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Gary D. Hansen, Edward C. Prescott
NBER Working Paper No. 6858*
Issued in December 1998
NBER Program(s): EFG
---- Abstract -----
A unified growth theory is developed that accounts for the roughly constant living standards displayed by world economies prior to 1800 as well as the growing living standards exhibited by modern industrial economies. Our theory also explains the industrial revolution, which is the transition from an era when per capita incomes are stagnant to one with sustained growth. This transition is inevitable given positive rates of total factor productivity growth. We use a standard growth model with one good and two available technologies. The first, denoted the capital as inputs. The second, denoted the does not require land. We show that in the early stages of development, only the Malthus technology is used and, due to population growth, living standards are stagnant despite technological progress. Eventually, technological progress causes the Solow technology to become profitable and both technologies are employed. At this point, living standards improve since population growth has less influence on per capita income growth. In the limit, the economy behaves like a standard Solow growth model.
*Published: Hansen, Gary D. and Edward C. Prescott. "Malthus To Solow," American Economic Review, 2002, v92(4,Sep), 1205-1217.
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