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

Abstract

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.

Keywords: Competition, Industrial Revolution, Innovation, Market Revolution, Unified Growth Theory

JEL Classification: N33, O14, O33, O41