1 Economics 201 European Economic History Fall 2004 MWF 9-9:50 Castleman 212 R. N. Langlois...

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Economics 201European Economic History

Fall 2004

MWF 9-9:50Castleman 212R. N. Langlois

Richard.Langlois@UConn.eduhttp://langlois.uconn.edu

Office: Room 322 MonteithOffice hours: MWF 10:15-12 or by appointment

Books and readings. Rondo Cameron and Larry Neal, A Concise

Economic History of the World. New York: Oxford, 2003.

Jared Diamond, Guns, Germs, and Steel. New York: Norton, 1997.

Douglass C. North, Structure and Change in Economic History. New York: Norton, 1981.

Nathan Rosenberg and L. E. Birdzell, Jr., How the West Grew Rich. New York: Basic Books, 1986.

Frances and Joseph Gies, Life in a Medieval

Village. New York: Harper, 1990. .

Course requirements.

Midterm 1 30%

Midterm 2 30%

Final 40%

Points to remember.

Come to class.

Check online syllabus regularly for new links and materials.

Central Question: Why Europe?

Economic growth.

Extensive growth. Total income (Y) increases.

Intensive growth. Per capita income (Y/N) increases.

Example: India versus Australia.

Intensive economic growth.

US$ 382,335 million*

US$ 1,702,712 million*975 million

18.75 million

Australia India

(1998)

US$ 20,391 US$ 1,746*1990 international $

Income per capita 1999.

United States $30,600

Japan $24,041

Australia $22,448

United Kingdom $20,883

Spain $16,730

Argentina $11,324

Russia $6,339

China $3,291

India $2,149

Tanzania $478

GNP per capita, 1999 international dollars, PPP method.

Source: The World Bank.

Economic growth.

Growth in U. S. GDP per capita, 1789-2001 (1996 dollars).Source: Johnston and Williamson (2002)

$5,000

$10,000

$15,000

$20,000

$25,000

$30,000

$35,000

$40,0001

What is economic growth?

Mercantilists: wealth is an excess of money or real goods.

Adam Smith: wealth is not stuff; wealth is productivity.

Productivity is total output divided by total input: Y/L.

Smith: the ability to command resources with labor time.

Adam Smith (1723-1790). Author of the Wealth of Nations (1776). Picture courtesy of the Warren J. Samuels Portrait Collection at Duke University.

Declining time-price of food.

3-lb. Fryer: 1919: 3.5 hours. 1997: 27 minutes.

Falling death rates.

1700 1850 1910 1980

Annual deaths per thousand, United States and Great Britain.

Source: Fogel (1986), p. 44, Table 9.1.

Increasing life expectancy.

1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000

U. S. life expectancy at birth in the twentieth century (years). Source: National Center for Health Statistics.

Decreasing price of computing power.

The decreasing cost of computing power (1998 dollars per MFLOPS.) Source: Kurzweil (1999, pp. 320-321).

Decreasing price of illumination.

0.0001

Time price of light (hours of work per kilolumen-hour). Source: Nordhaus (1997).

Who is wealthier?

Louis XIV (1638–1715)King of France (1643–1715)

Louis You

Info tech

Entertainment

Housing

Medicine

Economic growth.

“[I]t is the cheap cloth, the cheap cotton and rayon fabric, boots, motorcars and so on that are the typical achievements of capitalist production, and not as a rule improvements that would mean much to the rich man. Queen Elizabeth owned silk stockings. The capitalist achievement does not typically consist in providing more silk stockings for queens but in bringing them within the reach of factory girls in return for steadily decreasing amounts of effort.”

Joseph A. Schumpeter (1883-1950)

Schumpeter, Capitalism, Socialism, and Democracy (1942).

Economic growth.

0 1000 1820 1998

Western Europe 450 400 1,232 17,921

Western Offshoots 400 400 1,201 26,146

Japan 400 425 1,201 20,413

Average Group A 443 405 1,130 21,470

Latin America 400 400 665 5,795

Eastern Europe & former USSR 400 400 667 4,354

Asia (excluding Japan) 450 450 575 2,936

Africa 425 416 418 1,368

Average Group B 444 440 573 3,102

World 444 435 667 5,709

Per capita income by region, selected years CE. (1990 International $.) Source: Maddison (2001)

World population growth.

