1

Why did Australian living standards stagnate between 1890 and 1939?

The race between land, labour and technology

Rajabrata Banerjee* and Martin Shanahan

School of Commerce, University of South Australia

To be presented at the

Asia-Pacific Economic and Business History Conference,

14-16 February 2013, Seoul

Abstract: It is well known that Australia’s living standards stagnated between 1890 and 1939. Having

moved rapidly to a country with one of the highest per-capita GDPs in the world in 1870, there is

virtually no improvement in living standards from 1890 until 1939 when once again, positive growth

returns. Given Australia’s long-term reliance on the pastoral and agricultural sectors, we explicitly

include land as a factor of production, something that has not been done before. When land is a fixed

factor of production, population growth reduces productivity without offsetting improvements in

technology. Where available land is increasing, the net interaction with population and technological

growth is less certain. We find evidence that between 1890 and 1939 negative effect of population and

labour growth outweighed the positive effects of increasing land and technological change. This

imbalance appears to have contributed to the conditions for stagnant living standards over half a

century.

Key words: living standards; agricultural productivity; land; technology

JEL classifications: N17; O30; O40; Q15

* Corresponding author: School of Commerce, University of South Australia, GPO Box 2471, Adelaide, South

Australia 5001. Tel.:+61883027046. Email address: Rajabrata.Banerjee@unisa.edu.au

Acknowledgments: We would like to thank Thomas Harper for his valuable research assistance. We

acknowledge support of research grants from the Centre for Regulation and Market Analysis (CRMA),

University of South Australia.

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1. Introduction

Compared to the period before 1890 and after 1939, Australian per capita income and living standards

appear to languish during the intervening half-century (Banerjee, 2012; McLean and Pincus, 1982;

McLean 2013). In this paper we focus on the role of agricultural productivity and the role of land as a

factor input, as a cause of this apparent stagnation in living standards.

In an important examination of previous explanations of Australia’s long-term economic growth,

McLean (2004) highlighted the problematic nature of many contemporary accounts. While global

demand for agricultural (especially wool) and mineral products (especially gold), combined with a

small population (and high productivity) created the initial circumstances for extremely high per

capita incomes in the late 19th century, the persistence of these conditions is less clear. The period

between 1890 and World War II was marked by a relatively slow shift to industrialisation, with the

contribution of factor accumulation compared to total factor productivity remaining relatively

unchanged (Kaspura and Weldon, 1980). The continued importance after World War II of

commodities (wool), minerals (iron ore) immigration and investment, despite some shift to

manufacturing, provides further evidence of the apparently slow shift in resource allocation within

Australia.1

Earlier research discussed issues of measurement (using per capita consumption as a measure of

living standards as these grew faster than per capita income, changes in leisure hours, technological

changes) as well as issues of policy and trade openness. More fundamental questions of why

Australia appears to have avoided the resources curse, the influence of geography, institutions, social

norms have also been examined.2

The question arises, however, as to the importance of factor accumulation compared to total factor

productivity over time – and the consequences of this for living standards in Australia. Can the

relative stagnation in per capita income over the period from 1890 to 1939 be explained by the

persistence of factor accumulation compared to total factor productivity? Curiously, and despite

agriculture long being a defining feature of the Australian economy, land as a factor input remains

relatively under-examined in a formal growth model of the Australian economy.

It has been shown that if land is explicitly included as a factor of production, but assumed to be fixed,

productivity growth becomes a race between the negative effects of population growth and the

positive effects of technological progress (Madsen, et al 2010; Ang et al. 2013). Where land

1 McLean, 2004, p 341. See also Meredith and Dyster, 1999 on primary commodities being a dominant element

of internal and external markets in the long term. 2 McLean, 2004 pp 334-341. McLean 2013.

3

availability is increasing at a rate equal or exceeding population growth, however, and with

everything else staying the same, the negative impact of population growth may not be detected. In

this scenario, total factor productivity growth depends on the interplay of the relative rates of change

of three factors, land, labour and technology. The relative growth of these three factors has not been

assessed before for Australia.

This paper examines Australia’s relative productivity of different sectors across the 19th and 20

th

centuries to examine how factors such as land availability, population growth and technological

progress contributed to growth. While natural resources were clearly a critical factor underpinning

19th century living standards, and facilitated later economic development, it is also possible that

Australia was overly reliant on agriculture and failed to industrialise quickly enough to in the 20th

century to avoid stagnation in living standards. The main objective here is to examine the role of the

agricultural sector in Australian economic growth in the long term and whether it is associated with

the relatively stagnant living standards of the period between 1890 and 1939.

The next section provides a brief overview of the relative importance of the agricultural sector in

Australia, and in particular, discusses issues of land growth, and technological change. Section three

expresses the underlying endogenous growth model including land as an explicit factor of production.

Section four briefly discusses some of the data sources and presents, in graph form, some of the

overall trends in population, productivity, and land growth. Section five provides the empirical

methodology and section six presents the empirical findings of the relative rate of change in factors of

interest before our final conclusions.

2. Agriculture and land in Australia

Australia’s dependence on agriculture through the 19th and early into the 20

th century is well known.

3

Many of Australia’s main agricultural industries have been examined, and their contribution to

regional and national development assessed.4 Similarly, the long-term reliance of the economy on

agriculture and the relatively slow shift of resources into manufacturing, something that did not

happen at the same rate as other more advanced countries until World War II, have been highlighted

by others.5 It has been suggested that Australia stayed in the factor accumulation stage for a longer

period than the US and had a slower transition of growth from factor accumulation to total factor

productivity.6 By comparison, at the turn of the twentieth century, US growth was already more

dependent on total factor productivity growth than on factor accumulation, despite both countries

3 Butlin 1962; McCarty 1964; Sinclair 1976; Greasley and Oxley, 1997, 1998; Maddock and McLean 1987;

Mclean, 2003, 2004, 2013; Attard 2010.; 4 As examples see: Dunsdorfs, 1956; Barnard 1962; Davidson 1981, Henzell 2007.

