The Three Horsemen of Riches: Plague, War, and Urbanization in Early Modern Europe

How did Europe escape the "Iron Law ofWages?"We construct a simple Malthusian model with two sectors and multiple steady states, and use it to explain why European per capita incomes and urbanization rates increased during the period 1350-1700. Productivity growth can only explain a small fraction of the rise in output per capita. Population dynamics-changes of the birth and death schedules-were far more important determinants of steady states. We show how a major shock to population can trigger a transition to a new steady state with higher per-capita income. The Black Death was such a shock, raisin wages substantially. Because of Engel's Law, demand for urban products increased, and urban centers grew in size. European cities were unhealthy, and rising urbanization pushed up aggregate death rates. This effect was reinforced by diseases spread through war, financed by higher tax revenues. In addition, rising trade also spread diseases. In this way higher wages themselves reduced population pressure. We show in a calibration exercise that our model can account for the sustained rise in European urbanization as well a permanently higher per capita incomes in 1700, without technological change. Wars contributed importantly to the "Rise of Europe", even if they had negative short-run effects. Wethus trace Europe's precocious rise to economic riches to interactions of the plague shock with the belligerent political environmen and thenature of cities.