8. Physical Capital in Dual Economies

Explicitly introducing the preferences that underlie the desire to bequeath land to children who continue the “farming” tradition does not affect the analysis qualitatively. It is worth showing that it can be done to complete the analysis and ensure that it is logically consistent. After Sect. 8.1 we return to the simpler approach that does not explicitly model the desire to keep land within the family.

We assume that the land is passed at death, rather than inter vivos, because this binds the children expecting to receive land to work on the family farm in their first period of adulthood.

The physical demands of farming help explain why the onset of the cottage industries and early factories increased the employment of women and children in the early stages of the Industrial Revolution, especially in regions dominated by the more strenuous Northern farming—hay, wheat, and dairy farming. For evidence in England, see Cunningham (1990) and Horrell and Humphries (1995). For the U.S., see Goldin and Sokoloff (1984).

Note that because preferences are identical, households in the traditional sector would prefer to work as much as those in the modern sector.

It is trickier to keep track of households in this chapter than in Chap. 6. In Chap. 6 it did not actually matter where we thought of workers residing because all households could work in either sector. Here, landless households can work in either sector, but landed households must reside and work in the traditional sector.

Static versions of the Specific Factors model date back to Jones (1971) and Samuleson (1971). A dynamic version of the model was first presented by Eaton (1987).

For more details see Mourmouras and Rangazas (2014).

We could have chosen a greater rise in the relative price but did not for the following reasons. As stressed by Quataert (1993), the rural sector, as is typically the case in developing economies, actually engaged in some informal manufacturing production. This means that the relative price of rural production did not rise as much as the relative price of food and primary commodities. We found that, with greater increases in the relative price of rural production, it was difficult to match the 1920 urbanization target without also assuming greater growth than was consistent with Pamuk’s findings (growth in per capita of less than one percent). A better way of addressing these points would be to allow the farmers to produce all types of goods, but we leave this for future work.

Taxing the return to capital, in addition, to wages would not alter the results much. In an open economy, the after-tax return to capital must remain equal to the after-tax world interest rate. Thus, country specific taxes cannot alter the after-tax return. However, higher taxes on capital in a given country will reduce that country’s capital-labor ratio. Thus, taxing capital in an open economy will be entirely shifted to labor by lowering before-tax wages. The primary difference between an income tax and a wage tax is that the economy reduces its capital-labor ratio as well as its total capital stock. See Problem 12.

Galor et al. (2009) provide a theory and supporting evidence that larger landowners have acted to slow the accumulation of human capital for similar reasons.

Our analysis ignores the growth in the size of government due to the growth in social transfers. This reason for the growth in government tends to occur in later stages of development as countries become more democratic. See Lindert (2004) for a thorough discussion of the connection between democracy and government size.