5 Broadberry and Irwin 2007.

6 Kaspura and Weldon 1980.

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exhibiting relatively similar proportions of natural resource abundance. Mclean (2007) argued that

Australia’s relative income lead over the US declined partly because labour productivity lead in

Australia did not continue after 1890s.

In the period 1890-1939 several exogenous variables impacted on the Australian economy. For

example, there were the well-known international economic depressions of 1890-1894, 1929-1932

and the wars of 1899-1902, 1914-1919, and 1939-45. Other exogenous shocks, especially important

in the case of agriculture were pests such as rabbits, and droughts such as the famous Federation

drought of 1895-1903 which greatly affected Australian farm production.

Despite the economy’s reliance on agricultural production, Australian agricultural development was

also littered with set-backs and the need to learn and adapt to the environment. By 1890 Europeans

had been exploring, settling and farming in Australia for a century, and despite considerable progress

much was still being learnt about how to farm efficiently. Many of the technological ‘breakthroughs’

that improved agricultural productivity were only just occurring – or were still to come.7

For example, superphosphate, critical to enhance many Australian soils, was not widely applied in

Australian much before 1900.8 Regular liming of arable land to improve soil acidity came even later.

Even late into the 19th century the benefit of crop rotations was still being learnt. Some inventions,

especially in grains were in direct response to declining productivity in the 1870s and 1880s as the

productivity of earlier farming techniques began to wane.9 Suitable strains of barley, wheat and other

grains were really developed from this later period onward, as were better suited animal types. Even

the types of farms continued to change. By early in the 20th century mixed farming (sheep and crops),

with all its benefits for crop rotation, was growing at the expense of single crop farming, even in

previously established areas.

As further examples, consider that no large areas of legumes (pulses), beans, maize, or oilseeds were

even grown in the 19th century.

10 Barley and oats were only grown in sufficient quantity to supply

domestic consumption. As farms continued to push into new regions in the 20th century, soil

deficiencies had to be discovered and overcome.

7 There were early exceptions, such as rollers, stump-jump ploughs and mechanical harvesters for example, but

even these were only called into play in wheat farming in South Australia in the 1860s after ‘frontier farming’,

continuous farming without fertilizer, had reached its limit. Several other inventions (such as a combined seed

and fertiliser drill, and merinos) were first imported from overseas.

8 Henzell, 2007, p5. Despite this, the uptake was rapid. For example, in 1900 only 27 per cent of South

Australian wheat was sown with super- a figure that had grown to 81 per cent by 1910 Henzell. 2007, 16-17. 9 Widespread declines in wheat yields occurred in the 1870s and 1880s and again in the 1930s as expansion into

new areas brought other problems (trace element deficiencies) to light. 10

Hezell, 2007, pp 34-35

5

Despite this relatively slow advance in agricultural technological development, Australians were

aware of the importance of such breakthroughs.11

Large variations between regions, in soil types,

climate, topography and others, however, also meant that even important improvements might

advance productivity in one region, but do relatively little for another.

The single most important agricultural product for Australia before 1890, wool, was also the

beneficiary of technological improvement (in breed varieties) that were developed in the first half of

the 19th century. Fencing expanded dramatically in the 1850s and 1860s. Combining these

technological improvements with the massive expansion in pastoral settlement before 1850 (and

consolidation to 1890) it is unsurprising that after 1890 measured productivity would struggle to

match previous levels. Other advances, especially in the provision of agricultural and veterinary

science education, did not emerge until the 1920s.12

Nor was pasture improvement widely adopted

until the 1920s.13

Beef cattle farming, although done over considerable expanses of land remained,

compared to sheep farming, comparatively marginal until the 1950s. As with dairy farming, it would

be mechanical advancements after 1880 that increased productivity and provided significant

incentives for investment. Nonetheless technological improvements in this field of agriculture were

only modest until the 1930s.14

A broad inspection of most indices of agricultural and pastoral

production for Australia repeat this similar finding that increases in total and per-factor inputs and in

outputs were modest between 1890 and World War Two.

The contribution of the pastoral and agricultural sectors to Australian GDP remained comparatively

large (and in the long-term, static) over an extended period. In percentage terms, these two sectors

contributed 17.2 per cent of GDP in 1861 and 18.75 in 1890. After rather sever fluctuations caused by

drought and war, by 1920 their combined contribution was again 18.8 per cent in 1920, before slowly

declining to 13.8 per cent by 1939.15

Figure 1 reveals that the share of agricultural and pastoral GDP

in Australia’s total GDP is very stable for the whole sample period of 1860-1939. The figure also

suggests that the shifting of resources from agriculture to other sectors did not occur in Australia

between 1890 and 1939. One reason may be because agriculture and pastoral sectors were more

efficient sectors than other sectors (see Figure 3 and 4 later) and thus they continued to maintain their

share in total income. By contrast, in other countries such as the US or Canada, the late 19th and early

20th century saw the shifting of resources from agricultural (which was less efficient) to more

11

It is also suggested that some 19th

century technological innovations did not produce measureable productivity

improvements until very late in the 19th

century or even the 20th

century. (McLean 1973, p10), Agricultural

innovators were celebrated. For example, the original $2 note contained the faces of two of Australia’s most

famous agricultural innovators – John Macarthur (responsible for introducing the merino) and William Farrer

(developer of Federation wheat). 12

Henzell 2007, p 76-77. 13

Henzell, 2007 p 11 14

Henzell 2007 chapter 3. 15

Calculated from Butlin, 1985Table 8.

6

productive sectors, such as manufacturing and services. While Australia relied more heavily on the

volatile agricultural and pastoral sectors across the entire period, productivity in other sectors did not

improve.

Figure 1: Share of Agricultural and Pastoral GDPs in total GDP (in real terms)

Source: See Appendix 1.

