The Great Divergence in World
Incomes:
Why Are Some Countries Rich and
Others Poor?
Bob Allen
Professor of Economic History
Nuffield College, Oxford
2008
Part 1:
When did Northwestern Europe
pull ahead of the Rest of the World?
The Great Divergence Debate
• The classical economists and most scholars
since have argued that Europe was ahead of
Asia for a very long time. They try to explain
why:
– Smith: Minimal government and openness to trade
– Malthus: Differences in marriage patterns
– Marx: capitalist versus other institutions (Asiatic
mode of production)
The California School has challenged
this.
• Key books:
– Ken Pomeranz, The Great Divergence
– Bin Wong, China Transformed
– James Lee and Wang Feng, One Quarter of Humanity:
Malthusian Mythology and Chinese Realities
• They claim that income differences between Europe
and Asia were small c. 1800 and Asian institutions
were adequate for development.
• Evidence for incomes is very weak.
I will argue that the California School
is wrong and that northwestern Europe
pulled ahead of Asia 1500-1750.
• I begin by measuring income differences.
• Maddison’s GDP estimates are very
unrealiable.
• Instead I rely on real wages. They measure
the incomes of workers and perhaps other
people as well.
Measuring real wages requires data on
wages and consumer prices.
• These are available for many European cities in price
histories.
– Many have been written in last 150 years
– Historian finds an institution that has lasted hundreds of
years and copies prices of all transactions.
– Published in books
• I have computerized these
– Weights and measures converted to metric
– Money converted to grams of silver
• This work is being extended to Asia
The first efforts were for Europe,
followed quickly by the Ottoman
Empire:
• Jan Luiten van Zanden, “Wages, and the Standards of
Living in Europe,” European Review of Economic
History, 1999, 175-98.
• Robert C. Allen, ‘The Great Divergence in European
Wages and Prices,’ Explorations in Economic
History, 2001, 411-447.
• S. Őzmucur and S. Pamuk, ‘Real Wages and
Standards of Living in the Ottoman Empire,” Journal
of Economic History, 2002, 293-321.
Now this research is being extended to
Asia:
• D Ma and J-P Bassino, “Japanese Unskilled Wages in
International Perspective,” Research in Economic
History, 2005.
• RC Allen, J-P Bassino, D Ma, C Moll-Murata, J-L
van Zanden, ‘Wages, prices, and Living Standards in
China, Japan, and Europe, 1738-1925”
• RC Allen, “India in the Great Divergence,” in Hatton,
O’Rourke, Taylor, eds., The New Comparative
Economic History: Essays in Honor of Jeffery G.
Williamson, 2007, pp. 9-32.
These studies involve comparing:
• Wage rates, which are usually expressed in
grams of silver per day.
• Consumer prices: usually the cost of a ‘basket
of goods’.
• Welfare ratio: a full year’s earnings divided by
the cost of maintaining a family for a year.
Here’s how daily wages compared:
g r a m s o f s ilv e r p e r d a y
Labourers' wages around the world
20
London
15
Amsterdam
Vienna
10
Florence
5
Delhi
0
1375
1475
1575
1675
1775
Beijing
Did high silver wages translate into
a high standard of living?
The answer depends on the cost of
living!
To measure the cost of living:
• Collect prices of all of the important consumer
goods.
• These must be converted to grams of silver per
metric unit.
• A basket of goods must be specified and its
cost computed.
A basket is specified for an adult male
covering a whole year.
• Various standards of comfort could be chosen.
• My first basket was what I now call the European
respectability basket. This is supposed to represent
total, annual spending for a man.
• This supplies 1940 kcalories per day.
• It was inspired by eighteenth century budgets and
poor house diets.
• Bread is the main carbohydrate. Beer or wine and
meat are included.
• Non-foods are included.
• Rent at 5% is added on.
Welfare ratio for a family:
• WR=Annual income/annual cost of subsistence
• Annual income = man’s annual income
assuming full time, full year work
• Annual cost of subsistence = 3 times cost of
basket (including 5% for rent).
• This annual subsistence cost includes man,
woman, and children
• If WR=1, income is just enough to buy the
specified basket or standard of living.
Roman Empire c. 300 AD
The problem with this basket is that it
is too expensive for most people in the
world!
• Therefore, I constructed a ‘bare bones’ minimum
basket. This is supposed to represent total, annual
spending for a man.
• This also supplies 1940 kcalories per day, mainly
from the cheapest grain.
• Small amounts of meat, beans, butter, or oil to supply
protein and fat in keeping with local diet.
• Small quantities of non-foods are included.
• Rent at 5% is added on.
