Rent Extraction, Population Growth and Economic Development: Development Despite Malthus' Theory and Precursors to the Industrial Revolution

Abstract

Economic Theory, Applications and Issues (Working Paper N°73) ; Several contemporary economists claim that 'real' economic development only occurred following the Industrial Revolution. We contend that this is only so if a narrow view is taken of what constitutes economic development, namely increasing per capita income. Given a wider perspective, we argue that economic development occurred in hunter-gatherer societies and eventually accelerated in the second stage of the Agricultural Revolution. During this stage, a small dominant class (the elite) were able to extract rent (the economic surplus) from the mass of the population (the dominated) which they could use for development purposes. As a result of this rent extraction, the bulk of the population remained at subsistence level. Nevertheless, dissipation of the rent as a result of population increase was prevented. Consequently, the Malthusian trap could be avoided and the economic surplus could be used by the elite for development or other purposes. Whether or not economic development occurred depended on how the elite allocated the economic surplus. In the second stage of the Agricultural Revolution, the economic surplus was extracted primarily in the form of staples and the exchange of commodities was mostly directly controlled by the elite. This situation changed as states became larger in size and commodities became more diverse. In the few centuries preceding the Industrial Revolution in Europe, monarchs exerted decreasing direct control over the exchange, production and use of commodities. This was particularly noticeable in England. Also devolution of increased political power to nobles and local areas added to principal-and-agent problems. Sovereigns, instead of concentrating on the extraction of the economic surplus in the form of staples, increasingly relied on its extraction and storage in the form of treasures, precious metals and gems. Monarchs (in order to maximize their net extraction) focused on increasing the number of different markets ...