Unified growth theory

From stagnation to growth

• Sustained economic growth is a recent phenomenon, most of it having occured in the past 200 years

• World GDP:– From year 1 to 1000, no growth– From year 1000 to 1820, 50% growth– From year 1820 to 2000, 850% growth

Unified growth theory, Galor (2005)

• UGT tries to explain not only the modern rates of growth, but also the period of stagnation before the industrial revolution

• This period of stagnation is sometimes referred to as Malthusian stagnation– Malthus (1798): Long-run growth in living standards is

impossible– Why? Higher living standards -> Higher population growth (from

higher life expectancy and larger families) -> living standards fall because of fixed land supply

• However, an economy can escape from Malthusian stagnation if it does not rely on agriculture anymore: e.g., industrialization

• Model solved in class

More on unified growth theory

• One missing part so far is the demographic transition– When production took off, population growth declined

• Why? Because of the greater importance of human capital in the production process– More advanced technologies require more human

capital– People started to make fewer children, so that each

child ends up with more human capital (quality/quantity tradeoff)

– This also increased production per capita by eliminating the negative effect of population growth