Notes on Robert Lucas’ The Industrial Revolution

Economist and Nobel Laureate Robert E. Lucas Jr. makes some interesting observations about economic growth in the Industrial Revolution and the inequality it has wrought in his essay The Industrial Revolution: Past and Future. Much of it reminded me of Robert Wright’s optimistic arguments in Nonzero, trying to prove that the arrow of history is pointing toward a more prosperous and enjoyable future for all. I hope so, but I’m still not convinced it will happen “automatically” as a result of everyone pursuing self-interest, as these two seem to be. Still, Lucas’ arguments are interesting coming from an economic perspective.

First he explains economic growth prior to the industrial revolution:

Between year 0 and year 1750, world population grew from around 160 million to perhaps 700 million…But in contrast to a modern society, a traditional agricultural society responds to technological change by increasing population, not living standards. Population dynamics in such a society obey a Malthusian law that maintains product per capita at $600 per year, independent of changes in productivity.

…As we know from many historical examples, traditional agricultural society can support an impressive civilization. What it cannot do is generate improvement in the living standards of masses of people.

His charts are especially convincing:

Production accelerates past population in about 1900

GDP per capita for five different world regions since the Industrial Revolution; as expected, the English-speaking First World leads the pack, with Japan, France, Germany and Scandanavia close behind. The rest barely improve, especially Africa.

Population growth now slows instead of increasing when GDP rises

A reason for the decline in population growth is that instead of simply having MORE children with the newfound wealth, technology enables parents to have BETTER children with more time and money invested in them:

As family income rises, spending on children increases, as assumed in Malthusian theory, but these increases can take the form of a greater number of children or of a larger allocation of parental time and other resources to each child. Parents are assumed to value increases both in the quantity of children and in the quality of each child’s life.

Interesting ruminations on the nature of innovation and the work produced by “knowledge workers”:

It is a unique feature of human capital that it yields returns that cannot be captured entirely by its “owner” Bach and Mozart were well paid (though neither as well as he thought he deserved), but both of them provided enormous stimulation and inspiration to others for which they were paid nothing, just as both of them also gained from others. Such external effects, as economists call them, are the subject matter of intellectual and artistic history and should be the main subject of industrial and commercial history as well. These pervasive external effects introduce a kind of feedback into human capital theory: Something that increases the return on human capital will stimulate greater accumulation, in turn stimulating higher returns, stimulating still greater accumulation and so on.

A summary of the process:

On this general view of economic growth, then, what began in England in the 18th century and continues to diffuse throughout the world today is something like the following. Technological advances occurred that increased the wages of those with the skills needed to make economic use of these advances. These wage effects stimulated others to accumulate skills and stimulated many families to decide against having a large number of unskilled children and in favor of having fewer children, with more time and resources invested in each. The presence of a higher-skilled workforce increased still further the return to acquiring skills, keeping the process going.

He argues that all economies will eventually make the leap up the curve, no matter how downtrodden they are now:

The rapid growth of non-European nations (and some of the poorer European ones) is mainly responsible for the extraordinarily rapid growth of world production in the postwar era. But enough other societies have been largely left out of this process of diffusion that the degree of inequality among nations remained about the same in 1990 as it was in 1960. As those economies that have joined the modern world catch up to the income levels of the wealthiest countries, their growth rates of both population and income will slow down to rates that are close to those that now prevail in Europe. We have seen these events occur in Japan; they will follow in country after country.

At the same time, countries that have been kept out of this process of diffusion by socialist planning or simply by corruption and lawlessness will, one after another, join the industrial revolution and become the miracle economies of the future.

And he concludes with trickle-down economics of the highest moral caliber:

Nothing remotely like the income differences of our current world, differences on the order of a factor of 25, existed in 1800 or at any earlier time. Such inequality is a product of the industrial revolution…

But of the vast increase in the well-being of hundreds of millions of people that has occurred in the 200-year course of the industrial revolution to date, virtually none of it can be attributed to the direct redistribution of resources from rich to poor. The potential for improving the lives of poor people by finding different ways of distributing current production is nothing compared to the apparently limitless potential of increasing production.

Fascinating, an economist tackling the problem of companies doing good things only when it makes economic sense to do so; now it’s on a global scale.