Economic History 2 - notes for biem second year PDF

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LESSON 2 – The big picture Introduction: What was the Industrial Revolution? Why was it British? Potential explanations and their limits What do we learn from the pre-industrial European economies? Industrial revolution: = A set of changes occurred in Britain  1760-1850  revolution in economics and society Economic changes    

from land  to capital capitalism (wage labor and profit) Continuous increase in productivity Continuous technological innovation

A set of revolutions:  Technological *Cotton* - Before the 18th century: China and India - 1750 yearly production Bengal: 85 million pounds Britain: 3 million pounds - Three stages of production:  Raw cotton cleaning  Carding into roving  Spinning (Spinning wheel) - Three main technological innovations:  Spinning Jenny (Heargraves, 1760) One wheel many spindles Bars ‘replacing’ spinners  Water frame Spinning one thread with the power of water  Spinning mule Combining the two Labor saving Productivity enhancing  Demographic  Agricultural  Commercial o 1500-1700: ↑ imports o Industrial Revolution: ↑ imports and exports

 Transportation o Maritime technology and shipping costs o Inland transports (canal systems and railways)  Financial o Trade credit o Land as security o 1690: Bank of England  Energy o From wood (charcoal) to coal o Geo location and reduced costs

UK: Overview of existing conjectures 1) 2) 3) 4)

Changes in the social structure Constitutions and property rights The role of the Scientific Revolution & the Industrial Enlightenment The Protestant reformation  Superior rationality  Science as a culture

Changes in social structure  

We can consider this type of explanation as the result of the “Marxist approach” to historical changes in the economy and society Modes of production → social structure Hunter gatherers → egalitarian societies Agricultural societies → slavery and serfdom Late medieval trade revival → urbanization and early modern states Industrial Revolution → capitalism and modern world  signs of capitalism already in pre industrial Europe, but combined with persistence of serfdom in rural areas  Main problem: economic systems and societies did not develop by stages

Political institutions and the modern economic growth North and Weingast Political institutions → Econ institutions → Econ growth or stagnation Problem: What prevents the ruler from using coercive power to expropriate wealth from citizens? Ex: Arbitrary expropriation of property rights or Not repaying public loans

Before: repudiation  Now: Constitutions - Check on the ruler’s power - Ex ante anticipation of ex post problems - Self-enforcing England in the 17th century: The Glorious Revolution 1688 

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First half to the 17th century: The Stuarts o Absence of check on the ruler (Royal prerogative, Star Chamber) o Arbitrary fiscal instruments (forced loans) 1640: Civil War and exile of the Stuarts o Abolition of the Star Chamber o Stable role of Parliament 1660: Restoration of the Monarchy (Charles II) and failure of the Civil War, why? o No removal of monarchy prerogatives had not been canceled o Parliament instead of the King 1688: Glorious Revolution o 1689: Bill of Rights, Constitutional Monarchy, dethroning of James II Main political innovations o Supremacy of the Parliament o (quasi-) abolition of royal prerogatives o independence of judges from the Crown Glorious Revolution: key for the British economic development as it protected the Parliament prerogatives o Security of property rights for the private entrepreneur (represented by the Parliament members) o Continuous checks on the ruler’s power and activity

 No similar break in the private investments after the Glorious Revolution  Security of property rights might be necessary for economic investment, but they are not sufficient  E.g. Early modern France: - Secure property rights on land - Private interests of landlords contrasting with the general interest of large-scale investment in irrigation - No investment

The role of the Protestant reform -

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Max Weber (1864-1920) Protestantism had effects on the cultural and scientific attitudes of the societies in which it spread:  Ethic for work  Use of rationality vs irrational approaches to reality  Spread of literacy (everyone can read the Bible) Limits with this approach:  No empirical evidence of a significant effect of Protestantism on economic growth  Calvinism and Protestantism  Spread of literacy took place even among other religious groups (e.g. the Jews)

The Scientific Revolution -

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Starting in the 16th century with the great scientific discoveries  From South to Northern Europe (Galileo to Newton)  From explanations of the natural world to the invention of new practical tools → A direct benefit for the economy Problems  A problem of geography and timing:  most of the invention came much earlier than the Industrial Revolution and not in England  A problem of demand:  why did the society demand these inventions at the end of the 18th century?

