Unified Growth Theory

For most of the vast span of human history, economic growth was all but nonexistent. Then, about two centuries ago, some nations began to emerge from this epoch of economic stagnation, experiencing sustained economic growth that led to significant increases in standards of living and profoundly altered the level and distribution of wealth, population, education, and health across the globe. The question ever since has been--why? This is the first book to put forward a unified theory of economic growth that accounts for the entire growth process, from the dawn of civilization to today. Oded Galor, who founded the field of unified growth theory, identifies the historical and prehistorical forces behind the differential transition timing from stagnation to growth and the emergence of income disparity around the world. Galor shows how the interaction between technological progress and population ultimately raised the importance of education in coping with the rapidly changing technological environment, brought about significant reduction in fertility rates, and enabled some economies to devote greater resources toward a steady increase in per capita income, paving the way for sustained economic growth.

Preface xv

CHAPTER 1: Introduction 1
1.1 Toward a Unified Theory of Economic Growth 3
1.2 Origins of Global Disparity in Living Standards 6
1.2.1 Catalysts for the Engine of Transition from Stagnation to Growth 6
1.2.2 Persistence of Prehistorical Biogeographical Conditions 7
1.2.3 Convergence Clubs 8


CHAPTER 2: From Stagnation to Growth 9
2.1 The Malthusian Epoch 10
2.1.1 Stagnation of Income per Capita in the Long Run 11
2.1.2 Population Dynamism 12
2.1.3 Fertility and Mortality 14
2.1.4 Fluctuations in Income and Population 15
2.1.5 Technological Progress 16
2.1.6 Main Characteristics of the Epoch 17
2.2 The Post-Malthusian Regime 17
2.2.1 Take-off in Income per Capita 18
2.2.2 Spike in Population Growth 18
2.2.3 Fertility and Mortality 23
2.2.4 Industrialization and Urbanization 25
2.2.5 Globalization and the Pace of Industrialization 27
2.2.6 Central Features of the Regime 29
2.3 Industrialization and Human Capital Formation 30
2.3.1 Industrial Demand for Education 31
2.3.2 Land Concentration and Human Capital Formation 37
2.3.3 Land Reforms and Education Reforms 39
2.3.4 Political and Education Reforms 42
2.3.5 Human Capital Formation in Less Developed Economies 45
2.3.6 Main Insights 45
2.4 The Demographic Transition 46
2.4.1 Decline in Population Growth 46
2.4.2 Fertility Decline 49
2.4.3 Mortality Decline 51
2.4.4 Life Expectancy 52
2.4.5 Central Characteristics 54
2.5 The Modern Growth Regime 55
2.5.1 Rapid Industrialization and Human Capital Formation 55
2.5.2 Sustained Growth of Income per Capita 57
2.5.3 Divergence in Income and Population across the Globe 57
2.5.4 Insights for Comparative Development 64
2.6 Concluding Remarks 65


CHAPTER 3: The Malthusian Theory 67
3.1 The Basic Structure of the Model 68
3.1.1 Production 69
3.1.2 Preferences and Budget Constraints 69
3.1.3 Optimization 70
3.2 The Evolution of the Economy 70
3.2.1 Population Dynamics 70
3.2.2 The Time Path of Income per Worker 72
3.3 Testable Predictions 74
3.4 Empirical Framework 74
3.4.1 Empirical Strategy 74
3.4.2 The Data 77
3.4.3 The Neolithic Revolution and Technological Advancement 78
3.4.4 Basic Regression Model 79
3.5 Cross-Country Evidence 80
3.5.1 Population Density in 1500 CE 81
3.5.2 Population Density in Earlier Historical Periods 86
3.5.3 Income per Capita versus Population Density 92
3.5.4 Effect of Technological Sophistication 96
3.5.5 Robustness to Technology Diffusion and Geographical Features 103
3.5.6 Rejection of Alternative Theories 105
3.6 Concluding Remarks 108
3.7 Appendix 110
3.7.1 First-Stage Regressions 110
3.7.2 Variable Definitions and Sources 110


CHAPTER 4: Theories of the Demographic Transition 115
4.1 The Rise in Income per Capita 116
4.1.1 The Theory and Its Testable Predictions 116
4.1.2 The Evidence 118
4.2 The Decline in Infant and Child Mortality 120
4.2.1 The Central Hypothesis 120
4.2.2 Evidence 121
4.3 The Rise in Demand for Human Capital 123
4.3.1 The Theory 125
4.3.2 Evidence: Education and the Demographic Transition 127
4.3.3 Quantity-Quality Trade-off in the Modern Era 129
4.4 The Rise in Demand for Human Capital: Reinforcing Mechanisms 130
4.4.1 The Decline in Child Labor 131
4.4.2 The Rise in Life Expectancy 131
4.4.3 Evolution of Preferences for Offspring Quality 132
4.5 The Decline in the Gender Gap 132
4.5.1 The Theory and Its Testable Predictions 133
4.5.2 The Evidence 135
4.6 The Old-Age Security Hypothesis 136
4.7 Concluding Remarks 136
4.8 Appendix 138
4.8.1 Optimal Investment in Child Quality 138
4.8.2 Optimal Investment in Child Quantity 139