Table 1 below shows the total employment growth in Australia for each decade from 1861 to 1940, as

well as the rates of growth in employment in the rural and non-rural sectors. In all periods,

employment growth was positive in both the rural and non-rural sectors, while growth in the rural

sector was above the national average in the twenty years before 1880. Thereafter, growth in

employment in the non-rural sector outstripped that occurring in the rural sector. The annual average

growth in non-rural employment across Australia was very stable throughout the period 1861-1939,

except in 1881-1890 when the employment growth rate jumped to 4.88 per cent per year. In 1861-

1870 the annual average growth rate is two per cent while the annual growth rate over the whole

period from 1861-1939 is only 2.5 per cent; an increase of only 0.5 per cent in 80 years. Of particular

interest to this paper, the period 1890-1939, reveals the annual growth rate is only two per cent, which

was almost same as the very first decade 1861-1870 (1.84 per cent). By comparison, rural

employment growth rate dropped continuously in every decade starting from 1860s (3.96 per cent) to

a low growth rate of 0.12 per cent per year in decade 1931-40.

The total employment growth rate shows the balance between non-rural and rural employment

growth. In the period 1890-1939, the annual average growth is 1.83 per cent, which is close to non-

rural employment growth of 2.06 per cent.

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Table 1: Average annual employment growth in rural and non-rural sectors (by decade): 1860-

1939

Period Rural (%) Non-rural (%) Total (%)

1861-1870 3.96 1.84 2.55

1871-1880 3.05 3.01 3.03

1881-1890 0.85 4.88 3.58

1891-1900 1.78 2.41 2.24

1901-1910 1.94 2.53 2.37

1911-1920 0.72 1.51 1.30

1921-1930 1.11 1.55 1.44

1931-1939 0.12 2.31 1.80

1861-1939 1.71 2.51 2.29

1890-1939 1.16 2.06 1.83

Source: See Appendix 1.

Having identified the slow growth in the rural and non-rural employment figures, the next section

provides an overview of the productivity of particular sectors of the economy.

3. Accounting for land as a factor of production

We can express the relationship between national output and the various factors of production (when

land is included as a separate variable factor) using a simple homogenous Cobb–Douglas production

function of the type:

)1)(1()1( ttttt LTKAY (1)

where Yt is real output, At is the knowledge stock, Kt is the capital stock, tT is land, Lt is labour, (1–

t) is the share of income going to capital and t is the share of income going to land under the

maintained assumption of perfect competition.16

The production function exhibits constant returns to

scale in Kt, Tt and Lt and increasing returns to scale in At, Kt, Tt and Lt together.

Re-expressed in terms of per-worker output,

tt

t

t

t

LTY

KA

L

Y )1(1

)1(

)1(1

1

, (5)

16

This simplifying assumption allows us to assume constant returns to scales in the model. Assuming other

market forms necessarily changes the returns to scale and currently remain empirically untested.

8

or,

tt

t

t L

T

Y

KA

L

Y

)1(1

)1(

)1(1

1

(6)

where )1(1

. Taking logs and differentiating eq. (6) yields:

ttt lAy ggg ..

, (7)

where gA is growth in TFP, gy is labour productivity growth, and gl is growth in land per unit of

labour. The role of capital for growth is suppressed in equations (7) under the assumption that the

economy is on a balanced growth path in which the K–Y ratio is constant.17

Capital deepening cannot

act as an independent growth factor since it is driven entirely by technological progress along the

balanced growth path (Madsen, et al., 2010).

Eq. (7) shows the indirect effect of higher population growth on productivity growth. Labour

productivity growth in eq. (7) is driven by two factors: growth in TFP (gA) and growth in land per unit

of labour (gl). While gA exerts positive effects on labour productivity growth, gl can go in either

direction, depending on the relative growth of available land for agriculture use and population

growth. In the first case, if the growth rate of the population is significantly higher than the growth

rate of agricultural land, an increase in the population will trigger lower availability of land per unit of

labour (Tt/Lt). The higher the rate of population growth, the higher will be the negative growth rate of

land per unit of labour (gl). Consequently, a lower availability of land per unit of labour negatively

affects the productivity growth rate in the long run. In the second case, however, if the growth rate of

land available for agriculture is higher than the growth rate of the population or labour, gl will have a

positive effect on productivity growth. While in the first case diminishing returns to land as a factor of

production, means the higher population growth poses a drag on productivity growth in the second

case the higher availability of land per unit of labour supresses the growth drag and overall exerts a

positive effect on labour productivity growth.

If land is not considered separately i.e. β=0 in eq. (1), then eq. (7) reduces to a standard neoclassical

growth model in which per capita income growth is entirely driven by technological progress. When

land is a factor of production, it will impose diminishing returns in the long run, as its rate of

expansion decreases relative to the other factors of production. The bigger is the share of agricultural

production in total output, the more population growth acts as a growth-drag on the economy

17

This assumption is true in the long-run when the economy is on the balanced growth path (see Klenow and

Rodriguez-Clare 1997; Madsen et al. 2010). However, in the empirical specification we can allow the temporary

movement of K-Y ratio in the short run to test the transitional dynamics.

9

provided the land to labour ratio is going down. If the land to labour ratio is going up over time,

however, then it can (at least partially) absorb the negative effects of population growth drag. Thus

the agricultural sector has the potential to have played an important role in Australia in the depression

period 1890-1939. It is important to note here that eq. (7) above applies to national labour

productivity and also to agricultural labour productivity, when only agricultural sector is considered.

Consequently, gA will then stand for growth in agricultural TFP, gy is labour productivity growth in

agriculture, and gl is growth in land per unit of agricultural labour. The effect of each variable remains

same as above, other than becoming sector specific.

4. The data and descriptive statistics: Australian growth anatomy

between 1860 and 1939

Before estimating the relative contribution of land, labour and technology we first depict the long-

term productivity trends of different sectors in the Australian economy. To identify land devoted to

urban development and agriculture more clearly, we explicitly include urban and arable land and

pastures, but owing to the difficulty with identifying leased land actively used for pastoral pursuits,

we exclude leased and waste land. 18

Figure 2: Agricultural TFP and Economy-wide TFP (1860=100)

Source: See Appendix 1.

