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The Evolution of Markets and the Revolution of Industry

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  • Stephen L. Parente

    (University of Illinois and CRENoS)

  • Klaus Desmet

    (Universidad Carlos III and CEPR)

Abstract

Why did the Industrial Revolution start sometime in the 18th century in England and not earlier and in some other country? This paper argues that the key to the start of the Industrial Revolution was the expansion and integration of markets that preceded it. Due to less regulation, increasing population, and declining trade costs, markets in England came to support an increasing variety of goods. As such, the demand became more elastic and competition intensified. This increased the benefits to process innovation. Sometime in the 18th century, these benefits became sufficiently large for firms to cover the fixed costs of innovation, giving rise to the Industrial Revolution. We illustrate this mechanism in a model with endogenous innovation and population and show that it generates a transition from a Malthusian era to a Modern Economic Growth era as well as a demographic transition and a structural transformation. We provide empirical support for our theory by documenting the evolution in markets in England prior to the Industrial Revolution and by documenting that markets at the start of the 18th century were more developed in England than in the rest of the world.

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Bibliographic Info

Paper provided by Society for Economic Dynamics in its series 2008 Meeting Papers with number 688.

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Date of creation: 2008
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Handle: RePEc:red:sed008:688

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  1. David Hummels & Volodymyr Lugovskyy, 2005. "Trade in Ideal Varieties: Theory and Evidence," NBER Working Papers 11828, National Bureau of Economic Research, Inc.
  2. Ronald Findlay & Kevin H. O'Rourke, 2007. "Preface to Power and Plenty: Trade, War, and the World Economy in the Second Millennium
    [Power and Plenty: Trade, War, and the World Economy in the Second Millennium]
    ," Introductory Chapters, Princeton University Press, Princeton University Press.
  3. Carol H. Shiue & Wolfgang Keller, 2007. "Markets in China and Europe on the Eve of the Industrial Revolution," American Economic Review, American Economic Association, American Economic Association, vol. 97(4), pages 1189-1216, September.
  4. Ronald Findlay & Kevin H. O'Rourke, 2007. "Power and Plenty: Trade, War and the World Economy in the Second Millennium (Preface)," The Institute for International Integration Studies Discussion Paper Series, IIIS iiisdp205, IIIS.
  5. Gary D. Hansen & Edward C. Prescott, 1999. "Malthus to Solow," Staff Report, Federal Reserve Bank of Minneapolis 257, Federal Reserve Bank of Minneapolis.
  6. Marvin Goodfriend & John McDermott, 1994. "Early development," Working Paper, Federal Reserve Bank of Richmond 94-02, Federal Reserve Bank of Richmond.
  7. Rosenzweig, Mark R & Evenson, Robert E, 1977. "Fertility, Schooling, and the Economic Contribution of Children in Rural India: An Econometric Analysis," Econometrica, Econometric Society, Econometric Society, vol. 45(5), pages 1065-79, July.
  8. Patrick Legros & Andrew F. Newman & Eugenio Proto, 2006. "Smithian Growth through Creative Organization," Boston University - Department of Economics - The Institute for Economic Development Working Papers Series, Boston University - Department of Economics dp-158, Boston University - Department of Economics.
  9. Ronald Findlay & Kevin H. O'Rourke, 2007. "Introduction to Power and Plenty: Trade, War, and the World Economy in the Second Millennium
    [Power and Plenty: Trade, War, and the World Economy in the Second Millennium]
    ," Introductory Chapters, Princeton University Press, Princeton University Press.
  10. Kevin O’rourke & Jeffrey Williamson, 2005. "From Malthus to Ohlin: Trade, Industrialisation and Distribution Since 1500," Journal of Economic Growth, Springer, Springer, vol. 10(1), pages 5-34, 01.
  11. Allen, Robert C., 2000. "Economic structure and agricultural productivity in Europe, 1300 1800," European Review of Economic History, Cambridge University Press, Cambridge University Press, vol. 4(01), pages 1-25, April.
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Cited by:
  1. Aleksandra Parteka & Massimo Tamberi, 2012. "Relative Product Diversification in the Course of Economic Development: Import-Export Analysis," DEGIT Conference Papers, DEGIT, Dynamics, Economic Growth, and International Trade c017_056, DEGIT, Dynamics, Economic Growth, and International Trade.

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