CHAPTER 5: Unified Growth Theory 140
5.1 The Fundamental Challenge 142
5.2 Incompatibility of Non-Unified Growth Theories 143
5.2.1 The Malthusian Theory 143
5.2.2 Theories of Modern Economic Growth 145
5.3 Central Building Blocks 146
5.3.1 The Malthusian Elements 147
5.3.2 Engines of Technological Progress 147
5.3.3 The Origin of Human Capital Formation 148
5.3.4 The Trigger of the Demographic Transition 148
5.4 The Basic Structure of the Model 149
5.4.1 Production of Final Output 149
5.4.2 Preferences and Budget Constraints 150
5.4.3 Production of Human Capital 151
5.4.4 Optimization 152
5.5 Evolution of Technology, Population, and Effective Resources 155
5.5.1 Technological Progress 155
5.5.2 Population 155
5.5.3 Effective Resources 156
5.6 The Dynamical System 156
5.6.1 The Dynamics of Technology and Education 157
5.6.2 Global Dynamics 161
5.7 From Malthusian Stagnation to Sustained Growth 164
5.8 Main Hypotheses 166
5.9 Complementary Mechanisms 170
5.9.1 Sources of Human Capital Formation 170
5.9.2 Triggers of the Demographic Transition 171
5.9.3 Engines of Technological Progress 172
5.9.4 The Transition from an Agricultural to an Industrial Economy 172
5.10 Calibrations of Unified Growth Theory 174
5.11 Concluding Remarks 177
5.12 Appendix: Optimal Investment in Child Quality 178


CHAPTER 6: Unified Growth Theory and Comparative Development 179
6.1 Country-Specific Characteristics and the Growth Process 182
6.1.1 Factors Contributing to Technological Progress 183
6.1.2 Reinforcing Elements in Human Capital Formation 185
6.1.3 The Dynamics of Technology and Education 187
6.2 Variation in Technological Progress and Comparative Development 189
6.3 Variation in Human Capital and Comparative Development 191
6.3.1 The Emergence of Human Capital--Promoting Institutions 193
6.3.2 Globalization and Divergence 198
6.4 Persistence of Deeply Rooted Biogeographical Factors 208
6.4.1 The Neolithic Revolution and Comparative Development 208
6.4.2 The Out-of-Africa Hypothesis and Comparative Development 217
6.5 Multiple Growth Regimes and Convergence Clubs 226
6.6 Concluding Remarks 229


CHAPTER 7: Human Evolution and the Process of Development 232
7.1 Natural Selection and the Origins of Economic Growth 233
7.2 Primary Ingredients 235
7.2.1 The Darwinian Elements 235
7.2.2 The Malthusian Components 237
7.2.3 Determinants of Technological Progress and Human Capital
Formation 237
7.2.4 The Trigger of the Demographic Transition 238
7.3 The Basic Structure of the Model 238
7.3.1 Production of Final Output 239
7.3.2 Preferences and Budget Constraints 240
7.3.3 Production of Human Capital 241
7.3.4 Optimization 242
7.3.5 Distribution of Types and Human Capital Formation 246
7.3.6 Time Path of the Macroeconomic Variables 249
7.4 The Dynamical System 254
7.4.1 Conditional Dynamics of Technology and Education 254
7.4.2 Conditional Dynamics of Technology and Effective Resources 259
7.4.3 Conditional Steady-State Equilibria 260
7.4.4 Human Evolution and the Transition from Stagnation to Growth 261
7.5 Failed Take-off Attempts 265
7.6 Main Hypotheses and Their Empirical Assessment 266
7.7 Complementary Mechanisms 269
7.7.1 Evolution of Entrepreneurial Spirit and Economic Growth 270
7.7.2 Evolution of Life Expectancy and Economic Growth 273
7.8 Concluding Remarks 278
7.9 Appendix 279
7.9.1 Conditional Dynamics of Technology and Education 279
7.9.2 Conditional Dynamics of Technology and Effective Resources 280


CHAPTER 8: Concluding Remarks 285
References 289
Name Index 311
Subject Index 317