The three horsemen of riches: Plague, war and urbanization in early modern Europe

How did Europe escape the "Iron Law of Wages?" We construct a simple Malthusian model withtwo sectors and multiple steady states, and use it to explain why European per capita incomes andurbanization rates increased during the period 1350-1700. Productivity growth can only explain a smallfraction 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 cantrigger a transition to a new steady state with higher per-capita income. The Black Death was such ashock, raising wages substantially. Because of Engel's Law, demand for urban products increased, andurban centers grew in size. European cities were unhealthy, and rising urbanization pushed up aggregatedeath 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 populationpressure. We show in a calibration exercise that our model can account for the sustained rise in Europeanurbanization as well as 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. We thustrace Europe s precocious rise to economic riches to interactions of the plague shock with the belligerentpolitical environment and the nature of cities.