UNIT 2: TECHNOLOGY, POPULATION, AND GROWTH
Improvements in technology → growth in living standards
- Wages, the cost of machinery, and other prices all matter when people make
economic decisions.
- In a capitalist economy, innovation creates temporary rewards for the innovator
→ provides incentives for improvements in technology that reduce costs →
rewards are destroyed by competition once the innovation diffuses throughout
the economy.
- Population, the productivity of labour, and living standards may interact to produce a
vicious circle of economic stagnation.
- The permanent technological revolution (associated with capitalism) allowed some
countries to make a transition to sustained growth in living standards.
The industrial revolution
- Economic models help explain the Industrial Revolution, and why it started in Britain.
- Coal played a central role in the Industrial Revolution → UK was able to exploit a
vast reserve of what is effectively stored sunlight → coal has been the
environmental impact of burning fossil fuels.
- Example: James Watt’s steam engines were gradually improved over a long
period of time and were eventually used across the economy → steam engines
used in mining, powered water pumps, textiles, manufacturing, railways and
steamships → an example of general-purpose innovation or technology.
Malthusianism - Thomas Robert Malthus
- A sustained increase in income per capita would be impossible → even if
technology improved and raised the productivity of labour, people would still
have more children as soon as they were somewhat better off → population
growth would continue until living standards fell to subsistence level, halting the
population increase → hence, Malthus’ vicious cycle of poverty was widely
accepted as inevitable.
- The Industrial Revolution broke Malthus’ vicious circle → advances in technology
and increased use of non-renewables increased the amount that a person could
produce in a given amount of time (productivity) → incomes increased even as
the population increased.
Technology can outpace the
population growth that
resulted from the increased
income.
There was a long period in which living standards were
trapped according to Malthusian logic, followed by a
dramatic increase after 1830.
,2.1 Economists, historians, and the industrial revolution
Robert Allen
- Presents a model for the sudden and dramatic rise in living standards that began in
18th century Britain.
- Gives a central role to two features of Britain’s economy at the time → the
relatively high cost of labour and the low cost of local energy sources, drove the
structural changes of the Industrial Revolution.
Joel Mokyr
- Claims that the real sources of technological change are due to Europe’s
scientific revolution and its Enlightenment of the century before → this period
brought the development of new ways to transfer and transform elite scientific
knowledge into practical advice and tools for the engineers, who used it to build
machines.
- While wages and energy prices may tilt the direction of invention, they were more of
a steering wheel, not the motor, of technological progress.
David Landes
- Emphasises the political and cultural characteristics of nations → suggests
European countries pulled ahead of China because the Chinese state was too
powerful and stifled innovation, and as Chinese culture at the time favoured
stability over change.
Gregory Clark
- Keys to success were cultural attributes such as hard work and savings, which were
passed onto future generations.
Kenneth Pomeranz
- Claims that superior European growth after 1800 was more due to the abundance of
coal in Britain than to any cultural or institutional differences with other countries.
- Also argues that Britain’s access to agricultural production in its New World
colonies (especially sugar and its by-products) fed the expanding class of
industrial workers → helping them escape the Malthusian trap.
- The European take-off was likely the result of a combination of scientific,
demographical, political, geographical and military factors.
, - Economic historians have made progress in quantifying economic growth over
the long run → helps clarify what happened and why it happened. Their work
involves comparing real wages in countries over the long run by collecting both
wages and the prices of goods that workers consumed.
Economies breaking out of the Malthusian trap
- National trajectories of the early followers were influenced in part by the dominant
role of Britain in the world economy.
- Germany could not compete with Britain in textiles, but the gov and large banks
played a major role in building steel and other heavy industries.
- Japan outcompeted Britain in some Asian textile markets. They selectively
copied both technology and institutions → introduced a capitalist economic
system while retaining many traditional Japanese institutions.
- China experienced the capitalist revolution when the Communist Party led a
transition away from the centrally planned economy.
- India is the first major economy in history to have adopted democracy (universal
voting rights) prior to its capitalist revolution.
2.2 Economic models: how to see more by looking at less
- To create an effective model we need to distinguish between the essential features of
the economy that are relevant to the question we want to answer and unimportant
details that can be ignored.
- Malthus’ explanation of why improvements in technology could not raise living
standards was also based on a model → a simple description of the
relationships between income and population.
How models are used in economics
- Fisher’s study of the economy illustrates how all models are used:
1. First he built a model to capture the elements of the economy that he thought
mattered for the determination of prices.
2. Then he used the model to show how interactions between these elements
could result in a set of prices that did not change.
3. Finally he conducted experiments with the model to discover the effects of
changes in economic conditions: for example, if the supply of one of the
goods increased, what would happen to its price? What would happen to the
prices of all of the other goods,
- Equilibrium → a situation that is self-perpetuating → something of interest does
not change unless an outside or external force for change is introduced that
alters the model’s description of the situation.
