Unit 2 Technology and incentives
2.10 Growth: Escaping the Malthusian trap
Conditions in eighteenth century Britain led firms to adopt new labour-saving and energy-intensive technologies and provided incentives for further innovation, and that the shift to production in firms and the expansion of markets brought opportunities for specialization and the division of labour. Together, these changes brought about rapid increases in the average product of labour.
The population grew (Figure 2.1) but productivity grew faster.
Figure 2.17 shows the contrast between the paths of real wages and population before and after 1800. Before then, as Figure 1.12 explains, Britain was stuck in a Malthusian trap. Around 1800, the economy moved to what appears to be an entirely new regime, with both population and real wages simultaneously increasing. This is labelled the ‘Escape’.
Figure 2.17 Escaping the Malthusian trap.
Robert C. Allen. 2001. ‘The Great Divergence in European Wages and Prices from the Middle Ages to the First World War’. Explorations in Economic History 38 (4): pp. 411–447.
Figure 2.18 zooms in on the ‘Escape’ portion of the wage data. Although rapid technological progress and rising labour productivity (that is, output per worker, or the average product of labour) began in the eighteenth century, the sustained increase in wages came later. The steps in the figure explain how this happened.
Figure 2.18 From technological progress to rising living standards. Note: Labour productivity and real wages are five-year centred moving averages. Arrows connect causes (the end of the arrow shaft) to results (the head of the arrow).
Robert C. Allen. 2001. ‘The Great Divergence in European Wages and Prices from the Middle Ages to the First World War’. Explorations in Economic History 38 (4): pp. 411–447.
The continuous technological revolution
Urban unemployment
New opportunities
Workers’ power
The escape from Malthusianism
A summary of how technological progress led to higher wages.
The story of the continuous technological revolution demonstrates that there are two influences on wages.
- How much is produced: We can think of this as the size of the pie to be divided between workers and the owners of other inputs (land or machines).
- The share going to workers: This depends on how wages are determined (individually, or through bargaining by trade unions with employers, for example) and if workers have well-paying employment opportunities other than their current job. If many workers are competing for the same job and their next best alternative is a low-paid job, then wages are likely to be low.
After 1830, the pie continued growing, and the workers’ wages grew along with it.
Britain had escaped from the Malthusian trap. This process would soon be repeated in other countries, as Figure 1.1 shows.
Question 2.10 Choose the correct answer(s)
Figure 2.17 plots real wages against population in England from the 1280s to the 1860s.
According to Malthus, with diminishing average product of labour in production and population growth in response to increases in real wages, an increase in productivity will result in a larger population but not higher real wages in the long run. Based on the information above, read the following statements and choose the correct option(s).
- It is true that Malthus assumes population growth in response to real wage increases. However, as population increases, the average per capita output falls, resulting in a fall in real wages back to subsistence level. This feature is not evident in the graph post-1800s.
- There are actually two periods—between the 1280s and the 1590s, and between the 1740s and the 1800s—when a Malthusian trap is evident. There is, however, the period in between, when the negative relationship between the real wage and population seems to break down (no population growth despite the wage increase).
- Though the second cycle of the Malthusian trap lasted about 60 years (between the 1740s and the 1800s), the first cycle seems to have lasted around 300 years.
- If technological developments increase the average productivity of labour faster than population growth decreases it, then population growth and real wages can coexist. This is what is shown by the escape trajectory of the English economy after the eighteenth century.
Exercise 2.13 The basic institutions of capitalism
The escape from the Malthusian trap, in which technological progress outstripped the effects of population growth, took place following the emergence of capitalism. Consider the three basic institutions of capitalism in turn:
- Why is private property important for technological progress to occur?
- Explain how markets can provide both carrots and sticks to encourage innovation.
- How can production in firms, rather than families, contribute to the growth of living standards?
