Exploring the Three Factors of Economic Development and Their Role in the Emergence of the Great Divergence and Little Divergence

Abstract

The Fourth Industrial Revolution has generated a fresh impetus to investigate the underlying reasons for sustained economic growth. To better understand the present-day situation, it is helpful to examine historical periods such as the Great Divergence and Little Divergence, which respectively saw Europe and Northern Europe experience significant economic growth compared to the rest of the world or region. However, many existing explanatory models contain inconsistencies, especially when applied to the Little Divergence. This study uses institutional theory, statistical analysis, and comparative analysis of theoretical models to propose an origi­nal model for institutional change leading to long-term growth. This model suggests that three factors, namely ethical and economic motivation for intensifying economic activity, along with social institutions that support collective action, led to the development of a market-based economy in early-modern Europe. Institutions are found to be responsible for consolidating short-term economic growth rather than just motivating individuals to work harder. The model is tested against historical data from five European countries between the 12th and 17th centuries — Italy, Spain, the Netherlands, England, and France. The study concludes by suggesting further research possibilities for developing predictive models that explain long-term growth in modern economies.