18

Agricultural land includes land that is arable, under permanent crops, and under permanent pastures. Arable

land is land under temporary crops, temporary meadows for mowing or for pasture, land under market or

kitchen gardens, and land temporarily fallow. Land abandoned as a result of shifting cultivation is excluded.

Land under permanent crops is land with crops that occupy the land for long periods and need not be replanted

after harvest. It excludes land devoted to wood or timber. Permanent pasture is land used for five or more years

for forage, including natural and cultivated crops. Land leased for grazing is included.

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AGR TFP ECO TFP

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Figure 2 depicts the trends and fluctuations in economy-wide total factor productivity (TFP) and

agricultural TFP from 1860 to 1940. The figure indicates that prior to 1900 TFP in the agricultural

sector is below the economy as a whole (indicating higher productivity in manufacturing, service and

other sectors) but the gap appears to close, especially after 1915 so that despite frequent fluctuations

TFP in the economy as a whole, and in agriculture tend to track more closely. More transient dips and

peaks in agricultural TFP are also consistent with the impact of exogenous shocks.

Figure 3: TFP of all major sectors (1860=100)

Source: See Appendix 1.

Figure 3 provides a finer grained image of TFP in three different sectors of the economy; mining,

manufacturing and agriculture.19

Immediately obvious is the long run trend in mining TFP which was

the lowest of all the sectors throughout the period and with no discernible long-term improvement. As

with mining, TFP in the manufacturing sector is relatively flat for the entire period, which indicates

that productivity of both of these sectors did not seemingly contribute to the economy’s growth for

almost 80 years after 1860. By contrast the agricultural sector performed better than other sectors in

the period 1870-1939 and was the driver of the total economy after 1900. As both the manufacturing

and mining sectors remained stagnant, while the agricultural sector exhibited large fluctuations,

especially in the period after 1914, overall economy TFP did not improve in Australia and the

depressed period of economic growth that began around 1890 appears to continue from 1900 to 1939.

Mclean (2004) and Broadberry and Irwin (2007) argue that for the successful ‘take-off’ of any

country and in the initial phases of industrialisation, resources must be shifted from less productive

sectors (agriculture) to more productive sectors (manufacturing and services). In Australia, it would

19

Note here, and in the figures that follow, that the trend lines depicting economy-wide TFP (Figure 2) or

economy wide labour productivity (Figure 3) are not the simple arithmetic mean of the other sectors, but

includes all sectors of the economy (including services, construction, government etc).

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AGR TFP ECO TFP MINING TFP MANF TFP

11

appear that the shifting of resources did not happen in the stagnant period 1890-1939. Australia

lagged behind other economies in terms of industrialisation and relied mostly on the agricultural

sector.

To examine this further, Figure 4 depicts labour productivity in the three sectors over the same 80

year period. The result is a series of trends that are similar to those for TFP, although the image does

reveal greater variation in labour productivity in mining than in the same sector’s TFP. After 1900

labour productivity in mining increases, to exceed that of manufacturing until the early 1930s when

the gap largely closes (a result possibly reflecting the mining strikes of the late 1920s). Despite some

short-term volatility, labour productivity in agriculture as with TFP, remains the clear leader in all

three sectors after 1900, a position that it appears to hold from as far back as 1875.

Figure 4: Labour Productivity of the major sectors (1860=100)

Source: See Appendix 1.

Figure 5: Land (agricultural use)

Note: Land here comprises the area under crops and artificially-sown grasses

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AGR LP ECO LP MINING LP MANF LP

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000' hectares

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Figure 5 depicts the increase in total land for agricultural use over the period 1860-1939. In this

figure, land includes acreage devoted to arable crops and permanent pastures, but excludes lease held

land (due to unavailability of data) – which arguably is critical for sheep and beef production. This

figure thus understates the total land devoted to agriculture across the period. The dip around 1914

reflects the exogenous shock of World War 1.

Figure 6 reveals the trend in total Australian population growth from 1865 to 1939. It shows that that

overall population growth (as opposed to total population) was on a downward trend from an annual

high just of over 0.2 per cent in 1865 to less than 0.05 per cent per annum by 1939. Nevertheless,

population maintained a positive growth throughout the period 1861-1939. Within this trend,

however, population growth increased between 1870 and 1885, from 1900 to 1915 and briefly

between 1919 and 1922. The theoretical model in section 3 predicts that due to diminishing returns

posed by land as a factor of production, higher population growth will impose growth drag in the long

run. Figure 6 illustrates positive population growth between 1860 and 1939, which may have imposed

negative effects on agricultural and economy-wide productivity growth. More detailed empirical

examination is required, however, to reach any such conclusion.

Figure 6: Australian Population growth (five years moving average)

Source: See Appendix 1.

While the rate of population growth shows a long-run downward trend, critical to this analysis is the

growth of land per unit of population. Figure 7 shows the growth rates of land per unit of labour and

population were positive throughout the period 1860-1939, except between 1881-1887, 1914-1917

(WW1) and 1929-30 (depression). This suggests that the drag caused by population growth was

minimised by the greater availability of land for agriculture in Australia. This may be one the key

reasons why agriculture remained as the key driver of the economy in the depression period in spite of

lower technological progress in the same period. Efficiency in the agricultural sector was high since

labour growth was lower than land growth. The result was that the amount of land per capita actually

increased over time and positively influenced the productivity growth in the sector.

0.00

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Figure 7: Growth of land per unit of population and labour

Note: dT/L and dT/Pop refer to growth of land per unit of labour and growth of land per unit of population,

respectively.

