Demographic forces determine long-run economic
1305Economic History of Western Europe Study Guide -What can economic history teach us about why some countries rich and other countries poor? Economic history can show us how institutions, property rights and how money/income per capita affected countries and their standards of living. Economic theory
• Domar’s trilemma o Free land o Free labor o Aristocracy o Can’t have all three at the same time
because of competition We use history to understand economics
• Data o Test theory
§ Theory open for revision o Duhem Quine o Empirical orientation
§ Do the facts fit? o Use history to understand context
§ Economics is not a natural science § Laws of economics à socially,
historically contingent Comin et. Al
• Finds that there is a strong link between tech level in the past and tech level today for countries (positively correlated)
• Evidence for technology persistence • High tech in the past means high tech in the
future -What is the role of technology in economic growth and development? Is modern technology necessary and/or sufficient for high labor productivity?
In a Malthusian world, technology change does nothing for long run economic growth. Birth rates and death rates are what determined living standards and they always went back to subsistence. Until the industrial/glorious revolution there was no long run growth or increases in GDP per capita Long-run is full of discontinuity, context is always changing, be weary of predictions Mechanisms for persistence of high technology:
• Complimentary technology • Recombination of old technology to make new
technology • Feedback from technology to science • Feedback from technology to lower access costs
for knowledge • Spillover technology from one sector to another • Economies of scale • Economies of scope • Learn by doing
In modern terms, technology is a complement to workers, in some circumstances technology can replace workers, but overall technology is a complement to workers because workers can be much more productive and provide more output with technology So technology is highly related to productivity. Think of a farmer for example, without a tractor a farmer can only get so much done by hand, but with a tractor, the farmer can be 10x more productive Countries that are more technologically developed, are better off economically -What forces explain cross-country variation in living standards today? What is the role of “history” in shaping these forces?
Growth theory can explain these variations: investments in human capital (knowledge),and innovation contribute to growth significantly A lot of forces explain cross-country variation in living standards today Institutions, property rights, government (policies), productivity (GDP), education and technology We learn from history and use the history to shape our world today Adam Smith says good liberal government is what makes countries rich Good government provides defense, rule of law and provide public goods History takes data and makes sense of it and explains why certain things are a certain way History is how people are able to take data from Europe and all around the world and explain why some countries are rich and some are poor -Have the pre-conditions for growth and development changed over time, i.e. is what matters for modern growth different than what matters for early-modern growth? What matters for modern growth is somewhat different than what mattered for early-modern growth. Property rights are necessary for modern growth and were necessary for early-modern growth But for modern growth technology change and innovation, influences modern growth a lot And for early-modern growth (before 1800), technology change didn’t do anything for growth. What matters for modern growth today is technology, human capital, institutions, property rights etc. -How does the Malthusian model differ from the Neoclassical model?
Malthusian model: • Demographic forces determine long-run economic
growth • Technology does nothing for long-run growth • If tech curve shifts out, GDP per capita/living
standards increase in the short run, but since living standards increase, birth rates will ultimately increase and then living standards will ultimately fall back to subsistence
• Poverty is the natural order • Can never have prosperity in the long-run • An increase in prosperity à increases amount of
people and then prosperity falls because of diminishing marginal productivity
• “positive” checks on population • War, disease, famine were preventative checks • Before industrial revolution, Malthusian model
holds true Neoclassical:
• Y = income (GDP) • X = Land • L =Labor • r = rent • w = wage
Y = rX + wL Assume:
• Diminishing marginal productivity • Cobb-douglas specification • Constant returns to scale • Perfectly competitive markets
Under neoclassical model, TFP (total factor productivity) and land-labor ratio determine living standards Increasing number of workers decreases living standards because of diminishing marginal productivity of each worker – average income per worker falls
If I grow TFP: Spend productivity on—
1) Y à better living standard/ income per worker 2) More people (L/X population density) 3) Or some constant / spend productivity on both 1
and 2 but there’s a trade-off Neo-classical model takeaways:
• Government, institutions, education, and technology all affect Y positively
• TFP also has a positive relationship with Y -Be able to make predictions with the Malthusian model using graphs.
