1 Unified Growth Theory

We begin this chapter by combining the Malthus model studied in Chapter 5 with the Solow model studied in Chapter 3 for the purpose of accounting for the key development and growth facts outlined in Chapter 4. After combining the two models and studying its equilibrium properties, we proceed to calibrate it so as to explore to what extent various factors can account for today’s huge disparity in international income levels. This is really a question of what factor or set of factors can plausibly account for the fact that some late starters started to grow roughly 250 years after England accomplished this feat. The combined model studied in this chapter is a derivation of a model put forth by Gary Hansen and Edward C. Prescott in a 2002 article titled Malthus to Solow. It is as an example of a very recent advance in the growth literature that goes under the heading of Unified Growth Theory. This literature owes much of its start to the work of Oded Galor and David Weil, both at Brown University, particularly their 2000 paper titled Population, Technology, and Growth: From Malthusian Stagnation to the Demographic Transition and Beyond. Unified Growth Theory takes a very long historical view of economic development. It seeks to account for the fact that living standards were low and stagnant for most of human history standards but increased dramatically over the last three centuries. In effect, a unified growth model needs to generate an initial period whereby income levels are stagnant followed by a take-off where the economy escapes from the Malthusian era and begins to experience sustained increases in living standards, 2 followed by a modern growth era where the economy appears to be on a balanced growth path with a constant and positive rate of growth of per capita output. II. The Combined Theory Let us recall the structures of the Malthus Model and Solow Model. To distinguish the two model variables we will use the subscripts M and S where appropriate. The four equations that describe the Malthus model are (C-M) ttt YscN)1