The industrial revolution, Malthusian constraints and modelling

A view of Machester from Kersal Moor, Willian Wylde (1852)

The industrial revolution that occurred in Britain during the mid to late 18^th century initiated an unprecedented increase in material living standards that continues today. Before the mid-18^th century, income per capita was stable and relatively equal across the world with the emergence of global inequality occurring concurrent with the industrial revolution (see below). 

Gross domestic product per capita depicting data from Maddison (2007)

This has led to the period being known as ‘the great divergence’. As the historian P.H.H. Vries writes:

‘The great divergence in the end, by definition, must boil down to the fact that during its industrialisation Britain escaped from the Malthusian constraints and Smithian limits that characterised (advanced) organic economies’. (Vries 2001 p 423).

This escape from ‘Malthusian constraints’ described by Vries indicates how the industrial revolution caused a considerable change in the relationship between economic activity and the natural environment: from being limited by a dependence on the natural environment, production was now able to accelerate considerably through mineral and fossil fuel exploitation (Thomas 1985). However, although the industrial revolution changed the nature of the production-environment relationship, it did not terminate it; contemporary economic activity remains dependent on the environment. The present-day dependence of production on the natural environment might seem obvious to some, but I believe that the relational shift caused by the industrial revolution has led to a chronic neglect of environmental considerations within mainstream academic economics.

This is particularly apparent within the esoteric subject of economic modeling. Whenever you hear that the IMF or some similar institution has produced an economic forecast, it’s not just the outcome of a bunch of suits sat in a room gazing at crystal balls. These forecasts are produced using mathematical models of that consist of thousands of equations intended to describe the significant relationships within an economic system[1]. Establishing these relationships is a considerable task and therefore a degree of simplification is necessary and, because the natural environment does not overtly limit contemporary economic production, there has been a tendency to ‘simplify’ away environmental factors. Although major commodity prices such as oil and grain are usually included, there is no consideration of soil fertility, water quality, climate or any similar ‘uneconomic’ environmental variables. 

Such oversight is dangerous. As previously stated, economic activity is still dependent on and impacts the environment. If models are unable to capture how these environmental impacts change in response to economic variation and how these changes feedback into economic systems, the environment is going to remain inadequately considered by policy makers and economies are going to become increasingly vulnerable to external environmental impacts. Thankfully, the environment-shaped hole in contemporary models is being addressed by several projects that are attempting to create new models capturing interactions between economic activity and the environment (for example see Tukker et al 2009 and Peters et al 2011).

Although the particular environment-economy relationships included in these new models differ between projects and are often estimated from past data, which risks overlooking threshold effects, their development can only be seen as a good thing as they are challenging orthodox models in which the economy is represented as a self-contained system unbound from the ‘malthusian constraints’ of the environment.  

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[1] (sadly more tangible and entertaining models such as the Phillip’s model are no longer used).