Subsistence Incomes: Baskets of Goods
European oats
Beijing sorghum
quantity
nutrients/day
quantiy nutrients/day
per person
grams of per person
grams of
per year calories protein
per year calories prot
sorghum
oats
163
rice
millet
bread
beans/peas
5
meat
5
butter/oil
3
cheese
3
eggs
beer
sugar
soap
1.3
linen/cotton 3
candles
1.3
lamp oil
1.3
fuel
3.0
total
kg
1745
75
kg
kg
kg
kg
47
34
60
31
4
3
0
2
kg
m
kg
l
M BTU
1914
156
1453
48
39.52
8
3
370
34
60
28
3
0
1917
79
3 m
2.0 M BTU
84
The Great Divergence in Living Standards Happened 1400-1750
Subsistence Ratio for Labourers
income/cost of subsistence basket
6
London
5
Amsterdam
4
Vienna
3
2
Florence
1
Delhi
0
1375
1475
1575
1675
1775
1875
Beijing
Workers around the World earned incomes 3 – 4
times subsistence in 1400.
• Some of the surplus was spent on more
calories.
• Much of the surplus was spent on better
quality food—meat, alcohol.
The Great Divergence preceded the
Industrial Revolution:
• English and Dutch workers still earned 3 – 4
times subsistence.
• They provided the mass market for the
‘consumer revolution.’
• Workers in India, China, and south and central
Europe earned only enough to survive
(Welfare Ratio = 1).
Part II: Why did northwest Europe
pull ahead?
The immediate explanation is that the high wage
economies were economically more developed:
1500
1800
rural
nonagriurban culture agric
rural
nonagri
urban culture agric
greatest transformation
England
.07
.18
.74
.29
.36
.35
significant modernization
Netherlands
.30
Belgium
.28
.14
.14
.56
.58
.34
.22
.25
.29
.41
.49
slight evolution
Germany
France
Austria/Hungary
Poland
.08
.09
.05
.06
.18
.18
.19
.19
.73
.73
.76
.75
.09
.13
.08
.05
.29
.28
.35
.39
.62
.59
.57
.56
little change
Italy
Spain
.22
.19
.16
.16
.62
.65
.22
.20
.20
.16
.58
.64
Wage was maintained in northwest Europe (W)
and fell elsewhere (W1)
Why was northwest Europe more successful?
• Legal, constitutional, institutional development?
• Culture?
• In keeping with the assessment of Marxism, I investigate:
– Agrarian structure? No
– Commercial expansion? Yes
• I will review evidence about agriculture and about energy to
argue that urban growth was a cause of these developments.
Agricultural revolution
Commercial
expansion
Urban
growth
Cheap energy (coal)
High wages
Agriculture did play an important role:
output per worker
Output per worker is agricultural output divided by the
agricultural population from earlier population
breakdown.
• Agricultural output is calculated from a demand curve.
• Other investigators have used this procedure for Spain, the Netherlands,
and Italy.
• This procedure makes per capita consumption of agricultural products a
function of income and price.
– Q = P-.6W.5M.1N
– P = price, W = wage income, M=price manufactures, N=population
– Estimates of net agricultural exports must be added to go from
consumption to production.
• The output estimates are consistent with direct calculations for England and
the Netherlands.
Standard explanation emphasizes enclosures and
capitalist farming:
Surviving medieval ridge and furrow
In fact, these institutional changes made only
minor contributions to productivity growth:
Much of the incentive to increase productivity
was a response to the growth of cities:
Sir James Steuart (1767) had the essential insight: “a farmer will not labour
to produce a superfluity of grain relative to his own consumption, unless he
finds some want which may be supplied by the means of the superfluity.”
Sixty years later, Gibbon Wakefield spelled out the global context: “In
England, the greatest improvements have taken place continually, ever
since colonization has continually produced new desires amongst the
English, and new markets wherein to purchase the objects of desire. With
the growth of sugar and tobacco in America, came the more skillful growth
of corn in England. Because in England, sugar was drank and tobacco
smoked, corn was raised with less labour, by fewer hands.
If farmer’s increased output, they could keep up
with high wage economy:
The Growth of London created cheap energy:
• London population
– 1500: 50,000
– 1600: 200,000
– 1700: 500,000
– 1800: 1,000,000
• This growth created the British coal industry, which was
unique in the world.
• The British coal industry gave Britain the cheapest energy in
the world.
• Cheap energy led to invention of energy using technology and
the expansion of energy using industries.
As a result, northern and western Britain had the
cheapest energy in the world.
Next challenge: Put these ideas together in a model that
separates out the causes of success and failure in the
early modern economy:
• Things to explain (endogenous variables)
– Real wage
– Urbanization
– Agricultural productivity
– Proto-industrialization
• Explanatory factors (exogenous variables)
– population
– Agricultural land
– Productivity in textiles (new draperies)
– Intercontinental trade (result of imperial policy)
– Price of energy
– Prince or republic
– literacy
A data base is put together
• Countries at fifty or one hundred year intervals
• Uses earlier occupational distribution data
• Agricultural total factor productivity estimated from output,
land, and labour
• Other variables like textile productivity, literacy, trade data are
calculated.
