The Industrial Revolution Past and Future Robert E. Lucas Jr. John Dewey Distinguished Service Professor of Economics, University of Chicago Adviser, Federal Reserve Bank of Minneapolis We live in a world of staggering and unprecedented income inequality. Production per person in the wealthiest economy, the United States, is something like 15 times production per person in the poorest economies of Africa and South Asia. Since the end of the European colonial age, in the 1950s and ’60s, the economies of South Korea, Singapore, Taiwan and Hong Kong have been transformed from among the very poorest in the world to middle-income societies with a living standard about one-third of America’s or higher. In other economies, many of them no worse off in 1960 than these East Asian “miracle” economies were, large fractions of the population still live in feudal sectors with incomes only slightly above subsistence levels. How are we to interpret these successes and failures? Economists, today, are divided on many aspects of this question, but I think that if we look at the right evidence, organized in the right way, we can get very close to a coherent and reliable view of the changes in the wealth of nations that have occurred in the last two centuries and those that are likely to occur in this one. The Asian miracles are only one chapter in the larger story of the world economy since World War II, and that story in turn is only one chapter in the history of the industrial revolution. I will set out what I see as the main facts of the economic history of the recent past, with a minimum of theoretical interpretation, and try to see what they suggest about the future of the world economy. I do not think we can understand the contemporary world without understanding the events that have given rise to it. I will begin and end with numbers, starting with an attempt to give a quantitative picture of the world economy in the postwar period, of the growth of population and production since 1950. Next, I will turn to the economic history of the world up to about 1750 or 1800, in other words, the economic history known to Adam Smith, David Ricardo and the other thinkers who have helped us form our vision of how the world works. Third, I will sketch what I see as the main features of the initial phase of the industrial revolution, the years from 1800 to the end of the colonial age in 1950. Following these historical reviews, I will outline a theoretical structure roughly consistent with the facts. If I succeed in doing this well, it may be possible to conclude with some useful generalizations and some assessments of the world’s future economic prospects. The world economy in the postwar period Today, most economies enjoy sustained growth in average real incomes as a matter of course. Living standards in all economies in the world 300 years ago were more or less equal to one another and more or less constant over time. Following commonpractice, I use the term industrial revolution to refer to this change in the human condition, although the modifier industrial is slightly outmoded, and I do not intend to single out iron and steel or other heavy industry, or even manufacturing in general, as being of special importance. By a country’s average real income, I mean simply its gross domestic product (GDP) in constant dollars divided by its population. Although I will touch on other aspects of society, my focus will be on economic success, as measured by population and production. Our knowledge of production and living standards at various places and times has grown enormously in the past few decades. The most recent empirical contribution, one of the very first importance, is the Penn World Table project conducted by Robert Summers and Alan Heston.1 This readily available, conveniently organized data set contains population and production data on every country in the world from about 1950 or 1960 (depending on the country) to the present. The availability of this marvelous body of data has given the recent revival of mathematical growth theory an explicitly empirical character that is quite different from the more purely theoretical investigations of the 1960s. It has also stimulated a more universal, ambitious style of theorizing aimed at providing a unified account of the behavior of rich and poor societies alike. As a result of the Penn project, we now have a reliable picture of production in the entire world, both rich and poor countries. Let us review the main features of this picture, beginning with population estimates. Over the 40-year period from 1960 through 2000, world population grew from about 3 billion to 6.1 billion, or at an annual rate of 1.7 percent. These numbers are often cited with alarm, and obviously the number of people in the world cannot possibly grow at 2 percent per year forever. But many exponents of what a friend of mine calls the “economics of gloom” go beyond this truism to suggest that population growth is outstripping available resources, that the human race is blindly multiplying itself toward poverty and starvation. This is simply nonsense. There is, to be sure, much poverty and starvation in the world, but nothing could be further from the truth than the idea that poverty is increasing. Over the same period during which population has grown from 3 billion to 6.1 billion, total world production has grown much faster than population, from $6.5 trillion in 1960 to $31 trillion in 2000. (All the dollar magnitudes I cite, from the Penn World Table or any other source, will be in units of 1985 U.S. dollars.) That is, world production was nearly multiplied by five over this 40-year period, growing at an annual rate of 4 percent. Production per person—real income—thus grew at 2.3 percent per year, which is to say that the living standard of the average world citizen more than doubled. Please understand: I am not quoting figures for the advanced economies or for a handful of economic miracles. I am not excluding Africa or the communist countries. These are numbers for the world as a whole. The entire human race is getting rich, at historically unprecedented rates. The economic miracles of East Asia are, of course, atypical in their magnitudes, but economic growth is not the exception in the world today: It is the rule. Average figures like these mask diversity, of course. Figure 1 shows one way to use the information in the Penn World Table to