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: www.cepr.org/pubs/dps/DP7290.asp.asp

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.