Textile productivity is measured as the ratio of
input prices (wool, labour) to cloth price:
Energy price
Equations of Motion of the Early Modern Economy
Wage equation
LNWAGE = .23 LNURB +.54 LNAGTFP +.40LNTL -.03PRINCE -.66
Agricultural productivity equation
LNAGTFP = .23 LNURB + .50 LNPROTO +.44 LNWAGE +.18 ENCL
+.06 PRINCE +.40
Urbanization equation
LNURB = .40 LNAGTFP +.10 TRADEPOP -.14 LNPENERGY + .79
LNURBLAG
+ .05 PRINCE - .28
Proto-Industry equation
LNPROTO = -.93 LNAGTFP -1.00 LNWAGE +1.27 MANPROD
-.18 PRINCE -.80
The model is tested by seeing if it replicates the various
national histories. Here is the simulated wage:
10
9
England
8
Italy
7
France
6
Nether
5
1300
1500
1700
1800
Simulated agricultural TFP
2
1.8
England
1.6
Italy
1.4
France
1.2
Nether
1
0.8
1300
1500
1700
1800
Simulated urbanization rates:
0.35
0.3
England
0.25
Italy
0.2
France
0.15
Nether
0.1
0.05
1300
1500
1700
1800
We can use the model to identify the causes of
England’s advance. Can we turn England into France?
Here are simulated wages:
10
sim act
9
no rep
8
no encl
7
no man
6
no trade
5
no coal
1300
1500
1700
1800
Simulated urbanization
0.35
sim act
0.3
no rep
0.25
no encl
0.2
no man
0.15
no trade
0.1
0.05
no coal
1300
1500
1700
1800
Simulated agricultural TFP
1.8
sim act
1.6
no rep
1.4
no encl
1.2
no man
no trade
1
0.8
no coal
1300
1500
1700
1800
The Great Divergence was mainly the result of English
and Dutch success in the world economy.
• To a significant extent, this was successful mercantilism.
• England and the low countries were the high wage part of the
world.
• England was also the cheap energy region of the world.
Part III: Why did the early modern Great
Divergence lead to the Industrial Revolution?
The problem is explaining why the steam engine, cotton
spinning, coke smelting, etc., were invented and
adopted in Britain in the 18th century.
• These were macro-inventions
– Radically changed factor proportions (biased technical
change)
– Great potential for elaboration
– Ideas came from outside industry
– Despite their revolutionary potential, they were barely
viable commercially even under the most favourable
circumstances.
Were these technologies invented because of
better ‘fundamentals’?
•
•
•
•
Better property rights or limited government? No
Better culture? No
Better science? No
Better geography?
– Not better agricultural resources
– Britain had developed coal but other countries had it.
The macro-inventions were made in 18th century Britain
because that was the first time and place that it paid to
invent them.
• The macro-inventions were biased technical changes.
• They used inputs that were cheap in Britain and saved inputs
that were dear.
• Even under British conditions, they were barely profitable to
operate.
• They were not profitable to use elsewhere.
Invention was an economic activity influenced
by factor prices.
• “Invention is 1% inspiration and 99% perspiration.” (Edison)
– Inspiration for macro-inventions came from outside the
industry (science, copying, and so forth)
– Sometimes banal
• Perspiration refers to R&D.
– Perfecting the engineering was most of invention.
– This entailed costs.
• Factor prices determined adoption
• Adoption determined benefits
• Benefits necessary for R&D
• Therefore, factor prices affected invention.
Micro-inventions
•
•
•
•
•
Realized the potential of the macro-inventions
Came from local learning
Tended to produce neutral technical change
Unleashed path dependent trajectory of improvement.
Eventually cut costs enough to make the adoption of the
macro-inventions profitable outside of Britain
• When the ‘tipping point’ occurred, the Industrial Revolution
spread abroad.
Wage Relat ive to P rice of Capit al
8
7
6
5
4
3
2
1
1550
1600
N. England
1650
1700
Strasbourg
1750
Vienna
1800
Price of Labour re lative to Ene rgy
early 1700s
5
Amsterdam
4
London
3
Paris
2
Strasbourg
1
Newcastle
0
Beijing
The British inventions led to modern economic
growth because they were more transformative.
• Cotton was a global industry
– Demand for British cotton was very price elastic
– Technical improvements led to enormous output growth
– This led to Manchester—vast urbanization
– Also a very large demand for machinery
• Steam engine and iron industries allowed
– General mechanization of industry, railway, steam ship
– Basis of 19th century global economy
– Account for almost half of growth in British labour
productivity in 19th century.
• Engineering industry was the most important creation of
British industrial revolution.
The Great Divergence led to Modern Economic
Growth—not the other way around.