After the Industrial Revolution began in England in the mid-eighteenth century, experiments conducted in laboratories became the major source of technological invention and innovation (Lin 1995; Landes 1998). This was especially true for those macro-inventions that consisted of radical new ideas and involved large, discrete, novel changes, as defined by Mokyr (1990). For developed countries at the global technological frontier, such a transformation of the method of technological invention enabled them to accelerate technological advances through investment in research and development, and technological invention and innovation became endogenous (Romer 1986; Lucas 1988). With increasing investment in research and development, technology change accelerated, industrial structures upgraded continuously, and productivity increased. As a result, developed countries in the western hemisphere began to take off and the divergence between the North and the South appeared (Baumol 1994; Braudel 1984).

Since 1820, the total output of advanced capitalist countries has increased seventy-fold, with population rising nearly five-fold, per capita product fourteen-fold and real per capita consumption almost tenfold.<sup>8</sup> Figure 1 shows the evolution of per capita income in various regions of the world from 1 to 2001 AD, based on the estimation of Maddison (2006, p. 642). From an insignificant difference at the beginning of the eighteenth century, per capita income in the developed countries of Western Europe and its offshoots increased to more than 20 times that of the developing countries by the end of the twentieth century.<sup>9</sup>

**Figure 1: Per capita GDP of various regions, 1–2001 AD**

<!-- Start of picture text --> 30,000<br>Western Europe<br>25,000<br>Western Offshoots<br>20,000 Eastern Europe<br>Former USSR<br>15,000<br>Latin America<br>10,000 Japan<br>Asia excl. Japan<br>5,000<br>Africa<br>0<br>1 1000 1500 1600 1700 1820 1870 1913 1950 1973 2001<br><!-- End of picture text -->

**Note:** Gross domestic product (GDP) is calculated with 1990 international Geary-Khamis dollar. The Geary-Khamis dollar—also known as the international dollar—is a sophisticated aggregation method of calculating purchasing power parity (PPP). This facilitates comparing countries with one another. The statistical definition can be found at http://unstats.un.org/unsd/methods/icp/ipc7_htm.htm

**Source:** Maddison, A. (2006). _The World Economy_ . Paris: Organisation for Economic Cooperation and Development, 642.

From Adam Smith to the early twentieth century, most economists believed that _laissez faire_ was the best vehicle for achieving sustainable growth in an economy. It was assumed that in thriving economies, all decisions about resource allocation are made by economic agents interacting in markets free of government intervention. The price system determines not only what is produced and how but also for whom. Households and firms pursuing their own interests would be led, “as if

> 8 See Maddison (1982).

> 9 One caveat: As Lucas (1988) reflected in his 1985 Marshall Lectures, ‘[S]uch diversity across countries in measured per capita income levels is literally too great to be believed.’

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