Scale and the Origins of Structural Change∗ PRELIMINARY, DO NOT CITE

This paper extends the three major facts of long run structural transformation — (i) sectoral reallocations, (ii) rich movements of productive activities between home and market, and (iii) an increase in the scale of productive units — and develops a model based on scale technologies to understand and explain them within a unified framework. The crucial distinction between industry, services, and home production is the scale of the productive unit. Scale technologies give rise to industrialization, and the marketization of previously home produced activities. The rise of mass consumption leads to an expansion of industry, but a reversal of the marketization process for service industries. Finally, the later growth in the scale of services leads to a decline in industry and a rise in services. ∗We have benefited from helpful comments from participants of presentations at the AEA 2007 meetings, Northwestern University and the Federal Reserve Bank of Minneapolis. †Northwestern University, [email protected] ‡Ohio State University, [email protected]