The evolution of markets and the revolution of industry : a quantitative model of England’s development, 1300-2000

This paper argues that an economy's transition from Malthusian stagnation to modern growth requires markets to reach a critical size, and competition to reach a critical level of intensity. By allowing an economy to produce a greater variety of goods, a larger market makes goods more substitutable, raising the price elasticity of demand, and lowering mark-ups. Firms must then become larger to break even, which facilitates amortizing the fixed costs of innovation. We demonstrate our theory in a dynamic general equilibrium model calibrated to England's long-run development and explore how various factors affect the timing of takeoff.European Community's Seventh Framework ProgramFinancial aid from the European Commission (EFIGE Grant 225343 and HI-POD Grant 225551), the Comunidad de Madrid (PROCIUDAD-CM), and the Spanish Ministry of Science (ECO2008-01300) is acknowledged