- An income at subsistence level is an equilibrium → movements away from
subsistence income are self correcting; they automatically lead back to
subsistence income as population rises.
- Equilibrium means one or more things in the model are constant, i.e. we might see
an equilibrium in which GDP or prices are increasing, but at a constant rate.
- When we build a model, the process follows these steps:
, 1. We construct a simplified description of the conditions under which people
take actions.
2. Then we describe in simple terms what determines the actions that people
take.
3. We determine how each of their actions affect each other.
4. We determine the outcome of these actions → often an equilibrium.
5. We try to get more insight by studying what happens to certain variables
when conditions change.
- Economic models often use mathematical equations and graphs → help
communicate statements about models precisely.
- A model starts with some assumptions or hypotheses about how people behave, and
gives us predictions about what we will observe in the economy. Gathering data on
the economy, and comparing it with what a model predicts, help us to decide whether
the assumptions we made when we built the model - what to include, and what to
leave out - were justified.
- Govs, central banks, corporations, trade unions, and anyone else who makes
policies or forecasts use some type of simplified model.
What makes a good model
- Clear → it helps us better understand something important
- Predicts accurately → predictions are consistent with evidence.
- It improves communication → it helps us understand what we agree (and
disagree) about.
- It is useful → we can use it to find ways to improve how the economy works.
2.3 Basic concepts: prices, costs, and innovation rents
Four key ideas of economic modelling
- Ceteris paribus and other simplifications help us focus on the variables of interest.
- Incentives matter, because they affect the benefits and costs of taking one action as
opposed to another.
- Relative prices help us compare alternatives.
- Economic rent is the basis of how people make choices.
Ceteris paribus and simplification
- ‘Holding other things constant’ or ‘other things equal’.
- Economists often simplify an analysis by setting aside things that are thought to be of
less importance to the question of interest.
- Ceteris paribus assumptions, when used well, can clarify the picture without
distorting the key facts.
- When looking at the way a capitalist economic system promotes technological
improvement, you look at how changes in wages affect firms’ choice of technology.
For the simplest model we ‘hold constant’ other factors affecting firms, we
assume:
- Prices of all inputs are the same for all firms.
- All firms know the technologies used by other firms.
- Attitudes towards risk are similar among firm owners.
Incentives matter
Improvements in technology → growth in living standards
- Wages, the cost of machinery, and other prices all matter when people make
economic decisions.
- In a capitalist economy, innovation creates temporary rewards for the innovator
→ provides incentives for improvements in technology that reduce costs →
rewards are destroyed by competition once the innovation diffuses throughout
the economy.
- Population, the productivity of labour, and living standards may interact to produce a
vicious circle of economic stagnation.
- The permanent technological revolution (associated with capitalism) allowed some
countries to make a transition to sustained growth in living standards.
The industrial revolution
- Economic models help explain the Industrial Revolution, and why it started in Britain.
- Coal played a central role in the Industrial Revolution → UK was able to exploit a
vast reserve of what is effectively stored sunlight → coal has been the
environmental impact of burning fossil fuels.
- Example: James Watt’s steam engines were gradually improved over a long
period of time and were eventually used across the economy → steam engines
used in mining, powered water pumps, textiles, manufacturing, railways and
steamships → an example of general-purpose innovation or technology.
Malthusianism - Thomas Robert Malthus
- A sustained increase in income per capita would be impossible → even if
technology improved and raised the productivity of labour, people would still
have more children as soon as they were somewhat better off → population
growth would continue until living standards fell to subsistence level, halting the
population increase → hence, Malthus’ vicious cycle of poverty was widely
accepted as inevitable.
- The Industrial Revolution broke Malthus’ vicious circle → advances in technology
and increased use of non-renewables increased the amount that a person could
produce in a given amount of time (productivity) → incomes increased even as
the population increased.
Technology can outpace the
population growth that
resulted from the increased
income.
There was a long period in which living standards were
trapped according to Malthusian logic, followed by a
dramatic increase after 1830.
,2.1 Economists, historians, and the industrial revolution
Robert Allen
- Presents a model for the sudden and dramatic rise in living standards that began in
18th century Britain.
- Gives a central role to two features of Britain’s economy at the time → the
relatively high cost of labour and the low cost of local energy sources, drove the
structural changes of the Industrial Revolution.
Joel Mokyr
- Claims that the real sources of technological change are due to Europe’s
scientific revolution and its Enlightenment of the century before → this period
brought the development of new ways to transfer and transform elite scientific
knowledge into practical advice and tools for the engineers, who used it to build
machines.