Year Population (millions)25000 BCE 1

5000 BCE 5

1 CE 170

1000 CE 265

1400 CE 350

1800 CE 900

1900 CE 1625

2000 CE 6272

Source: Michael Kremer (1993), “Population Growth and Technical Change, One Million B.C. to 1990,” Quarterly Journal of Economics 108:3 (August), pp.

681-716.

Is intensive growth even possible?

“It has been said that the great question is now at issue, whether man shall henceforth start forwards with accelerated velocity towards illimitable, and hitherto unconceived improvement; or be condemned to a perpetual oscillation between happiness and misery, and after every effort remain still at an immeasurable distance from the wished-for goal.”Malthus (1798), I.2.

Thomas Robert Malthus (1766-1834)

Is intensive growth even possible?

Malthusian population doctrine. Population (potentially) grows exponentially but

food supply (potentially) grows only linearly. Any surplus above necessities leads to

population growth, which reduces real wages back down to subsistence.

Diminishing returns. Because land is a fixed factor, food supply

actually grows less than linearly. Rent of land sucks up all returns and brings

growth to a halt.

David Ricardo (1772-1823)Image courtesy of the Warren J. Samuels Portrait Collection at Duke University.

What Malthus and Ricardo forgot.

Diminishing returns. Wildly underestimated

the potential for productivity growth.

Malthusian population doctrine. Missed the

demographic transition.David Ricardo (1772-1823)Image courtesy of the Warren J. Samuels Portrait Collection at Duke University.

Malthusian responses.

When a Malthusian society generates economic surplus. Migration to new land. A Malthusian crisis. Technological, institutional,

and organizational change to increase productivity.

What causes (intensive) growth?

Resources help. Climate, geography.

Guns, germs, and steel.

Lack of resources helps. Hong Kong versus

Argentina.

The resource trap.

The spread of human populations.

The Neolithic era.

Pleistocene take-off (circa 50,000 B.C.E.) Evolution of

brain or voice box?

Cro-Magnon enter Europe (circa 40,000 B.C.E.)

Cave painting (32,000-30,000 B.C.E.) from the Chauvet cave at Vallon-Pont-d'Arc in the Ardèche region of France.

Hunter-gatherer society.

Dependence on natural foodstuffs: nomadism.

Generate surplus with technological change.

Common-pool problem. Migration when land abundant. Intergroup warfare when land scarce.

Hunter-gatherers maximize population.

The first economic revolution.

VMPAGR

N* Population (labor force)

Settled agriculture.

Population pressure creates “demand” for settled agriculture. First stage: defending naturally occurring

foodstuffs. Women cultivate crops by while men

hunt. Climate, geography, resources create

“supply” of settled agriculture.

Guns, germs, and steel.

The major axes of the continents.

The advantages of Eurasia.

Plant domestication. Large connected belt of Mediterranean climate. Wider availability of domesticable varieties

(cereals).

Animal domestication. Coevolution of humans and animals.

Prevents mass extinctions during hunter-gatherer era.

Evolved immunity to animal-borne diseases.

The Fertile Crescent.

Sites of food production before 7,000 B.C.E. The geographical distribution of the seven Neolithic founder crops in the Fertile Crescent (yellow) of the Near East. Large map shows the distribution of wild chickpea (red line) in a core area (green line) within the upper reaches of the Tigris and Euphrates rivers (present-day southeastern Turkey/northern Syria). Inset maps show the distribution of founder cereal crops — einkorn wheat (cross indicates the putative site of its domestication), emmer wheat, and barley — and founder legumes (lentil, pea, bitter vetch). Blue lines delineate the range of genetic founder stocks for lentil and pea, and red lines the range of emmer wheat, barley, and bitter vetch (no data are available on their genetic founder stocks). Red lines also indicate the distribution of einkorn wheat, lentil, and pea beyond that of their genetic founder stocks.

Source: Simcha Lev-Yadun, Avi Gopher, and Shahal Abbo, “The Cradle of Agriculture,” Science 2(288): 1602-1603, June 2000

The spread of agriculture to Europe.

The Indo-Europeans.

Common origins of European and Indo-Iranian languages (4000-2500 B.C.E).

Who were the Indo-Europeans? Theory 1: pastoral nomads.

Mobility of domestic horse, wheeled carts. Economic advantages of pastoralism.

Capital intensity. The secondary-products economy.