Another element of critical importance to productivity is technological change. This is notoriously

difficult to measure and is most frequently quantified through the use of proxies (Griliches, 1979,

1994, Khan and Sokoloff, 2007). One measure that has previously been used is the number of patents

(Gilfillan, 1935, Pavit and Soette, 1981, Englander et al., 1988, Sullivan, 1990, Griliches, 1990 and

Magee, 1999). Unfortunately, in the case of Australia, we are unable to yet identify patents for

inventions that are specifically focused on the agricultural sector. Magee (1997, 1998) discusses the

pattern of various patenting technology in colonial Victoria in the period 1857-1902.20

His research

demonstrates that before 1891, the share of patents applied for in Victoria by Victorian Patentees who

registered as farmers, graziers or sheep raisers was between 1.2% (1857-1861) and 4.9% (1887-1891)

of all patents. Similarly, New South Wales patentees in Victoria accounted for between 3.4% (1877-

1881) and 2.8% (1877-1891) of all patents. These incomplete insights suggest that agriculturally-

based innovation contributed only a small part of all innovations before 1891. Figure 7 however,

reflects the total number of patents applied for, per thousand people in the population. This figure

includes patents from all sectors of the economy, and thus overstates the number of agriculturally

based patents in Australia. Nonetheless, the trend is flat for the period 1860-1880 and non-increasing

between 1900 and 1940. The latter period involves many fluctuations due to war and depressions, but

20

To the best of our knowledge, Magee’s work is still the most comprehensive research on Australian patent

data. In pre-federation Australia patents had to be recorded separately in each colony, with patentees required to

lodge separate applications in each colony to register their work. The Melbourne Office was undoubtedly the

most important single patent office before 1900.

-0.4

-0.3

-0.2

-0.1

0

0.1

0.2

0.3

0.4

0.51

86

0

18

63

18

66

18

69

18

72

18

75

18

78

18

81

18

84

18

87

18

90

18

93

18

96

18

99

19

02

19

05

19

08

19

11

19

14

19

17

19

20

19

23

19

26

19

29

19

32

dT/L dT/Pop

14

overall it still appears to have a flat trend. The single period of great note is the years 1877/80 to

1900/03, when the number of patents exhibits a steep upward trend.21

Figure 8: Patents applied per ‘000 population

Source: See Appendix 1.

The evidence on technological change, therefore, while more ‘circumstantial’ than definitive, suggests

that from 1890 to 1940 there was little major local patenting occurring in Australia that was of

relevance to the agricultural sector. While it is likely that many inventions and new technologies were

imported into Australia, these were not developed for local conditions. This suggests the

counterfactual is possibly also true: that the extent of technological improvement in Australia in the

agricultural sector, over the period in question, is likely to have been less than it might have been, had

the degree of local inventiveness been greater.

5. Empirical Methodology

Considering the theoretical model presented in section 3, the following growth regression is estimated

for the period 1860-1939 and 1890-1939, respectively, for the Australian agricultural sector:

tttttt uPATbKYbALbTbaATFP lnlnlnlnln 43210 (8)

In the expression above, Δ represents five-year growth in each variable, ATFP is total factor

productivity in the agricultural sector, T is agricultural land, AL is agricultural labour, KY is the

21

Magee (1998) argues that in this period number of patents grew faster than the number of occupations

involved in the process. There was a surge of inventiveness in the 1880s, demonstrating both greater intensity of

inventive activity and increased participation in the nation’s inventive efforts. This also occurred in the US

where it is referred to as the period of ‘democratization of invention’. Magee’s figures show that the share of

patents from farmers, graziers and sheep raisers in Victoria increased from 4.9% in 1887-1891 to 9.4% in 1897-

1901 by Victorian patentees and 2.8% (1887-1891) to 5.3% (1897-1901) by New South Wales patentees. While

inventiveness increased in the agricultural sector as with other sectors, the total increase was eroded in later

periods.

0

0.2

0.4

0.6

0.8

1

1.2

18

60

18

64

18

68

18

72

18

76

18

80

18

84

18

88

18

92

18

96

19

00

19

04

19

08

19

12

19

16

19

20

19

24

19

28

19

32

19

36

15

capital-output ratio in the agricultural sector and PAT is the total number of patents applied for in

Australia. Using five-year intervals overcomes some cyclical influences and reduces erratic

movements in the data compared to using annual frequencies. Due to the unavailability of

disaggregated patent data in the agricultural sector, the aggregate number of patents applied for at the

Australian patent office in Melbourne is used in the regression estimates.22

This implies that b4 will

overestimate the effect of technological progress in the agricultural sector. The capital-output ratio is

included in the growth regression to capture the transitional dynamics in the period. This variable also

captures whether changes in total factor productivity were being driven by capital deepening rather

than technological progress.

In eq. (8), we expect b1 to be positive when increased land availability affects productivity positively

in the agricultural sector, and b1 to be negative if land availability decreases over time and causes

growth drag in the long run. Where b2 is negative because of higher population growth (and thus

higher labour growth) this poses a drag in the agricultural sector. If b3 is negative, the capital output

ratio (K/Y) is high in the agricultural sector, an outcome that implies lower capital productivity

(K/Y).23

Where b3 is positive the capital-output ratio is low in the sector implying higher capital

productivity (Y/K). Finally we expect b4 to be positive as higher technological progress affects

productivity positively.

Equation (8) is re-estimated by adding the following control variables: rainfall (RF), macroeconomic

uncertainty (UNC) and trade openness (TO). Without the inclusion of the control variables, the

empirical model would be likely be mis-specified, and estimated coefficients would be biased due to

the problem of omitted variables. In addition to the farming system in use, climate (especially

precipitation) is a key element affecting agricultural production.24

Rainfall captures both the years of

drought and declining output as well as periods of good harvests in agricultural production.25

Inflation

variability, used here as a proxy for macroeconomic uncertainty (UNC), is a drag on the economy

because it is often associated with fiscal mismanagement, war, crop failure or other periods of

uncertainty. It is expected that inflation variability will have a negative effect on productivity

growth.26

Finally, Australian economic growth is greatly influenced by trade openness, particularly in

the late nineteenth and early twentieth centuries. Export-led growth is often considered a prime factor

of Australian economic growth from the early 1870s, while the over-exporting of commodities is held

22

Before 1903 patents had to be filed separately in each colonial office. Further details on the patent data are

given in the appendix. 23

The inverse of the capital output ratio (K/Y) is capital productivity (Y/K). The higher is the capital output

ratio, the lower is the capital productivity, which implies lower efficiency in the sector. This will be reflected by

lower technological progress and lower total factor productivity growth. 24

Roberts, Haseltine and. Maliyasena 2009. 25

The relationship is not necessarily linear. Besides the usual fluctuations in weather, too much rainfall (flood)

is also associated with lower agricultural outputs. 26

See Fischer, 1993; Andrés and Hernando, 1999; Dotsey and Sarte, 2000.