-Compare and contrast early-modern (before 1800) living standards within Europe. Before 1800:
• Living standards were low • Demographic forces determined living standards
(Income per capita) and living standards low • Technology did nothing for economic growth in
the long-run • Poverty was the natural calling • Everyone was poor and would result to the
subsistence level eventually • Long-run economic growth was nearly impossible
After 1800:
• After Industrial revolution we get tech change, and increased living standards even though birth rates increase
• We get long-run economic growth and development • Malthusian model was wrong • Living standards increase dramatically
-Compare and contrast early-modern living standards between Europe and Asia. Living standards Europe:
• Poverty was natural order • Standard of living was low • Subsistence would always result • Real wages didn’t reflect labor productivity • Institutional constraints • Up until about 1688 (glorious revolution) living
standards were low and Europe was stuck in the Malthusian trap
Living standards Asia: • Declining dramatically, mainly due to the trade
changing patterns brought about by Europe and Dutch
• Living standards also declined because of climate change
-Based on your reading of the economic history literature, if you were a policy advisor to a developing country, what policies would you suggest to encourage economic development and growth? The policies I would suggest would be: secure property rights, I would also advise competitive markets, and I would also implement policies that promoted technological change and innovation -What are the necessary pre-conditions for growth and development? Are any of these sufficient conditions for growth and development? Property rights are necessary for growth and development Clark argues that pre-modern political regimes are necessary for growth Epstein says they’re not -What are the roles of the following in explaining the “reversal of fortune” in early-modern Europe: o Population Dynamics (Malthusian Trap)
• Malthusian trap is when a population gets roped into this trap where everyone stays at a subsistence level regardless of tech change and increases in living standards
• We go back to this idea that poverty is the natural order, there’s no way out
• The change was for the worse à more people, less land available à lowered living standards
Population (X/L) (X/L) increases à Y increases
(X/L) decreases à Y decreases (X/L) increases à (w/r) increases Land labor ratio is central to the hypothesis & scarcity of workers o Enclosure Create private property Medieval period: Agriculture
• Commons: place where a piece of land where peasants, serfs, had rights to the land (grazing, gathering and gleening)
• Very disorganized • Overlapping jurisdictions • Tragedy of the commons • Highly inefficient
Reversal of fortune: the commons made living standards worse à free rider problem
• Enclosure movement takes commons & turns it into private property
• Increased agriculture productivity o Trade/Empire English take over global trade Trade à economic growth Trade necessary for urbanization Reversal of fortune: Development of trade allowed for growth through urbanization o Representative Government Prevents political power abuse Reversal of fortune: Check power of government à pro-growth institutions & policies which may enhance growth in the long-run Checks power à pro-growth institutions/policies à econ. Growth increased
o Technology 17th scientific revolution/ enlightenment à industrial revolution à take off Reversal of fortune: with technology change and development, leads to higher standards of living and economic growth and leads to industrial revolution o Literacy Reversal of fortune: Skills and talents in workers increased productivity à economic growth Literacy is scarce Skills are important for economy What does all of this imply about the “Great Divergence”? All of the above is going to help push through pre- modern constraints restrained by a malthusian world Divergence- Everyone is poor until 1800 à some countries take off economically Political changes, technology, human capital etc. all lead to economic growth à divergence -What is the relationship between political freedom and early-modern growth? Political & economic freedoms à PROSPERITY “English liberties” -How is omitted variable bias a problem in interpreting simple regression results and in inferring causality? Be able to critique regression results. Leaving out an omitted variable can change the results dramatically. The effects of a variable could
be underestimated/overestimated when another variable is being omitted from the problem. Example: crime rates are higher with higher ice cream sales Omitted variable: weather/ temperature à warmer temperature is probably what is driving higher crime rates CORRELATION DOES NOT IMPLY CAUSALITY -What was the significance of the Glorious Revolution for the English economy? The glorious revolution propelled the English economy into economic development and economic growth And an increase in living standards For English property rights? After glorious revolution, property rights were more secure than ever have been before For the English political system? The glorious revolution kept the crown in check Made the crown keep its word and keep promises Predictability of government increased For the English state? More vetos over policy/actions Increased power/control of wealth holders over state For the English financial system? Government now on a sound fiscal basis Parliament: central role in fiscal policy à new taxes, audit crown funds -Compare and contrast the views of the following authors on their interpretations of the impact of the Glorious Revolution: North and Weingast (1989), Clark (1996), Epstein (2000), Bogart (2011), Cox (2011). N&W:
• Instability & autocratic à Rates of return on private capital
• Winners of revolution are ultimately going to turn and change the way things are
• Crown will need to be held accountable and needs to keep their promises. The institutional changes will alter the incentives of the government in favor of the winners of the revolution
• By holding crown financially responsible, risk will decrease, and security of private rights will increase
• Willingness in lenders increased dramatically and this must show the government’s responsibility and commitment to its agreements