Theory 2: masters of settled agriculture. Genetic evidence.

Population pressure from settled agriculture.

Diffusion of innovation.

AGRICULTURE

MILKING?

PLOUGH, CART

Reconstruction of Ötzi the ice mummy (c. 3300 BCE), in the South Tyrol Museum of Archeology, Bolzano, Italy.

Years BCE

Bronze Age Europe.

Celtic

Germanic

Italic Greek

Baltic

Slavic

Early cities and civilizations.

Jericho (c. 7,000

Sumeria and Baylonia(c. 3100-

1600 BCE)

Mycenaea(c. 2000-1350

Egypt (c. 2705-332

The urban revolution.

Specialization. Artisans. Soldiers. Kleptocracy. Bureaucrats.

Irrigated settled agriculture.

Economic surplus.

Bull-headed lyre from the Royal Tombs of Ur. University of Pennsylvania

Museum of Archeaology and Anthropology.

North’s theory of the state.

The state (monarch) is a revenue-maximizing natural monopolist in the use of force. The minimum efficient scale of

defense. Revenue-maximization and the

Laffer curve.

Revenue maximization.

Tax rate

Revenue

0% 100%

The Laffer curve

“Oriental despotism.”

High MES of agricultural production. Labor-intensive irrigation projects. Slave or near-slave labor force.

Workers “deskilled” and can’t appropriate benefits of innovation.

Appropriation of surplus by aristocracy. Lavish monumental construction rather than

reinvestment. Specialists focus on luxury goods for aristocracy.

Low rate of technological change.Slow economic growth.

The Phoenicians and Greeks.

The Roman Empire.

The Rise of Rome.

Agriculture. Irrigation and servile

production. But, unlike Egypt,

agriculture private: the Villa system.

Organization and law.

Military technology. Discipline and large

numbers.

The Pont du Gard aqueduct, near Nîmes, France.

Early Roman economic policy.

Importance of trade and commerce.

Octavian defeats Antony (31 B.C.E.)

The pax romana and the Mediterranean “common market.”Head of the Emperor

Augustus (ruled 27 B.C.E. – 14 C.E.), from the Kelsey Museum, University of Michigan.

The Roman Empire about 117 C. E.

International trade in the Roman era.

The fall of Rome.

External causes. Change in military technology? Learning by “barbarians.”

Internal causes. End of expansion eliminates source of

revenue. Need to “bribe” political challengers.

Bread and circuses. Tax exemptions for nobility.

Spiraling fiscal crisis.

Roman fiscal crisis.

Emperors raise tax rates to meet revenue demands.

Tax base erodes as goods and services flee the money economy.

Reduced tax base leads to further increases in the tax rate, and so on in a vicious cycle.

Roman coin bearing the likeness of the Emperor Diocletian (284-305 C.E.) Tax revenue = tax rate * tax

Monetary Policy.

Debasement of the currency (another kind of tax) leads to hyperinflation in the third century.

Gresham's Law.(“Bad money drives out good.")

Government controls.

Diocletian reforms. Strict wage and price controls. In-kind system of taxation and

requisition.

Constantine (308-337) ties workers to the land.

“Demonetizing” the economy.

Barbarian invasions.

Germanic expansion. Population increase and Huns.

Augustulus deposed by barbarians in 476.

How dark the “Dark Ages”? Evidence of population

decline. From roving bandits to

sedentary bandits.

Augustulus

The feudal system.

Change in the MES of military technology. The great stirrup controversy.

Feudalism as a “contract.” Exchange of work for defense. Why an in-kind exchange? Serfdom: tying workers to the

land. Labor shortage and rent

distribution. Example: professional sports.

Charlemagne crowned emperor by Pope Leo III (800 C.E.), from Grandes Chroniques de France (14th Century), Bibliothèque Nationale de France.

Feudalism as a system of rights.

Although full-grown feudalism was largely the result of the breakdown of older government and law, it both inherited law from the past and created it by a rapid growth of custom based on present fact. In one sense it may be defined as an arrangement of society based on contract, expressed or implied. The status of a person depended in every way on his position on the land, and on the other hand land-tenure determined political rights and duties. The acts constituting the feudal contract were called homage and investiture. The tenant or vassal knelt before the lord surrounded by his court (curia), placing his folded hands between those of the lord, and thus became his ‘man’ (homme, whence the word homage). … The lord in turn responded by ‘investiture’, handing to his vassal a banner, a staff, a clod of earth, a charter, or other symbol of the property or office conceded, the fief (feodum or Lehn) as it was termed …. This was the free and honourable tenure characterized by military service, but the peasant, whether serf or free, equally swore a form of fealty and was thus invested with the tenement he held of his lord. The feudal nexus thus created essentially involved reciprocity. — The Shorter Cambridge Medieval History

The manorial system.

