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By the end of this section, you will be able to:

  • Explain the conditions that have allowed for modern economic growth in the last two centuries
  • Analyze the influence of public policies on the long-run economic growth of an economy

Let’s begin with a brief overview of the spectacular patterns of economic growth around the world in the last two centuries, commonly referred to as the period of modern economic growth    . (Later in the chapter we will discuss lower rates of economic growth and some key ingredients for economic progress.) Rapid and sustained economic growth is a relatively recent experience for the human race. Before the last two centuries, although rulers, nobles, and conquerors could afford some extravagances and although economies rose above the subsistence level, the average person’s standard of living had not changed much for centuries.

Progressive, powerful economic and institutional changes started to have a significant effect in the late eighteenth and early nineteenth centuries. According to the Dutch economic historian Jan Luiten van Zanden , slavery-based societies, favorable demographics, global trading routes, and standardized trading institutions that spread with different empires set the stage for the Industrial Revolution to succeed. The Industrial Revolution    refers to the widespread use of power-driven machinery and the economic and social changes that resulted in the first half of the 1800s. Ingenious machines—the steam engine, the power loom, and the steam locomotive—performed tasks that otherwise would have taken vast numbers of workers to do. The Industrial Revolution began in Great Britain, and soon spread to the United States, Germany, and other countries.

The jobs for ordinary people working with these machines were often dirty and dangerous by modern standards, but the alternative jobs of that time in peasant agriculture and small-village industry were often dirty and dangerous, too. The new jobs of the Industrial Revolution typically offered higher pay and a chance for social mobility. A self-reinforcing cycle began: New inventions and investments generated profits, the profits provided funds for new investment and inventions, and the investments and inventions provided opportunities for further profits. Slowly, a group of national economies in Europe and North America emerged from centuries of sluggishness into a period of rapid modern growth. During the last two centuries, the average rate of growth of GDP per capita in the leading industrialized countries has averaged about 2% per year. What were times like before then? Read the following Clear It Up feature for the answer.

What were economic conditions like before 1870?

Angus Maddison, a quantitative economic historian, led the most systematic inquiry into national incomes before 1870. His methods recently have been refined and used to compile GDP per capita estimates from year 1 C.E. to 1348. [link] is an important counterpoint to most of the narrative in this chapter. It shows that nations can decline as well as rise. The declines in income are explained by a wide array of forces, such as epidemics, natural and weather-related disasters, the inability to govern large empires, and the remarkably slow pace of technological and institutional progress. Institutions are the traditions, laws, and so on by which people in a community agree to behave and govern themselves. Such institutions include marriage, religion, education, and laws of governance. Institutional progress is the development and codification of these institutions to reinforce social order, and thus, economic growth.

One example of such an institution is the Magna Carta (Great Charter), which the English nobles forced King John to sign in 1215. The Magna Carta codified the principles of due process, whereby a free man could not be penalized unless his peers had made a lawful judgment against him. This concept was later adopted by the United States in its own constitution. This social order may have contributed to England’s GDP per capita in 1348, which was second to that of northern Italy.

In the study of economic growth, a country’s institutional framework plays a critical role. [link] also shows relative global equality for almost 1,300 years. After this, we begin to see significant divergence in income (not shown in table).

(Source: Bolt and van Zanden. “The First Update of the Maddison Project. Re-Estimating Growth Before 1820.” 2013)
Gdp per capita estimates in current international dollars from ad 1 to 1348
Year Northern Italy Spain England Holland Byzantium Iraq Egypt Japan
1 $800 $600 $600 $600 $700 $700 $700 -
730 - - - - - $920 $730 $402
1000 - - - - $600 $820 $600 -
1150 - - - - $580 $680 $660 $520
1280 - - - - - - $670 $527
1300 $1,588 $864 $892 - - - $610 -
1348 $1,486 $907 $919 - - - - -

Another fascinating and underreported fact is the high levels of income, compared to others at that time, attained by the Islamic Empire Abbasid Caliphate—which was founded in present-day Iraq in 730 C.E. At its height, the empire spanned large regions of the Middle East, North Africa, and Spain until its gradual decline over 200 years.

Questions & Answers

marginal cost formula
Nandu Reply
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boniphace
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Priyanka Reply
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Priyanka
Ceteris paribus - Literally, "other things being equal"; usually used in economics to indicate that all variables except the ones specified are assumed not to change.
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owusu
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owusu
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igwe Reply
disaster management cycle
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Fedric Wilson Taylor also define management as the act of knowing what to do and seeing that it is done in the best and cheapest way
OLANIYI
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Ugyen Reply
microeconomics is the study of individual units, firm and government while macroeconomics is the study of the economic aggregates.
okhiria
The classical theory of full employment
Lovely
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the situation that prevails when economic forces balance so that economic variables neither increase nor decrease
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salihu Reply
Economics is important because it helps people understand how a variety of factors work with and against each other to control how resources such as labor and capital get used, and how inflation, supply, demand, interest rates and other factors determine how much you pay for goods and services.
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Source:  OpenStax, Principles of economics. OpenStax CNX. Sep 19, 2014 Download for free at http://legacy.cnx.org/content/col11613/1.11
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