ne, and pesti l ence woul d condemn the
great majori ty of peopl e to a bare subsistencestandard of l i vi ng. Now, some200 years
later, i t appears that Mal thus was wrong, at least for i ndustri al i zi ng nati ons. The other
thi ng that Mal thus di d not foresee, of course, was the host of producti vi ty-enhanci ng
technol ogi cal and i nsti tuti onal i nnovati ons that have repeatedl y postponed the oper-
ati on of the l aw of di mi ni shi ng returns. For many countri es, however, especi al l y now
on the conti nent of Afri ca, the popul ati on checks of war, fami ne, disease, and natural
disaster aresti l l agri m real i ty.
Economic Structure and Structural Change
Economi c structure (not to be confused wi th soci al structure, al though the two are re-
l ated) deals wi th the rel ati onshi ps among the vari ous sectors of the economy, espe-
ci al l y the three major sectors known as pri mary, secondary, and tertiary.'* The pri mary
sector i ncl udes thoseacti vi ti es i n whi ch products are obtai ned di rectl y from nature:
agri cul ture, forestry, and fi shi ng. The secondary sector i ncl udes those acti vi ti es i n
whi ch the products of nature are transformed or processed: that i s, manufacturi ng and
constructi on. The terti ary, or servi ce, sector deals not wi th products or materi al goods
at al l , but wi th servi ces; thesecover a wi de range, from domesti c and personal ser-
vi ces (cooks, mai ds, barbers, etc.) to commerci al and fi nanci al (retai l cl erks, mer-
chants, bankers, brokers, etc.) to professi onal (doctors, l awyers, educators) to gov-
ernmental (postal workers, bureaucrats, pol i ti ci ans, the mi l i tary, etc.). (There are
someambi gui ti es and anomal i es. For exampl e, mi ni ng l ogi cal l y bel ongs i n the pri -
mary sector, but i t i s frequentl y regarded as secondary; si mi l arl y, transportati on, a ser-
vi ce, i s al so often treated as part of the secondary sector. Hunti ng, the most i mportant
acti vi ty of pal eol i thi c ti mes, is now regarded as a recreati onal acti vi tyconsumpti on
rather than producti on.)
For thousands of years, from the earl i est ci vi l i zati ons unti l less than a century ago,
agri cul ture was thepri nci pal occupati on of the vast majori ty of the human race. As a
perusal of Tabl e 1-2 wi l l show, thi s is sti l l the casefor the l ow-i ncome nati ons. Thi s
* The pioneering work on economic structure is Colin Clark's Condtions of Economic Progress (Lon-
don, 1940, 1957). Simn Kuznets made major contributions to the claboration of the concept, notably in
Modern Economic Growth: Rate, Structure, and Spread (New Haven, 1966), and The Economic Growth
of Nations: Total Output and Production Structure (Cambridge, MA, 1971).
Introduction: Economic History and Economic Development 15
was true becauseproducti vi ty was so l ow that mere survi val requi red concentrati ng
on the producti on of foodstuffs. A few hundred years ago, for reasons expl ai ned i n
subsequent chapters, agri cul tural producti vi ty began to ri se, sl owl y at fi rst and then
morerapi dl y. As i t rose, fewer workers were needed for the producti on of subsistence
goods and coul d be spared for other producti veacti vi ti es. Thus began the process of
i ndustri al i zati on, whi ch extended from the l ateMi ddl e Ages to themi d-twenti eth cen-
tury (i n western Europe and North Ameri ca; i t is sti l l conti nui ng i n much of the rest
of the worl d). The proporti on of the l abor forc engaged i n agri cul turefel l from 80
or 90 percent of thetotal to less than 50 percent by the end of the ni neteenth century
i n the most advanced i ndustri al nati ons and to less than 10 percent more recentl y. Con-
comi tantl y, theproporti on of total i ncome, or GDP, ori gi nati ng i n agri cul ture al so fel l ,
even though i n absol ute terms the total val u of agri cul tural producti on i ncreased
manyfol d.