16

responsible for the depression around the 1890s.27

The variable is expected to be positive for

Australia’s growth regressions during its boom periods. Thus equation (8) can be written as:

tttt

ttttt

uTObUNCbRFb

PATbKYbALbTbaATFP

lnlnln

lnlnlnlnln

665

43210 (9)

In this equation, RF is measured by the amount of rainfall, which is measured using a five-year

average. Uncertainty, (UNC) is calculated as the five-year standard deviation of annual growth in CPI,

and trade openness (TO) is measured as the sum of imports and exports over nominal GDP. While TO

is not an ideal proxy for openness, better data on openness, such as tariffs and non-tariff trade barriers,

are not available for the early periods.28

All variables are estimated in five-year intervals to overcome

cyclical influences and the erratic movements in the data on annual frequencies.

6. Empirical Results

Before presenting the empirical results for equation (9), Table 2 shows a simple correlation matrix

among economy-wide total factor productivity (ETFP), agricultural TFP (ATFP) and the key

variables outlined in equation (8).

Table 2: Correlation matrix between key variables, 1860-1939

ETFP ATFP T AL KY PAT

ETFP 1.00 0.88 0.74 0.76 -0.64 0.64

ATFP 0.88 1.00 0.57 0.58 -0.82 0.47

T 0.74 0.57 1.00 0.99 -0.32 0.96

AL 0.76 0.58 0.99 1.00 -0.36 0.95

KY -0.64 -0.82 -0.32 -0.36 1.00 -0.16

PAT 0.64 0.47 0.96 0.95 -0.16 1.00

The correlation between ETFP and ATFP is 0.88, which indicates that these variables are strongly

correlated to each other. Thus the key variables in the agricultural sector will also affect the overall

TFP in the Australian economy, a result, which is consistent with the earlier graphical depictions (see

Figure 2).

The availability of agricultural land (T) and labour (AL), the two factors of production are fairly

highly correlated (0.74 and 0.76, respectively) to economy-wide TFP. It is not surprising that the two

27

Oxley and Greasley, 1995; Greasley and Oxley, 1998. 28

Since imports, exports and GDP are all measured in nominal terms and GDP is the value added of domestic

production, TO can also be interpreted as the terms of trade measured by the ratio of the prices of tradable to

non-tradable goods.

For a robustness check, equation (9) is also estimated with agricultural labour productivity (ALP) as the

dependent variable. The results are presented in the next section.

17

factors are also correlated to agricultural total factor productivity (0.6) in the sample period under

review.

The agricultural capital-output ratio is highly negatively correlated (-0.8) to agricultural TFP. This

implies the capital output ratio is very high in agricultural sector, suggesting a low level of efficiency;

something which would affect TFP negatively in this period. This conclusion is somewhat tentative,

however, and requires a more detailed empirical examination.

Finally aggregate patents applied (PAT), which is one measure of technological progress in Australia

is positively correlated (0.64) to ETFP and reasonably correlated (0.47) to ATFP. Recall that these

figures overstate the impact of patents in the agricultural sector as it is based on aggregate patent

numbers not only agricultural patents. Thus the correlation should be high with economy-wide TFP.

Higher technological progress is, however, associated with higher productivity growth; something

which is evident from the above results.

Table 3: Total factor productivity growth estimates in the agricultural sector, Eq. (9)

Period Δ ln Tt Δ ln ALt Δ ln KYt Δ ln PATt ln RFt ln UNCt Δ ln TOt

1860-1939

0.20

(0.16)

-0.14

(0.58)

-0.68***

(0.00)

0.16***

(0.00)

0.16

(0.26)

-0.13

(0.59)

-0.68***

(0.00)

0.15***

(0.00)

-0.15

(0.41)

0.15

(0.28)

-0.11

(0.66)

-0.69***

(0.00)

0.15***

(0.00)

-0.18

(0.39)

-0.01

(0.61)

0.17

(0.26)

-0.08

(0.77)

-0.68***

(0.00)

0.15***

(0.00)

-0.17

(0.42)

-0.01

(0.52)

0.05

(0.58)

Period Δ ln Tt Δ ln ALt Δ ln KYt Δ ln PATt ln RFt ln UNCt Δ ln TOt

1890-1939

-0.11

(0.19)

–0.41***

(0.00)

–0.76***

(0.00)

0.07

(0.20)

-0.03

(0.79)

–0.55***

(0.01)

–0.75***

(0.00)

0.09**

(0.03)

0.46**

(0.05)

-0.06

(0.54)

–0.50***

(0.00)

–0.77***

(0.00)

0.07**

(0.04)

0.44**

(0.04)

-0.05**

(0.04)

-0.14

(0.13)

–0.57***

(0.00)

–0.80**

(0.04)

0.02

(0.50)

0.39**

(0.04)

–0.03*

(0.07)

-0.17***

(0.00)

Note: The dependent variable is Δ ln ATFP (agricultural total factor productivity). p-values are indicated in

parentheses. The estimates are based on Newey-West heteroskedastic-consistent standard errors and covariance.

An intercept was included in the estimation, but the estimates are not reported. All series are in five-year

interval periods. *,

** and

*** indicate 10 %, 5 % and 1 % levels of significance, respectively.

18

Table 3 presents the empirical results following equation (9). The top half of Table 3 represents the

empirical estimates for the entire period 1860-1939 while the lower half only covers the period of

particular interest, 1890-1939. In each period four different models are run. The first row in both

halves incorporates only the key variables, and represents the variables from equation (8) above.

Thereafter, following equation (9), one additional control variable is added in each row, to gauge the

changes in the estimated coefficients caused by their inclusion. The final row in each half represents

the full equation expressed as equation (9).

