An Exceptionally Simple Theory of Industrialization

Historically, industrialization has been associated with falling relative returns to skills. This fact is at odds with most theories of industrialization, which tend to imply rising skill premia as natural concomitants to economic growth. This paper develops a very simple model of historical growth to help solve this puzzle. Assuming that human capital is both a consumption good and an investment good, the model demonstrates how rising education levels, non-monotonic fertility rates, and falling skill premia can all be explained within one theory.