DP7290 The Evolution of Markets and the Revolution of Industry: A Quantitative Model of England's Development, 1300-2000

Author(s): Klaus Desmet, Stephen Parente
Publication Date: May 2009
Keyword(s): Competition, Industrial Revolution, Innovation, Market Revolution, Unified Growth Theory
JEL(s): N33, O14, O33, O41
Programme Areas: International Trade and Regional Economics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=7290

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.