It is interesting, to compare the estimates of land and labour growth in the agricultural sector across

the two sample periods. Although the coefficients of land and labour growth are not significant, they

consistently show opposite signs in all regression models. If, however, we concentrate only on the

shorter period 1890-1939, growth in land is not significant (and now negative), but higher labour

growth becomes significant in reducing productivity growth. Combining the estimates of both land

and labour in the two periods, suggests that, negative population growth drag is important in the

stagnant decades, affecting productivity growth negatively in the agricultural sector.

Growth in the capital-output ratio (KY), is also revealed to be negative and significant in all the

regression models and across the two sample periods. This indicates a higher capital output ratio in

the agricultural sector. Recall that the higher is the incremental capital to output ratio (ICOR), the

lower is capital productivity because ICOR is the inverse of capital productivity (Y/K). Lower capital

productivity implies that the capital is not used efficiently in the production process, something which

is mainly determined by technological progress. In other words there is not much technological

progress happening in the agricultural sector during the entire period. Although the coefficient of

growth in patents applied for is positive and significant, recall that the data used means it

overestimates the effect in agricultural sector. Moreover the positive coefficients (ranging between

0.07 and 0.19) are much lower compared to the negative effects imposed by KY (with coefficients

ranging between -0.68 to -0.80 in the whole period) and agricultural labour growth (-0.41 to -0.57) in

the period 1890-1939. The empirical estimates suggest, therefore, that Australia remained in a capital

deepening state for a longer period than in comparator countries, and with a slower transition to total

factor productivity; results that are consistent with Kaspura and Weldon (1980).

The level of rainfall is positive and significant in the period 1890-1939 confirming the importance of

rainfall for agricultural production and thus agricultural TFP. A higher quantity of rainfall implies

improved crop production. The coefficient is not significant for the whole period 1860-1939 because

19

the rainfall data before 1900 are estimated.29

For the period 1900-1939, the data limitation is not

present and the results show rainfall is positively significant to TFP growth in the agricultural sector.

Although measured macroeconomic uncertainty (UNC) and trade openness (TO) are not significant

when measured across the entire period 1860 to 1939, they have the expected sign. UNC is negative

and significant in the period 1890-1939, which suggests even more negative drag on TFP was

imposed by higher inflation variability during that time. Trade openness is negatively significant in

the period 1890-1939, which suggests that higher trade openness was hurting growth in the Australian

agricultural sector over this period. As the period after 1919 was one of significant world contraction

in global trade and increasing tariff barriers, this result is perhaps not as surprising as may first

appear.30

Table 4: Labour productivity growth estimates in the agricultural sector, Eq. (9)

Period Δ ln Tt Δ ln ALt Δ ln KYt Δ ln PATt ln RFt ln UNCt Δ ln TOt

1860-1939

0.58***

(0.01)

-0.46

(0.27)

-0.74***

(0.00)

0.24***

(0.00)

0.51**

(0.03)

-0.45

(0.28)

-0.75***

(0.00)

0.21***

(0.00)

-0.29

(0.34)

0.50**

(0.04)

-0.41

(0.30)

-0.76***

(0.00)

0.21***

(0.00)

-0.33

(0.31)

-0.01

(0.68)

0.57**

(0.02)

-0.29

(0.43)

-0.75***

(0.00)

0.21***

(0.00)

-0.30

(0.37)

-0.02

(0.41)

0.21

(0.15)

Period Δ ln Tt Δ ln ALt Δ ln KYt Δ ln PATt ln RFt ln UNCt Δ ln TOt

1890-1939

0.09

(0.73)

–0.88***

(0.00)

–0.93***

(0.00)

0.02

(0.84)

0.23

(0.11)

–1.12***

(0.00)

–0.91***

(0.00)

0.05

(0.43)

0.76**

(0.02)

0.18

(0.14)

–1.04***

(0.00)

–0.94***

(0.00)

0.02

(0.63)

0.72***

(0.01)

-0.08***

(0.01)

0.10

(0.42)

–1.11***

(0.00)

–0.96***

(0.00)

0.03

(0.60)

0.68***

(0.01)

–0.06*

(0.06)

-0.18**

(0.03)

Note: The dependent variable is Δ ln ALP (agricultural labour productivity). p-values are indicated in

parentheses. The estimates are based on Newey-West heteroskedastic-consistent standard errors and

covariance. An intercept was included in the estimation, but the estimates are not reported. All series

are in five-year interval periods. *,

** and

*** indicate 10%, 5% and 1% levels of significance,

respectively.

29

Rainfall data are only available after 1900 and data for earlier years are extrapolated backwards. Thus, the

series is suffering from data limitations for the period 1860-1899 (which is half of the total period under

consideration) and the coefficient is, unsurprisingly, insignificant. 30

Williamson 2002.

20

All the four models in Table 3 are re-estimated in Table 4 with labour productivity growth as the

dependent variable instead of total factor productivity growth. The findings suggest that the results are

robust and all the findings of the key variables in Table 3 are valid in Table 4. The findings are robust

to the specification of two different productivity measures.

In table 4, changes in land availability influences labour productivity growth positively in the whole

sample period 1860-1939, however, the coefficient is no longer significant in the stagnant period.

Consequently, agricultural labour growth is not significant in the overall period, but negative and

significant in the period of 1890-1939. In the long term (1861 to 1939), higher growth in land

availability for agricultural use significantly enhances labour productivity growth. Across the entire

period 1860-1939, therefore, higher land availability suppressed the negative effects of higher labour

growth and sustained agricultural productivity growth. This is consistent with our earlier findings that

growth in the land to labour ratio is positive in most years for the entire period 1860-1939 (see Figure

7) and the share of agricultural sector in total GDP is fairly stable in the same period (see Figure 5). It

is also consistent with the view that Australia was, for a large part of this entire period, still engaging

in factor accumulation. Growth drag is dominant in the stagnant period (after 1890) with a lower

positive effect from technological progress and no effect from higher land availability, which appears

in the regression as insignificant.31

Combining the results in Tables 3 and 4, all our findings are robust

in terms of different sample period and empirical specifications.

