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

42 Pages Posted: 15 Jul 2009

See all articles by Klaus Desmet

Klaus Desmet

Southern Methodist University (SMU); Centre for Economic Policy Research (CEPR)

Stephen L. Parente

University of Illinois at Urbana-Champaign - Department of Economics

Date Written: May 2009

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

Suggested Citation

Desmet, Klaus and Parente, Stephen L., The Evolution of Markets and the Revolution of Industry: A Quantitative Model of England's Development, 1300-2000 (May 2009). CEPR Discussion Paper No. DP7290. Available at SSRN: https://ssrn.com/abstract=1433885

Klaus Desmet (Contact Author)

Southern Methodist University (SMU) ( email )

6212 Bishop Blvd.
Dallas, TX 75275
United States

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Stephen L. Parente

University of Illinois at Urbana-Champaign - Department of Economics ( email )

410 David Kinley Hall
1407 W. Gregory
Urbana, IL 61801
United States

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