Villein tenancy. Disappearance of slavery. The custom of the manor.

Demesne obligation. Three days of week-work

on the lord’s land. An input-sharing contract.

October, from Les très Riches Heures du Duc de Berry (c. 1412). The Chantilly Museum, Paris.

Early medieval agriculture.

Traditional individualistic subsistence agriculture.

Shared common “wastes” with little common-pool pressure.

“Sedentary pastoralism” takes precedence over cultivation of arable.

Eventually: communal control over common-field grazing.

Evolution of the manorial system.

Population growth leads to nucleation. Peasants leave

hamlets and assemble in villages.

Arable of hamlets merged to become village arable.

June, from Les très Riches Heures du Duc de Berry (c. 1412). The Chantilly Museum, Paris.

Evolution of the manorial system.

Labor transferred from pastoralism to cultivation of the arable.

“Cerealization” and “destocking.”

“Common of shack”: grazing on the fallow arable.

Final element: scattering of arable holdings.

Population growth leads to increased demand.

June, from Les très Riches Heures du Duc de Berry (c. 1412). The Chantilly Museum, Paris.

Crop rotation.

Spring crop: Oats/barley or

peas/beans. Harvested in summer.

Autumn sowing of wheat or rye, harvested following summer.

A year fallow. Nitrogen fixing by soil

bacteria. Manure from pasturing.

Three-course rotation in wide use by ninth century.

Four seasons and seasonal labors. From Bartholomaeus Anglicus (Bartholomew the Englishman), On the Properties of Things. France, Le Mans 15th Century. Bibliothèque Nationale de France.

The open-field system.

Representative village.

Division into arable and non-arable land. “Waste” for grazing.

Arable divided into two or more fields. Hundreds of acres each.

Arable subdivided into elongated narrow strips. But waste not

subdivided.

Physical structure.

Villeins, copyholders, and freeholders. Not much practical

difference.

OFS as a village system, not a manorial system.

Commons owned collectively. Not “unowned.”

Ownership structure.

Management of the Commons. Changeover from private to

collective rights. Use of commons. Joint expenses.

Manor court or village meeting. Set planting and harvesting

dates. Prevented overuse of

commons. Controlled private exchange

of strips.

Institutional structure.

Little specialization in production. Except near big cities. Specialized farms didn’t

use the OFS.

High transportation and transaction costs.

Some activities collective. Grazing, plowing,

harvesting.

Some activities private. Sowing, weeding.

Technological structure.

The OFS: economic analysis.

Fine-tuned adaptation to diversified autarkic production. Pastoralism and crop rotation.

Many tasks, with different levels of economies of scale and different costs of monitoring. Manage tasks collectively when

economies of scale high and monitoring costs low.

Assign private property rights when economies of scale low and monitoring costs high.

July, from Les très Riches Heures du Duc de Berry (c. 1412). The Chantilly Museum, Paris.

Scattering.

Scattering: early explanations.

Size of plow team. Land in proportion to contribution. But scattering observed even when light plow

Desire for equality. But there were many inequalities among peasants.

Partible inheritance. But this applies only to holders in fee simple.

Assarting. Creating new arable form the waste.

General problem: why does scattering persist?

Active markets in strips.

Scattering and risk.

McCloskey: scattering as a form of insurance.

Variability of climate and soil over small areas.

Scattering as portfolio diversification in the absence of other assets.

Problems with the risk hypothesis.

Landlords provide de facto “charity.”

Livestock another portfolio asset.

Optimal risk sharing through combination of rental, wage, and share-cropping contracts.

Scattering and the open-field system.

Dahlman: scattering helps preserve OFS. By increasing costs of private enclosure,

scattering reduces “hold-up” threats. Scattering protects the system against the

individual. Fenoaltea: stands Dahlman on his head.

Collective activities (especially harvesting) capacity constrained.

Not all parts of all fields can be harvested in some years.