7. Conclusions

This paper looks to discover why measured Australian per capita living standards stagnated between

1890 and 1939. While, as expected, agriculture played a significant role between 1860 and 1939, we

identify, for the first time, the significance land availability, relative to population growth and

technological change, as putting a break on the economy for almost 50 years.

The results suggest that although land availability increased, and technological progress occurred

across the entire period between 1860 and 1939, during the period of stagnant living standards

between 1890 and 1939, the positive influences of technological change and land availability were

outweighed by negative effect of increasing population and labour and these were significant in

reducing productivity growth. Although higher growth in land availability enhanced productivity

growth, and technological change also had a positive impact on productivity, negative population

growth drag was important in the stagnant decades by reducing productivity growth in the agricultural

sector. These results stand even after taking into account other possible variables such as the capital

31

Regarding the control variables, rainfall is again positive and significant to labour productivity growth in the

period 1890-1939, and important in sustaining growth in the Australian agricultural sector. UNC and TO again

reflect the expected sign, but are not significant in the period 1860-1939. Similar to the findings in Table 3,

UNC and TO in Table 4 are negatively significant in the stagnant period.

21

efficiency (which also reflects the impact of technological change) variation in rainfall,

macroeconomic uncertainty and the degree of trade openness. The outcomes are also robust when we

estimate the impact of these variables on labour productivity rather than total factor productivity.

Our conclusions, while corroborating the findings of earlier studies about Australian growth,

explicitly identify an important lesson for long term productivity growth. While investment in areas of

comparative advantage is critical to long-term living standards, a balance must be maintained between

the different factors of production. If the rate of growth in a single factor is overdone, this can have a

negative impact on total factor productivity and consequently living standards. In the case of

Australia, the exploitation of its comparative advantage in natural resources was fundamental to the

higher per capita living standards of the 1870s. While this provided an important platform from which

to industrialise, Australia appears to have been slow to do so. The stagnant period between 1890 and

1939 reflected in part, an over reliance on factor accumulation as population growth exceeded the

ability of technological change and expansion in land availability to enhance growth. Only after 1945

did this balance begin to really change, but even then the process was relatively slow, with

agricultural and mineral gains still providing important contributions to overall growth.

22

Appendix 1: Data Sources and measurement issues

TFP: Total factor productivity (TFP) in the overall economy and in the agricultural sector is

calculated from eq. (1):

)1)(1()1( ttttt LTKAY

or, )1)(1()1(

ttt

tt

LTK

YA (1a)

where At is the total factor productivity, Yt is real GDP, Tt is agricultural land use, Kt is capital stock

and Lt is employment times number of hours worked annually. α(1-β) is the share of income going to

capital, β is the share of income going to land and (1-α)(1-β) is share income going to labour. While α

is set to 0.3, β is varied every year, which is measured by the share of agricultural income in total

income. Assuming working hours did not change for the farmers, working hours are kept constant for

the agricultural sector. In the manufacturing and services sectors, land is no more considered to be a

factor of production. Thus in these two sectors, TFP is measured as follows:

)1( tttt LKAY (1c)

or, )1(

tt

tt

LK

YA (1d)

where At is the total factor productivity, Yt is real GDP, Kt is capital stock, α (= 0.3) is the share of

capital, β (=0.7) is the share of labour and Lt is employment times number of hours worked annually.

Due to unavailability of data for individual sectors, annual hours worked per labour for the aggregate

economy is used for TFP calculation in these two sectors.

GDP: Nominal GDP and real GDP in aggregate and also for each individual sector in the period

1860–1939 are taken from Butlin (1962).

Patent applications: Before 1903, each colony used to issue patents separately. In 1904, Australian

National patent office was introduced and all patents needed to be filed through it. Data from 1904

onward are based on “patents applied to residents” from the World Intellectual Property Organisation

(WIPO) www.wipo.int/ipstats/en/statistics/patents. Before 1904, data is for “Total patents in

Australia”, collected from Federico (1964). Since every state used to issue patents separately, the data

is based on the summation of total patents in all available states.

Labour force: For the agricultural sector, 1860-1870 is from Vamplew (1987), pg. 72. 1870–1901 is

from Australian Year book 1903-1904, pg. 405. The data points are in decadal form; hence, missing

years were interpolated. Data from 1901 onwards is from Withers et al. (1985). For Australia in

aggregate, 1861-1900 is from Vamplew (1987), pg.147. 1901 onwards is taken from Butlin (1962).

Land: Land is defined as land area under agricultural use, which is the sum of land area under crop

cultivation and land area used for cattle/pasture feeding. Land under cultivation for the period 1860-

1939 is from Vamplew (1987), pg.74. Land area used for cattle/pasture feeding is collected from

various years of Australian yearbooks. Missing years were interpolated to form complete series on

annual basis.

Capital: Gross private capital formation for Australia in aggregate and also for each sector is

collected from Butlin (1985), pg.52. Perpetual inventory method with 8% depreciation rate is applied

to calculate the capital stock series from each investment series.

23

Population: the data is collected from Australian Bureau of Statistics, catalogue number

3105.0.65.001

Rainfall: Annual rainfall (measured in millimetres) in Australia is taken from Bureau of Meteorology

(BOM), Australia www.bom.gov.au/. The data are only available since 1900 on annual basis. The

period 1860-1899 is extrapolated backward using the geometric growth rate between 1900 and 1940.

Trade openness: Trade openness is measured by the sum of total exports and imports divided by

nominal GDP. Due to unavailability of data for agricultural sector, aggregate trade openness measure

is used in this study. Exports and imports for the period 1861–1939 are taken from Mitchell (2007),

p.583.

Macro uncertainty: The measure of macro uncertainty is calculated as five year standard deviation

of annual growth rate of Consumer Price Index (CPI) series. CPI data for the period 1861–1939 is

from Mitchell (2007), pg.1014.

24

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