The Colonial Origins of the Industrial Revolution

This paper attempts to provide a coherent general equilibrium explanation for the joint U.S-British evolution during the last thousand years. We typified this period by initial Malthusian stagnation (before 1500); discovery and colonization (between 1500 and 1750); independence of the colony and the outset of an industrial revolution in the Empire (between 1750 and 1800); sustained economic growth (after 1800); and overtaking by the former colony (after 1900). We set up a model in which both economies transform themselves from Malthusian economies to Romer type of economies over the course of centuries. The ultimate cause of this transformation is the sudden discovery of a large but sparsely populated territory (the U.S or the Colony) by a more advanced but territorially smaller country (Britain or the Empire). This discovery ignites a gradual process of colonization, technological transfer to the colony, population growth, both in the Empire and in the Colony, and urbanization of the Empire. The significantly larger territorial size of the Colony guarantees its eventual independence since its long term population size is significantly larger than the Empire’s and technologies of war can be copied. The increased population size of the Empire and particularly its high rate of urbanization – both legacy of the colonization era – together with the sudden vanishing of rent seeking opportunities after the independence of the colony make the use economies of scale in the former Empire finally profitable. As a result, an industrial revolution with sustained economic growth takes off in the former Empire right after independence. An industrial revolution also eventually ignites in the former Colony due to its increasing population size and technological diffusion from the former Empire. Finally, the larger population size of the former Colony, due to its larger territorial size, guarantees an eventual overtaking in terms of per-capita output thanks to its more extensive use of economies of scale. In the long-run, both economies grow at the same rate but the former colony is richer.