• Monarchies: higher risk default, higher interest rates
• Republics: lower risk default, lower interest rates
Europe’s financial success is what guided their warfare success Basically, N&W argue that, by holding the crown accountable of their debt contracts, ultimately led to increases in mutually financial (loans) benefits that benefited all parties. (crown, parliament) CLARK:
• Private capital markets • Did the Glorious Revolution actually change
anything for private investors? • Says you’d expect a structural break for private
investors à but we don’t see it in the data • For economic growth, are property rights
sufficient enough? à No Clark used data from charities and the data doesn’t seem to fit what N&W are saying Clark argues that nothing is changing in private returns Pre-modern political regime matters EPSTEIN:
• Says pre-modern growth was so patchy because of a lack of republican and parliamentary
institutions in which autocratic rule was restrained by
No empirical evidence that pre-modern political regime matters BOGART:
• Land improvement rights o Markets o Regulatory authority (i.e. crown/parliament) o 1690+ regulatory parliament o decreased power of the crown o Fewer purges after 1688 o Fewer post hoc revisions of rights
COX:
• Argues that increasing the crown’s accountability and credibility didn’t increase financial trade (except in warfare)
• Crown can constantly default and find new loaners
• Ministerial responsibility was an important and key innovation à resolved royal moral hazard
• England then became more successful in war because the holders in equity shares of the business of war had large stakes in the outcome
-Are property rights necessary for economic growth? Are property rights sufficient for economic growth? Property rights necessary for economic growth? –YES Property rights sufficient for economic growth? –NO -What is the relationship between the state, property rights, and economic growth/prosperity? Property rights are needed for economic growth and prosperity à secured property rights à people feel
more secure in protecting their land and being productive on it Political institutions and policies probably (most likely) needed for economic growth and prosperity Need a constrained state that is strong in governing the economy in order for economic growth -Are representative political institutions necessary for economic growth? Political stability and institutions may be needed for economic growth Is political freedom necessary for economic growth? Clark: pre-modern political regime matters for economic growth Epstein: pre-modern political regime does not matter for economic growth -What is jurisdictional fragmentation? Why did it hinder economic growth? Jurisdictional fragmentation- Fragmenting official power The conflicts between district residents and feudal government resulted in determining and affecting how public open spaces are used and managed District residents vs. feudal government and the desire for autonomy or home rule Jurisdictional fragmentation & hindrance on economic growth:
• Increases cost of providing public goods • Increases costs of fiscal extraction • Results in prisoner’s Dilemma & coordination
problems -How did the pre-modern state differ from the modern state?
Pre-modern state: • lacks full soveirgnty • No monopoly power • No property rights • No public goods • No fiscal extraction powers • No universal rights/ liberty freedom
Pre-modern liberties/freedoms • Socially specific • Inequality & status • Contingent transferrable • Aristocrats / nobles have different rules
applied to them than commoners Under Epstein: Pre-Modern—
• Absolutist state Modern liberties:
• Choice, will à action • Social mobility • Freedom of religion, speech • Fundamental equality before the law • Universal • Being alive gives you all these freedoms • Modern liberties are anachronistic
Modern states are associated with property rights, technology advancement and freedoms and rights and also public goods -What was the transportation revolution? Late 17th – early 19th centuries à world where commodities are being traded (coal, grain, pottery etc.) Increases in innovation à improved technological change in transportation & increased transportation investment
Ocean shipping Steam railroads, railways How did it affect economic development? Helped increase economic development
• Ocean shipping o Better organization of docks/boats o Better ships, navigation, improved harbors o Clearing rivers improvement
• Construction of turnpikes • Steam railroad: best way to transport things,
way more efficient and very cheap All of the above made the economy way more productive and efficient, allowing for more output Transportation revolution improved social welfare dramatically Transportation revolution led to the industrial revolution How was it related to changes in political regime? Transportation revolution improved people’s lives by giving them better output and making output more efficient, it increases standard of living by increasing GDP per capita Much like political regimes do -What was the Ancien Régime? Everyone was subject to the king along with being a subject to a member of a province and estate under a political and social system Existed before French revolution How did its institutions inhibit economic growth and development? No property rights, wealth could be exploited from King at any given time No political freedoms, and no institutions benefiting non- royals
-Is a minimal and constrained state necessary for economic growth? Economies that are governed by states that are strong and constrained are able to avoid disastrous economic policies and are able to overcome and solve distorted incentives The constrained states of western Europe is what saved it from fiscal/economic/political traps Adam smith argues that a good liberal (free markets, free people) government is what makes countries rich Good liberal government provides defense, rule of law and public goods Is a minimal and constrained state sufficient for economic growth? Sufficient constrained and minimal states are sufficient for economic growth Markets that are well functioning are required to reach allocative efficiency, but they also require property rights and well enforced government institutions Markets are able to provide the conditions necessary for sustained economic growth Strong constrained states are associated with sustainable economic growth