The Industrial Enlightenment -

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Joel Mokyr, Nortwestern University Enlightenment → Industrial enlightenment → Industrial revolution Industrial enlightenment: Not just British (a western Europe phenomenon) Two main channels  Expansion of useful knowledge  ↓ Access costs to useful knowledge Technical factors behind the reduction of access costs  From tacit to codified knowledge (mathematics and physics)  Paper and printing  New artefacts as storage devices How the process of knowledge changed  from intuition  to systematic analysis  from secrets  to open debates How the social dimension of knowledge changed

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 Elite vs non elite to open scientific community  from knowledge as source of rent to knowledge as a source of prestige New organizations with the aim of spreading ideas  Universities  17th century: informal meeting  from 1750: formal organizations (Royal Society, etc) Effect on access costs  Community-type knowledge  Scientific and practical problems  Incentive to research

Industrial Revolution: still a puzzle  each explanation has limits!!  Marxist approach → economic and societal development not by stage  Constitutions and property rights → not sufficient for growth  Cultural explanations → Lack of empirical evidence (Did cultural change anticipate economic growth or vice versa?) -

All focusing on the supply-side of the economy: emphasis is on that made some new technique, new culture, new attitude, new political institution, available These changes were certainly important and contributed to the Industrial Revolution But why England demanded new technique, new culture, new attitude, new political institution in the 18th century? BEFORE industrial revolution:

1. Smithian growth and constraints to development Adam Smith (1723-90), An Inquiry into the Nature and Causes of the Wealth of Nations - Division of labor → gains from specialization - Opportunity costs explain rise of trade - Pre-requisites allowing specialization:  Population growth  Aggregate demand - What is the fundamental idea of the Smithian grow? Overall comment:  If we imagine a society where everyone produces for self-sufficiency, if there is some slow increase in population, and in economic terms an increase in the aggregate demand, meaning that the demand for goods in this economy is increasing, I can have many people close to me, and they can ask me the clothes I produce because I am better. Then in my production I have an opportunity cost, because I also need some time to produce my food, if there is a market where I can exchange the clothes I produce and buy the food I don’t have the time to produce. So: we will have the labor division and the gains from specialization!  Of course we gain if the specialize.

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Technological progress types:  Learning by doing  Rarely written  Transmitted with the experience

2. Late medieval economic growth -

9th - 13th centuries: Population recovery Economic consequences:  Rise of Mediterranean trade  Money, guilds and fairs  Urbanization  Small scale manufacturing

3. The Black Death 1348 -

Decline of population by 1⁄3 Decline of urbanization Warfare and decline of inland and Mediterranean trade Smithian reversal

4. The origins of the Northern economic take off -

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Late Renaissance (15th-16th centuries): new ideas and discoveries  1439: invention of the movable type print  1470s: invention of the matchlock rifle  1487: Vasco de Gama sails around the Cape to India  1492: Columbus reaches the Americas Consequences for growth  New imports (and new consumption): tobacco, sugar  New trade routes and new exports  Colonization  1500s: Spanish and Portuguese conquests (Americas, Africa, and India)  1600-1800: British, Dutch and French colonies in the Americas and Asia

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In the 15th-18th century period a series of economic changes involved the northern part of Europe but the southern part  New trade routes  New goods imported  New markets for export  New inventions scientific knowledge

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Main consequence: a marked structural change in the northern economies  Proto-industrialization

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 Urbanization  Productivity growth of the agricultural sector How we capture these changes: looking at the percentage distribution of population across sectors

