The evolution of markets and the revolution of industry: a unified theory of growth Articles uri icon

authors

  • PARENTE, STEPHEN
  • DESMET, KLAUS

publication date

  • September 2012

start page

  • 205

end page

  • 234

volume

  • 17

International Standard Serial Number (ISSN)

  • 1381-4338

Electronic International Standard Serial Number (EISSN)

  • 1573-7020

abstract

  • This paper puts forth a theory of the Industrial Revolution whereby an economy transitions from Malthusian stagnation to modern economic growth as firms implement cost-reducing production technologies. This take-off of industry occurs once the market reaches a critical size. The mechanism by which market size affects process innovation relies on two overlooked facts pre-dating England's Industrial Revolution: the expansion in the variety of consumer goods and the increase in firm size. We demonstrate this mechanism in a dynamic general equilibrium model calibrated to England's long-run development, and explore how various factors affected the timing of its industrialization.