- While wages and energy prices may tilt the direction of invention, they were more of
a steering wheel, not the motor, of technological progress.
David Landes
- Emphasises the political and cultural characteristics of nations → suggests
European countries pulled ahead of China because the Chinese state was too
powerful and stifled innovation, and as Chinese culture at the time favoured
stability over change.
Gregory Clark
- Keys to success were cultural attributes such as hard work and savings, which were
passed onto future generations.
Kenneth Pomeranz
- Claims that superior European growth after 1800 was more due to the abundance of
coal in Britain than to any cultural or institutional differences with other countries.
- Also argues that Britain’s access to agricultural production in its New World
colonies (especially sugar and its by-products) fed the expanding class of
industrial workers → helping them escape the Malthusian trap.
- The European take-off was likely the result of a combination of scientific,
demographical, political, geographical and military factors.
, - Economic historians have made progress in quantifying economic growth over
the long run → helps clarify what happened and why it happened. Their work
involves comparing real wages in countries over the long run by collecting both
wages and the prices of goods that workers consumed.
Economies breaking out of the Malthusian trap
- National trajectories of the early followers were influenced in part by the dominant
role of Britain in the world economy.
- Germany could not compete with Britain in textiles, but the gov and large banks
played a major role in building steel and other heavy industries.
- Japan outcompeted Britain in some Asian textile markets. They selectively
copied both technology and institutions → introduced a capitalist economic
system while retaining many traditional Japanese institutions.
- China experienced the capitalist revolution when the Communist Party led a
transition away from the centrally planned economy.
- India is the first major economy in history to have adopted democracy (universal
voting rights) prior to its capitalist revolution.
2.2 Economic models: how to see more by looking at less
- To create an effective model we need to distinguish between the essential features of
the economy that are relevant to the question we want to answer and unimportant
details that can be ignored.
- Malthus’ explanation of why improvements in technology could not raise living
standards was also based on a model → a simple description of the
relationships between income and population.
How models are used in economics
- Fisher’s study of the economy illustrates how all models are used:
1. First he built a model to capture the elements of the economy that he thought
mattered for the determination of prices.
2. Then he used the model to show how interactions between these elements
could result in a set of prices that did not change.
3. Finally he conducted experiments with the model to discover the effects of
changes in economic conditions: for example, if the supply of one of the
goods increased, what would happen to its price? What would happen to the
prices of all of the other goods,
- Equilibrium → a situation that is self-perpetuating → something of interest does
not change unless an outside or external force for change is introduced that
alters the model’s description of the situation.
- An income at subsistence level is an equilibrium → movements away from
subsistence income are self correcting; they automatically lead back to
subsistence income as population rises.
- Equilibrium means one or more things in the model are constant, i.e. we might see
an equilibrium in which GDP or prices are increasing, but at a constant rate.
- When we build a model, the process follows these steps:
, 1. We construct a simplified description of the conditions under which people
take actions.
2. Then we describe in simple terms what determines the actions that people
take.
3. We determine how each of their actions affect each other.
4. We determine the outcome of these actions → often an equilibrium.
5. We try to get more insight by studying what happens to certain variables
when conditions change.
- Economic models often use mathematical equations and graphs → help
communicate statements about models precisely.
- A model starts with some assumptions or hypotheses about how people behave, and
gives us predictions about what we will observe in the economy. Gathering data on
the economy, and comparing it with what a model predicts, help us to decide whether
the assumptions we made when we built the model - what to include, and what to
leave out - were justified.
- Govs, central banks, corporations, trade unions, and anyone else who makes
policies or forecasts use some type of simplified model.
What makes a good model
- Clear → it helps us better understand something important
- Predicts accurately → predictions are consistent with evidence.
- It improves communication → it helps us understand what we agree (and
disagree) about.
- It is useful → we can use it to find ways to improve how the economy works.
2.3 Basic concepts: prices, costs, and innovation rents
Four key ideas of economic modelling
- Ceteris paribus and other simplifications help us focus on the variables of interest.
- Incentives matter, because they affect the benefits and costs of taking one action as
opposed to another.
- Relative prices help us compare alternatives.
- Economic rent is the basis of how people make choices.
Ceteris paribus and simplification
- ‘Holding other things constant’ or ‘other things equal’.
- Economists often simplify an analysis by setting aside things that are thought to be of
less importance to the question of interest.
- Ceteris paribus assumptions, when used well, can clarify the picture without
distorting the key facts.
- When looking at the way a capitalist economic system promotes technological
improvement, you look at how changes in wages affect firms’ choice of technology.
For the simplest model we ‘hold constant’ other factors affecting firms, we
assume:
- Prices of all inputs are the same for all firms.
- All firms know the technologies used by other firms.
- Attitudes towards risk are similar among firm owners.
Incentives matter
