Industrialisation and the origins of modern prosperity: evidence from the United States in the 19th century

by Ori Katz (Tel Aviv University)

Wiki Commons. Market scene by Pieter Aertsen, c.1550


The largest economic mystery is the modern prosperity of humankind. For thousands of years since the Neolithic revolution, most humans lived in small communities, working as farmers, and their average standard of living did not change much.

But in the nineteenth century, things changed: large parts of the world become industrialised. In those parts, people moved to live in huge cities, where they worked in manufacturing and commerce, had fewer children, invested more in schooling, and their standard of living began to rise, and then to rise dramatically, and it has never stopped since. Whether you look at life expectancy, birth fatality, income per person or any other measure, the trend is the same. And we don’t really know why.

We have a lot of theories. Some believe that this dramatic change has something to do with a geopolitical environment that encouraged competition and maintained stability in property rights. Others talk about a change in human preferences, maybe even in human biology. But in every theory, two of the main ingredients are the dramatic reduction in fertility and the increasing investment in human capital during the late nineteenth century.

This research examines the effect of industrialisation on human capital and fertility in the United States during the period from 1850 to 1900. This effect is hard to identify, for example because human capital also affects industrialisation, or because other variables such as ‘culture’ may affect both.

To deal with those problems, the study uses the westward expansion of the country as a ‘natural experiment’. The appearance of new large cities such as Chicago and Buffalo led to the development of new transport routes, and the study looks at counties that happened to be close to those new routes.

Those counties experienced industrialisation only because of their geographical location, and not because of the human capital of the local population or other variables. This means that analysing them is similar to a laboratory experiment, where it is possible to change only one parameter and leave the others intact.

Results show a very large effect of industrialisation on both fertility and human capital. These results are in contrast with an old theory according to which industrialisation was a ‘de-skilling’ process that increased the demand for unskilled labour. It seems that industrialisation was conducive to human capital.

They also find that the effects of industrialisation on both fertility and human capital were larger in counties that were already more developed in the first place. This led to a divergence between them and less developed counties. Indeed, when we look at the country level, we see increasing gaps between the industrialised countries and the rest of the world, starting in the nineteenth century, just like the gaps shown at the county level.

The modern period of growth is still a mystery, but these research results tell us that the effects of industrialisation on fertility and human capital are an important piece of the puzzle. These effects might be the reason for the great divergence between nineteenth century economies that created the modern wealth gaps between nations.

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