Scattering protects the individual against the system.

A different sort of risk-diversification argument.

The success of the OFS.

Population densities highest where the manorial/OFS was most extensive. Northern France, Northern Italy.

Population growth in Eastern Europe the result of migration.

Year W. Europe All Europe*

1000 12-15 million 15-20 million

1300 45-59 million 60-70 million

*All Europe includes Norway, Sweden, most of Eastern Europe, and Christian Spain.

Results of population growth.

Clearing the waste.

Colonizing Eastern Europe.

The Crusades as a frontier movement.

From 11th to 13th century, a frontier movement.

Thirteenth century: looming crisis.

Frontier movement ceases, population growth continues.

General increase in land rents. Increase in relative prices

of cereals. Some shift from pasture

to cultivation.

Diminishing returns and declining real wage.

Pieter Bruegel the Elder, The Harvesters (1565 ) Metropolitan Museum of Art, New York

Thirteenth century: response.

Feudal obligations transformed into money rents in many places by 11th century.

Money rents seen as fixed: origin of the word “farm.” A farmer (fermier) held a

right to rents that were fixed or firm (ferme).

Why return to feudal obligations?

Refeudalization: return to direct cultivation of the demesne.

Pieter Bruegel the Elder, The Harvesters (1565 ) Metropolitan Museum of Art, New York

Why refeudalization?

Lords dig in their heels. Fixed rents allows peasants

to capture the gains from increasing land rents.

Return to demesne avoids renegotiation costs.

Proto-enclosure. A move toward specialized

production?Pieter Bruegel the Elder, The Harvesters (1565 ) Metropolitan Museum of Art, New York

Either way: the failure of institutional transformation.

The calamitous fourteenth century.

1200 61 1400 45

1250 69 1450 60

1300 73 1500 69

1350 51 1550 78

Population of Western Europe, 1200-1550 (millions).

Albrecht Dürer, The Four Horsemen of the Apocalypse (1498).

The calamitous fourteenth century.

Population of England, 1086-1603 (millions).

Albrecht Dürer, The Four Horsemen of the Apocalypse (1498).

1086 1.1 1374 2.25

1348 3.76 1377 2.23

1350 3.13 1400 2.1

1360 2.75 1430 2.1

1369 2.45 1603 3.78

Malthusian crisis.

Famine. War. The Black Death.

Bubonic plague, 1348-51 Recurred many times

through 15th century. Population didn’t stop

falling until mid 15th century, and did not recover until 16th century.

Les Quatres Morts, from the Danse Macabre of the Cemetery of the Innocents, Paris, 15th century.

Economic effects of population decline.

Price fluctuations, with general deflation after 1375.

Prices of agricultural goods fall relative to manufactured goods.

Real wages increase. Rents decline, as does

cultivation of marginal lands.

Supply and demand for agricultural products in Europe before (D) and after (D’) the plague.

Institutional effects of population decline.

Transformation of servile obligations into property rights. Competition for peasant labor leads to attractive

rental contracts. Rents fixed — renegotiated on death of peasant. Eventually, life leases become hereditary by

custom. Inflation reduces value of “quit rent” to nominal

sum. Hereditary leases become rights in fee simple. Soil tilled by free tenants and wage workers.

Trading rights for revenue.

Institutional transformation.

Like the 13th century, the 16th century was a period of rising population and increasing land rents.

But this time Europe responded with an institutional innovation that led to continual increases in productivity.Pieter Bruegel the Elder, The Harvesters

(1565 ) Metropolitan Museum of Art, New York

The enclosure movement.

Physical enclosure.

Legal enclosure. Voluntary

enclosure. Parliamentary

enclosure.

The timing of English enclosure.

Period

Percentage enclosed.

<1550 45 1500-1599 2 1600-1699 24 1700-1799 13 1800-1914 11.4

>1914 4.6

Percentages approximate. Source: Wordie (1983).

Transaction costs of enclosure.

Voluntary enclosure. Required unanimity, side-payments. Complex property law geared to protect

hereditary estates from profligate descendants. Enclosures with highest net benefits take place

first. Parliamentary enclosure.

Case-by-case exemption from common law. Majority not unanimity. A form of eminent domain. Not important until mid-18th century.

“Hardest” enclosures Parliamentary.

The benefits of enclosure.

Benefits of specialization and trade.

Greater appropriability of innovation.