Meanwhi l e, as the percent of the l abor forc engaged i n agri cul turefel l , that i n
the secondary sector rose, al though not i n proporti on; typi cal l y, i n hi ghl y i ndustri al -
i zed nati ons, manufacturi ng and rel ated occupati ons empl oy between 30 and 50 per-
cent of the l abor forc, wi th the remai nder di vi ded between the pri mary and terti ary
sectors. As the shareof the l abor forc i n the secondary sector rose, so di d that of i n-
comeori gi nati ng i n that sector.
Thetwi n processes of shi fts i n the proporti ons of the l abor forc empl oyed and of
i ncomeori gi nati ng i n the two sectors are major exampl es of structural change i n the
economy. Si nce about 1950 the most advanced economi es have experi enced a further
structural change, from the secondary to the terti ary sector.
How can thesestructural changes be expl ai ned? Theshi ft from agri cul ture to sec-
ondary acti vi ti es i nvol ved two major processes. On the suppl y si de, i ncreasi ng pro-
ducti vi ty, as al ready expl ai ned, made i t possi bl e to produce the sameamount of out-
put wi th less l abor (or more output wi th the sameamount of l abor). On the demand
side a regul ari ty of human behavi or cal l ed Engel 's Law (named for Ernst Engel , a
ni neteenth-century Germn stati sti ci an, not Fri ederi ch Engel s, Karl Marx's col l abo-
rator) camei nto pl ay. Based on numerous fami l y budget studi es, Engel 's Law states
that as a consumer's i ncome increases, the proporti on of i ncome spent on food de-
cl i nes. (Thi s, i n turn, may be rel ated to the l aw of di mi ni shi ng margi nal uti l i ty, namel y,
the more one has of a gi ven commodi ty, the less oneval es any si ngl euni t of i t.)
The second structural changenow underway, the rel ati veshi ft from commodi ty
producti on (and consumpti on) to servi ces, i nvol ves acorol l ary of Engel 's Law: as i n-
come increases, the demand for al l commodi ti es increases, but at a l ower rate than i n-
come, wi th an i ncreased demand for servi ces and l ei sure partl y repl aci ng the demand
for commodi ti es.
Changes i n technol ogy, wi th i ncreased producti vi ty, and i n tastes are basi cal l y re-
sponsi bl e for such structural changes, but the i mmedi ate moti vati ng forc for the
changes i s usual l y changei n rel ati ve pri ces (and wages). Thi s i s also true for many
other economi c changes, such as the ri se of new i ndustri es and the decl i ne of od ones
or the shi ft of producti on from one geographi c rea to another. The pri ces of com-
modi ti es and servi ces are determi ned by the i nteracti on of suppl y and demand, as
taught i n el ementary economi es textbooks. A hi gh rel ati ve pri ce i ndi cares that suppl y
i s scarcei n rel ati on to demand; a l ow rel ati ve pri ce i ndi cares the opposi te. As a gen-
16 A C O N C I S E E C ON OMI C HI S T OR Y O FT H E WO R L D
eral rule, the factors of production move to uses for which they are best rewarded,
that is. thosefor which their prices are highest. The importance of relative scarcity
and relative prices as dynamic elements in economic changewi l l become evident in
the historical cases considered later.
The Logistics of Economic Growth
I n ordinary usagethe termlogistics refers to the organization of supplies for a large
group of people, such as an army. But logistic (singular) is also a mathematical for-
mula. The logistic curve derivedfromit has theformof an elongated S and is some-
times called the S-curve (.see Fig. 1-1). Biologists also cali it thegrowth curve be-
causeit describes rather accurately thegrowth of many subhuman populations, such
as a colony of fruit flies in a closed container with a constant food supply. The curve
has two phases, one of accelerating growth followed by a deceleration phase; math-
ematically, at its limit the curve asymptotically approaches a horizontal line that is
parallel to the asymptote of origin.
