Human capital formation, life expectancy, and the process of Development

From the second half of the eighteenth cen-tury onward, the Western world experienced unprecedented changes in the economic envi-ronment and in virtually all other aspects of human life. After continued stagnant develop-ment, aggregate and per capita incomes entered a path of rapid and sustained growth (as de-picted in Figure 1A). At the same time, living conditions also changed radically. Mortality fell and average life expectancy at birth as well as at later ages, which had virtually been unchanged for millennia, increased significantly within just a few generations (see Figure 1B). Simulta-neously, the traditional social environment changed profoundly, as the vast majority of the population became educated. Literacy, which used to be the privilege of a small elite, became widespread among the population (as is illus-trated in Figure 1C by the population share able to sign documents). While almost all skills were acquired through apprenticeships before the In-dustrial Revolution, formal schooling represents the main channel of human capital formation afterward.1 Furthermore, the size of the popula-tion increased substantially (Figure 1D).2 This increase seems to have been driven mainly by increased longevity, rather than changed fertility behavior.3 While GDP kept growing unboundedly after the transition, the growth in life expectancy and population eventually attenuated. This paper provides a theory explaining this transition in income, life expectancy, education, and population size as the endogenous outcome of a gradual process of development. Earlier contri-butions to the literature have concentrated on the existence of multiple steady-state equilibria and have explained the transition from a stagnant re-gime to an environment of sustained growth by scale effects, exogenous technological change, or shocks that move the dynamic system from on