Countries:  England was the area that changed more  Proto industrial change in the agricultural sector  Manufacturing industries  Urbanization as a sign of agricultural progress  Dutch economy  Second successful case: trade, manufacturing and urbanisation  Continental Europe  Some modest urbanization  Italy and Spain  No structural change  Absence of growth in the urban manufacturing SUMMARY: -

What was the Industrial Revolution  more than a single revolution  radical transformation of the economy and society

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Why was it British?  Potential explanations and their limits  Key: the demand side of the problem is missing in the available hypotheses

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Pre-industrial European economies  A series of changes showing the advantage of northern economies with respect to the southern ones  Smithian growth and technological change  The Black Death  The rise of the Atlantic trade  Structural change in NW Europe  Why in England

LESSON 3: The Pre-Industrial economy

Introduction: -

How were standards of living in pre-industrial Europe? Measuring living standards in pre-industrial times  Anecdotal evidence  Quantitative assessment Living standards across Europe Beyond economics: human capital as a measure of living standards

Economic growth and the standard of living -

We have already observed the impressive performance of British GDP  *Warning: pre-19th century data are scarce, inaccurate and derived from different ‘proxy’ indicators

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The per capita GDP is an average measure. (No information about the actual living conditions of population)

The standard of living Living standards very unequal within and between societies -

Determinants of living standards differentiate across regions. Social scientists  Adam smith  Wages were higher in Northern Europe than in Asia as a consequence of the Atlantic trade  Thomas Malthus (1766-1834)  Pre industrial wages depended on population and fertility behaviors

 The Malthusian Model -

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Preliminary definitions o Birth rate = number of births per year per person (usually per 1000) o Death rate = number of deaths per year per person (usually per 1000) o Material living standards =  set of consumption goods constituting the subsistence of individuals  In a sufficiently developed market economy: real wage, per capita income, etc. Three key ideas o The birth rate: increasing in material living standards o The death rate: decreasing in material living standards

o The total population: decreasing in material living standards

Y* = subsistence income  Birth rate is equal to death rate  Population is constant at N*  “Subsistence” here means that the population simply reproduce itself, no growth Ricardo’s law of diminishing return  Production function with only land and labor  Land is fixed  Capital is scarce with little technological change  As population increases, the marginal product from an additional worker decreases.

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Two mechanisms of adjustment  Preventive checks (UK)  Reducing fertility  In pre -industrial economies delayed marriage rather than contraceptive practices  Households will keep the birth rate at the subsistence level  Positive checks (Asia)  Larger population will be checked by crises  E.g. famines and plagues

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According to Malthus wages were higher in England than in Asia because they adopted different mechanisms for the adjustment  England: preventive checks  Asia: positive checks

*Subsistence Income* = Y*

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A more general method to define (and compare) living standards across regions is to refer to the concept of subsistence income In classical economics (Smith, Marx)  what was socially agreed as the minimum income that allowed material subsistence In Malthus:  the income that allowed a population to reproduce itself Here we look at the minimum income that a family needs to survive  Physiological minimum level of nutrition in terms of calories and protein  A diet which is sufficient to survive  Inferior quality bread  Legumes as main sources of protein  Meat only rarely consumed  Respectable standard of leaving:  More than physiological minimum  More calories  Includes more quality and quantity of proteins  Bread, meat and dairy products  Still almost all the budget is spent for food and beverages  “pre modern diet”  8th century England  Best workers large variety of food: meat, cheese  Bread was consumed instead of ‘inferior’ cereals (oats, barley)  Consumption of medium skill workers was above subsistence  Diet of the middle class in the rest of Europe  Low Countries: similar to the British standards  French workers had a much worse diet: mostly cereals, meat and milk very rare  Italian workers: declining living standards in the 18th-19th centuries Maize → large consumption of polenta → hiacin deficiency → pellagra  Asia  Rice, cheapest cereals and fish (when available) as the only source of protein