FI GU R E 1-1
I t has also been observed that logistic curves can also roughly describe many so-
cial phenomena, especially thegrowth of human populations. I n the caseof Europe,
long-period surges of population growth have been identified, each being followed
by a period of relative stagnation or even decline. Thefirst of thesebegan in theninth
or tenth century, probably reached peak rates in thetweifth century, began to slow
down in the thirteenth, and was abruptly terminated by the Great Plague of 1348,
when Europe lost athird or more of its total population. After a century of relative
stagnation, the population began to grow again around the middle of thefifteenth cen-
tury, reached peak rates in the sixteenth century, and again leveledoff or possibly even
declined in the seventeenth century. Toward the middle of the eighteenth century the
process got underway again, this time much morepowerfully, and continued at un-
precedented ratesuntil interrupted by theworld wars and related misfortunes of the
first half of the twentieth century. There is evidence of afourth logistic, this time on
aworld scale, beginning after World War I I .
Although precise quantitative data arelacking, it seemslikely that thegrowth of
the Greek population between theninth andfifth century B.C. followed a logistic pat-
tern, as did the population of the Mediterranean basin in the era of thepax romana
(ca. 50 B. C.-200 A. D.). Some scholars believe the three identifiable European logis-
tics were, in fact, worldwide and related to climatic variations. The population of
China, for example, seems to have kept pacewith that of Europe. We are even more
Introduction: Economic History and Economic Development 17
ignorant about the pattern of population growth in eariier epochs, but, as Chapter 2
shows, the population of the present-day Near and Middle East definitely grew after
the advent of agriculture in the neolithic period, and the populations of the great river
valleys (theNile, Tigris-Euphrates, I ndus, andYellow River in China) likewise grew
rapidly after the introduction of irrigation agriculture.
Whether or not thegrowth of population actually conforms to the logistic curve,
other related aspects of the phenomenon intrigue the scientific imagination. I t is vir-
tually certain that each accelerating phaseof population growth in Europe was ac-
companied by economic growth, in the sensethat both total and per capita output were
increasing. (I f per capita output merely remained constant as the population grew, the
total output, of course, would increase; but we are warranted in making the stronger
statement.) This is most clearly attested for thethird logistic (and theincipient fourth),
for which statistical evidence is relatively plentiful; but there is also much indirect
evidence for similar behavior during thefirst and second logistics.
The hypothesis of economic growth accompanying thegrowth of population is
strongly supported by the unquestioned evidence of both physical and economic ex-
pansin of Europeancivilization during each of the accelerating phases of population
growth. During the eleventh, tweifth, and thirteenth centuries, European civilization
expanded fromthe heartland of feudalismbetween theLoire and Rhine rivers to the
British I sles, the I berianpen nsula, Sicily, and southernI taly, into central and eastern
Europe, and even to Palestine and the eastern Mediterranean temporarily during the
Crusades. I n each lcale, the institutions of feudalismwere adapted to local condi-
tions and customs, creating a variety of economic systems. I n the latefifteenth and
sixteenth centuries maritime exploration, discovery, and conquest took Europeans to
Africa, theI ndian ocean, and the Western Hemisphere. Finally, in the nineteenth cen-
tury, through migration, conquest, and annexation, Europeans established their polit-
ical and economic hegemony throughout the world.
There is also evidence that conditions of life for ordinary men and women were
becoming increasingly difficult in the decelerating phases of the first two logistics
(thefirst halves of the fourteenth and seventeenth centuries, respectively), suggest-
ing a decline in or at least stagnation of per capita incomes. By the seventeenth cen-
tury, however, the variety of institutional arrangements in Europe created somepock-
ets of prosperity in the midst of overall decline; for example, cities grew rapidly in
the Low Countries and northernI taly. I n thethird logistic the opportunity for large-
scaleemigrationfromEurope in the late nineteenth and early twentieth centuries pal-
liated thecondition of the masses; even so, a number of countries experienced local-
ized subsistencecrises, of which theI rish famine of the 1840s was the most dramatic.
