Lecture 4. The Law of Increasing Returns to Scale
Recommended reading: 【Economic History】 Table of Contents (Economic History)
1. Europe’s economic growth and decline before industrialization can be inferred from Greenland’s ice sheet.
2. This prosperity and decline can be explained as follows.
3. Changes in major aggregate demand in the European economy can largely be explained through population and social order.
4. In addition to the gains from the division of labor, various other factors affected the European economy.
5. Europe’s economic growth and decline after industrialization are as follows.
1. Europe’s economic growth and decline before industrialization can be inferred from Greenland’s ice sheet.
Figure 1. An approximation of metal production in the Northern Hemisphere revealed by lead emissions found in Greenland’s ice sheet.
⑴ BC 1300 to AD 1800: We can estimate the trajectory of Europe’s economic growth and decline.
⑵ From BC 1300 to AD 100, the approximation of metal production increased steadily.
① BC 1300: 102 tons/year
② AD 100: 105 tons/year
⑶ From AD 100 to AD 800, the approximation of metal production decreased steadily.
① AD 800: 103 tons/year
⑷ From AD 800 to AD 1800, the approximation of metal production increased steadily.
① AD 1800: 105 tons/year
2. This prosperity and decline can be explained as follows.
⑴ Population, income per capita, and social order determine aggregate demand.
⑵ When aggregate demand increases, it creates pressure toward specialization in the division of labor. In other words, the gains from exchange outweigh the risks of not being able to produce certain goods on one’s own, which promotes specialization and division of labor.
⑶ Specialization in the division of labor develops economies of practice. (This is similar to “skill,” but its key feature is that it is not transmitted.)
① K-schedule: A graph where the horizontal axis is the degree of division of labor and the vertical axis is output per worker.
Figure 2. K-schedule.
⑷ (Note) The gains from the division of labor require a certain minimum market size.
⑸ Economies of practice develop learning by doing. (This is similar to “knowledge,” and its key feature is that it can be transmitted.)
⑹ Learning by doing can have overlapping effects across generations. These cumulative effects can make an economy grow cumulatively.
① Example: Lucas’s analysis of 1940s shipyard data.
⑺ (Note) Unlike rival goods, non-rival items such as technology and policy can support sustained, cumulative economic growth.
3. Changes in major aggregate demand in the European economy can largely be explained through population and social order.
⑴ Europe’s population increased steadily until around AD 200, then declined steadily until around AD 600. Thus, the population trend is similar to the trend in lead emissions.
① (Note) Economic patterns tied to population can be more diverse than one might think.
⑵ Major changes in social order also affected economic growth.
① After the decline of the Roman Empire, social order collapsed significantly, leading to reduced aggregate demand, a retreat of the division of labor, loss of knowledge, and technological regression. The loss of Roman construction techniques and reinforced cement technology illustrates this well. This can explain the decline in lead emissions from AD 100 to AD 800.
○ In Ancient Rome, many construction techniques existed, but during Europe’s “Dark Ages,” reduced demand led to the disappearance of such techniques.
○ This loss of technology is also related to the loss of artisanal skills in the modern era.
② From the Renaissance onward, active trade increased aggregate demand, promoted the division of labor, generated knowledge, and drove technological progress. This can explain the increase in lead emissions from AD 800 to AD 1800.
4. In addition to the gains from the division of labor, various other factors affected the European economy.
⑴ Hoffman argued that external factors—such as climate shocks, the spread of the Black Death, and religious wars—negatively affected economic growth.
⑵ The diffusion of technology and knowledge (e.g., know-how) also played an important role.
① Economies of practice are not the only way knowledge is created. Know-how, for example, cannot be explained solely by economies of practice.
② Representative cases include knowledge that was lost and later rediscovered through books, or technologies transferred from Asian and Arab civilizations.○ Example: paper
③ Unlike Ancient Rome, the existence of paper and movable metal type made it possible to store knowledge, enabling much more active diffusion of technology and knowledge.
④ Before industrialization, diffusion of technology and knowledge was slow. Therefore, economies tended to grow more when they were closer to trade routes and major cities.
⑶ Malthusian forces also need to be considered.
① As population increases, administrative costs rise and the food supply per person decreases.
② Europe is considered to have managed Malthusian forces relatively well.
③ The Mongol Empire and the Chinese empires are sometimes viewed as having failed to manage Malthusian forces, leading them toward decline.
⑷ In addition to productivity gains through the division of labor, capital accumulation likely contributed to some extent.
① Accumulation of human capital advanced the monetary system, and a more developed monetary system reduced missed opportunities, maximizing gains from the division of labor and developing the economy.
② Accumulation of physical capital can generate a self-reinforcing effect. This is easy to observe in modern society.
③ Nevertheless, in traditional societies, productivity improvements through technology were the main driver, and the influence of capital accumulation is considered to have been limited.
⑸ Emergence driven by population
① Pepys’s law: The probability of producing one genius per 10,000 people is higher than the probability of producing one genius per 1,000 people.
⑹ After the Black Death, Egypt’s economy declined while England’s economy grew.
① Why Egypt’s economy declined
○ Population decrease → retreat of the division of labor → technological regression → productivity decline → decline in income per capita
○ Flood control and irrigation in response to the Nile’s flooding were crucial, but absentee landowners with concentrated landholdings failed to build an efficient system
○ A centralized government tried to overcome the crisis through forced labor, but this amplified inefficiency
○ Farmers fled low-productivity rural areas and migrated to cities (a positive feedback loop)
○ Bedouins used vast lands to cultivate fodder crops for raising sheep herds
② Why England’s economy grew
5. Europe’s economic growth and decline after industrialization are as follows.
⑴ David Ricardo’s growth model
① Presented a typical growth pattern, which fits well in developing countries
② Viewed the source of economic growth as accumulation of physical capital
③ The source of capital accumulation is profit
④ As capital accumulates, scarcity of capital decreases, slowing the growth rate
⑤ Fundamentally a “dismal” perspective on economics
⑵ Schumpeter’s growth model
① Viewed the source of economic growth as technological innovation
Posted: 2019-07-04 19:30