Measuring standards of living  Anecdotal evidence and historical accounts show that the English workers enjoyed higher standards of living than workers in other European and world regions in Europe How asses that difference?  Pre-industrial real wages of representative workers in a region  Real wage: measuring the wage earned compared to the cost of living

 Advantages of this measure with respect to per capita GDP  Based on direct measures derived from the historical accounts of large urban institutions paying salaries and buying goods (hospitals, universities, monasteries)  Comparable across cities: wages paid in the building sector Common activity across European cities  Wages were usually registered for skilled (masters) and unskilled (helpers) workers Reconstruct real wages  First step: collect nominal wages - Average labor income from historical sources - Values reported in the different currencies and converted into silver grams equivalent  Second step: deflate the nominal wages by an index of prices summarizing the cost of living - Define a basket of consumption (food, beverages, clothes, energy, housing) - Collect prices of each good in the basket - Compute the cost for the whole basket and use it as a deflator of the nominal wage  Nominal wages similar across Europe up to the 16th century  England and Netherlands took off in the second half of the 16th century  Note: inflation due to increased silver stock might explain only part of the increase Real wages and subsistence ratios: Real wages are usually derived from nominal wages as a ratio, in each period, between nominal wages and the basket of consumption  Compute subsistence ratios = a preferred measure to capture the real value of wages with respect to subsistence

Subsistence ratio is preferred because:

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Straightforward economic interpretation: the subsistence ratio can be  = 1, total earnings are just sufficient for the consumption  > 1 total earnings are above the cost of consumption  < 1 total earnings are not sufficient for consumption Possible to quantify the consumer surplus:  how much workers are above subsistence  If they can use their wages for better food and/or other consumer goods Informative about living standards:  It depends on the composition (and the cost) of the basket of consumption

 Consumer Baskets -

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Subsistence basket  Simple diet sufficient to sustain an adult male at 1,900 kcal per day  Varying across countries to take into account of different availability of grains and cereals  Very little consumption other food: some cheap cloth and Respectability basket  Based on historical accounts of English and Dutch household behaviors  2,500 kcal per day including expensive food: meat, bread, cheese  Consumption other than food: clothing, fuel, beer.

Subsistent ratio: - Increasing after the Black Death and then declining during the 16th century - English and Dutch workers much above subsistence (3-4 times) in the 17th-18th century - Southern and central Europe very close to bare subsistence Respectability ratio: - Similar trends - Confirming that English and Dutch workers were not only above subsistence but also above respectability - Workers in southern Europe and Asia could not afford the same living standards New England - Atlantic trade  North American economies based on exports of primary goods to Europe  High land-to-labor ratio: attracting settlers from England  Commercial agriculture → high wages - Structural change

 Mainly a rural economy with largest cities similar in size to English county towns  After independence: growth of manufacturing and urbanization

 Quality of life - Higher income  more and better food consumption  Meat and dairy  Alcohol consumption increased during the 18th century  Sugar, tea now consumed by the middle class - Higher wages improve the quality of life of the British middle class - Biological standard of living  Measured through adult height (correlated with childhood nutrition)  Mean height across 18th recruits in different part of Europe: British recruits were on average 10cm taller than recruits in France, Italy and Austria  Human capital - Literacy:  In the Middle Ages: limited to urban centers and to those involved in trade activities and public services  the printing press, the spread of Protestantism and a new attitude towards scientific knowledge increased the literacy rate across Europe - Numeracy  New skills required by maritime trade.  Spread of knowledge of arithmetic and geometry - Craft skills  The spread of apprenticeship  Young workers paid in order to learn practical skills from a master. This system required  High incentives: returns on skilled labor should have been high  Capability to pay the cost of the apprenticeship  The high wage economy provided both incentives and initial income (parents’ income) SUMMARY - Historical accounts show that pre-industrial living standards (proxy: diet and food habits) were heterogenous across Europe - Nominal wages and prices series might help to quantitatively compare living standards in pre industrial soc...