This chapter constructs a formal model of our hypothesis from Chapter 9 about the rise of Uruk. We assume there are many open sites where people can obtain food by foraging, farming, or pastoralism. There is also one site controlled by a local elite. We start from an equilibrium with mild stratification, reflecting the conditions of the ’Ubaid period. A climate shift toward increasing aridity reduces the productivities of sites dependent on rainfall but does not affect the productivity of the elite-controlled site where irrigation is based on river water. This lowers commoner food income and shifts population toward elite-controlled land. The declining standard of living for commoners makes it profitable for the elite to create urban workshops producing textiles and other goods, where manufacturing has aggregate increasing returns to scale. The taxation of manufacturing allows the elite to enforce monopolistic output restrictions, driving up the price of manufactured goods and driving down the wage. Organized elites may want to establish city-states based upon manufacturing even if they lack interest in public goods, because taxation can be used to enhance private elite consumption. The key tradeoff for the elite involves profit from manufacturing versus land rent from agriculture.

Population dynamics are central to any theory of economic prehistory. This chapter explains the Malthusian framework widely used by economists. We rely on these ideas throughout the book. The exposition is graphical and should be accessible to non-economists. We define a production function and the average and marginal products of labor. With fixed natural resources and a fixed technology, food per person decreases as the population of a geographic area increases. Decreasing food per person tends to lower fertility and raise mortality. These demographic effects yield an equilibrium with a stable long-run population. If technology improves, food per person rises at a given population level. In the short run this raises the standard of living for the existing population, but in the long run, population growth brings the standard of living back down to its previous level. The main implication is that in the long run, technological innovation or a better climate raises population but not living standards. We discuss the relationship of these ideas to the concepts of migration, carrying capacity, population density, and population pressure. We conclude with a review of empirical evidence supporting the relevance of Malthusian models for pre-industrial societies.

We close with some linkages between prehistory and the modern world. We survey an empirical literature in economics arguing that regions where agriculture began early, or state formation occurred early, have higher per capita incomes or more rapid economic growth in the present. Another literature in economics involves the use of growth theory to explain the full trajectory from Neolithic agriculture to the Industrial Revolution, the recent demographic transition to slower population growth, and rising per capita incomes in advanced economies. We also discuss hypotheses about the transition from elite-dominated states in prehistory to widespread democracy today. Against this backdrop we consider the evolution of human welfare, as measured by nutrition, health, and life expectancy, from mobile foraging bands to modern societies. Theory and evidence suggest that welfare diminished in the transitions to sedentism and agriculture, and then remained low for commoners due to stratification and Malthusian population dynamics. But during the last 100–150 years the Industrial Revolution, the Demographic Transition, and political democratization have made billions of people better off. We conclude by discussing the role of climate change in prehistory, along with some lessons about the likely effects of global warming in the future.

After an introductory section that frames some conceptual issues surrounding the emergence of city-states, most of the chapter is devoted to a chronological narrative describing the case of southern Mesopotamia. This includes sections on the pre-’Ubaid period, the ’Ubaid period, the Uruk period, and the post-Uruk period. The key puzzle is how to explain the transition from scattered villages and small towns in the ’Ubaid period to large city-states with tens of thousands of residents in the Uruk period. Following the main narrative, we review causal hypotheses on this subject proposed by archaeologists and economists. These include ideas about climate change, migration, food production, manufacturing, trade, warfare, and culture. We also offer a synthesis of our own. In our view, the prime mover was increasing aridity, which motivated migration from outlying areas toward the south. As this process unfolded, commoner living standards fell, which enabled local elites in the south to employ commoners at a lower wage. When the wage had fallen far enough, urban manufacturing became profitable. Elite taxation of urban manufacturing was probably easier than taxation of rural agriculture, and this provided the fiscal foundations for early city-states like Uruk.

This chapter constructs a theory about the origins of inequality. Our model involves a continuum of sites that have differing productivities with respect to food. All sites are initially open, and free mobility of agents across sites tends to equalize the food incomes of the agents. However, an organized group that is large enough relative to the land area of a site can establish property rights over that site and keep other agents from entering. As climate or technology improves, population densities grow, and over time the best sites become closed. This generates insider–outsider inequality, where different groups have different standards of living depending on the productivities of their sites. Eventually insiders at the best sites find it profitable to hire outsiders to work on their land, either by paying them a wage or requiring them to pay land rent. This gives elite–commoner inequality, or stratification. Class positions become hereditary. Technical progress makes commoners worse off in the long run because as regional population rises, more sites are closed. The sites that remain open are the least desirable. These predictions are consistent with archaeological evidence from southwest Asia, Europe, Polynesia, and the Channel Islands of California.