I n the light of theseobservations AdamSmith's remark, written in the accelerating
phaseof thethird logistic, to the effect that the position of the laborer was happiest
in a "progressive" society, dreary in a stationary one, and miserable in a declining
one, takes on a new significance.
Another noteworthy similarity is that thefinal phases of all the logistics, and the
intervals of stagnation or depression that followed, witnessed the spread of social ten-
sin, civil unrest and disorder, and the outbreak of unusually fierce and destructive
wars. To be sure, wars andcivil strife occurred at other times as well; and there is no
obvious theoretical reason that the decline of population growth should have resulted
18 A C O N C I S E ECCJ NOMI C HI S T O R Y O F T H E WO R L D
i n the breakdown of i nternati onal relations. Possibly the wars were si mply forti i i tous
occurrences that ended periods of growth that were already wani ng. But the question
is worthy of further study.
I t would no doubt strain creduli ty to suggest that notable periods of i nteectual
and cultural ferment were also related somehow to the logi sti c. I t is nevertheless re-
markable that the accelerating phases of each peri od of populati on growth i n Europe
witnessed outbursts of i ntellectual and artistic creati vi ty followed by a proli ferati on
of monumental archi tecturemedi eval cathedrals, baroque palaces, and the nine-
teenth-century Gothi c revi val. Eariier, the "Golden Ages" of Greeceand Romeand
sti ll eariier, thoseof Mesopotami a and Egyptwere periods of populati on growth
and ended wi th ci vi l strife and internecine warfare (the Peloponnesian War, the de-
cli ne of Rome).
Of course, human creative efforts are not confi ned to specific hi stori cal periods
any more than our destructive tendencies. The ori gi ns of the Renaissancewere i n the
great depression of the late Mi ddle Ages, and the century of genius that i ncluded
Gali leo, Descartes, Newton, Lei bni tz, and Locke spanned the i nterval of stagnation
and upheaval between the second and thi rd European logi sti cs. Sti ll, i t is possible that
periods of crisis i n human affairs, when the established order appears to be breaki ng
down, may stimulate the best i ntellects i n a variety of fi elds to reexamine accepted
doctrines. Such lofty considerations li e outside the scopeof this volume, however.
A possible explanati on for the correlati on of populati on growth/stagnati on/de-
cli ne wi th i ncome movements can be fashioned by analyzi ng the i nteracti on of the
fundamental determinants of economi c development i ntroduced previ ously (pp. 9-
12). As i ndi cated, wi th a gi ven technology the resources avai lable to a society set
the upper li mi ts to its economi c achievements, i ncludi ng the size of its populati on.
Technologi cal change, by increasing producti vi ty and openi ng up new resources, has
the effect of rai si ng thecei li ng, as i t were, thereby permi tti ng further growth i n pop-
ulati on. Eventually, however, wi thout further technologi cal change, the phenome-
non of di mi ni shi ng returns sets i n, the society encounters a new cei li ng on produc-
ti on, and populati on again levi s off (or declines) unti l a new "epochal i nnovati on"
(the phraseis that of Si mn Kuznets, a Nobel Prize wi nner i n economies; see Chap-
ter 8) again increases producti vi ty and opens up sti ll newer resources. Fi gure 1-2
presents a si mpli fi ed representation of the relati onshi p between populati on and
epochal i nnovati ons.
FI G U R E 1- 2
The chapters that follow provi de an empi ri cal test for this hypothesis as they at-
tempt to explai n economi c development i n history.
APPENDI X
Let Y stand for national income (or output) andR R. T. andX for population, resources, tech-
nology, and social institutions (the "great unknown"), respectively. Then
Y=f(P, R.T.X)
and the rateof changethrough time is
dY _ dj
'dt~Yt'
For reasons noted in the text, the equation cannot bewritten in operational form.