Reduced costs of collective decision-making.

Enclosure for pasture in Britain reflected Britain’s growing comparative advantage in wool.

The benefits of enclosure.

Enclosed land rented for twice common-field land.

£2.1 million per year gain in productivity, about 1.5% of national income or about 3.5% of agricultural income.

Rate of return of 17% per year.

An average village 13% more productive.

Source: McCloskey (1975)

Like the 13th century, the 16th century was a period of rising population and increasing land rents.

But this time Europe responded with an institutional innovation that led to continual increases in productivity.Pieter Bruegel the Elder, The Harvesters

(1565 ) Metropolitan Museum of Art, New York

A more developed market economy.

Agricultural transformation. The enclosure movement.

Commercial transformation. The requickening of trade. The development of cities.

Political transformation. The rise of the nation-

state. Mercantilism.

Rise of the nation-state.

Lower communication and coordination costs.

Population increase. Change in military

technology? Pike and longbow. Gunpowder.

Increase in the MES of military technology.

The Battle of Crécy (1346). Jean Froissart, Chronicles. Flanders, 15th Century. Bibliothèque Nationale de France.

Rise of the nation-state.

Increase in the geographic extent of dominions. Overcoming “medieval

particularism.” “Shakeout” and fiscal

crisis among rulers. Search for new

sources of revenue leads to institutional change.

Increase in the MES of military technology.

The Battle of Crécy (1346). Jean Froissart, Chronicles. Flanders, 15th Century. Bibliothèque Nationale de France.

Institutions and economic growth.

Efficient institutions. Secure property rights. Reduce transaction costs. Positive-sum game.

Inefficient institutions. Redistribute wealth rather than create

wealth. Monopolies, trade restrictions. Zero-sum (negative-sum) game.

Market integration.

Tolls and internal customs barriers.

Coinage. Weights and measures. Law. Market-enhancing

institutions.

Rembrandt, detail from The Moneychanger (1627), Staatliche Museen, Gemäldegalerie, Berlin.

Not only tariffs at political boundaries but also internal tolls. Roads and waterways. Markets and towns.

Customs barriers every six miles on the best roads.

More than 60 tolls on the Rhine by the end of the Middle Ages.

In France, still 1600 tolls at the time of the French Revolution (1789).

England: monarch opposed tolls without a quid pro quo of service. Royal permission needed. Inhabitants could demand audit.

Gradual disappearance of tolls. Separated foreign from domestic:

“customs” vs. “tolls.” National customs system, 1275-

1350. Early power of monarchy.

The turnpike system.

1660 through eighteenth century. Best one-fifth of English roads. Privately constructed by “turnpike trusts.”

“The benefits of these turnpikes appears now to be so great, and the people in all places begin to be sensible of it, that it is incredible what effects it has already had upon trade in the counties where it is more completely finished.”

— Daniel Defoe

Coinage.

Unification quicker and easier. Theory of money.

England: unification under Henry II in 12th century. Depreciation ceases.

France: a talent for manipulating coinage.

Germany: coinage remains largest obstruction to internal trade.

Weights and measures.

In Middle Ages, varied not only by locality but also by type of product.

Aids cheating, raises transaction costs.

England leader in unification, but local weights and measures not abolished until statute of 1835.

“... to bring the whole of His Majesty’s kingdom within the same statutes and within the same system of weights and measures, an undertaking very worthy of our great King …”

— Jean-Baptiste Colbert (1665)

Evolution and unification of law.

On the continent, the rediscovery of Roman law.

In England, parallel development of Common Law. Battle against royal monopolies.

The Law Merchant. Enforcement at the Champagne

Fairs.

Economic association without kinship.

Trading within ethnic networks. Ethnic culture and institutions

promote trust, enforce sanctions.

The Community Responsibility System. Intergroup trading. Sanctions imposed at group

level. The Individual Responsibility

System. As groups grow, difficult to

monitor members effectively. Rise of legal institutions of

nation-state and law merchant.

Hans Holbein the Younger, Portrait of Georg Gisze, a German merchant in London (1532). Staatliche Museen, Gemäldegalerie, Berlin.

Other market-promoting innovations.

Bills of exchange. Development of banking.

Insurance. Separation of marine

insurance from financing.

Double-entry bookkeeping. Helps detect errors. Separation of business

account from family account.

Guilds.

Medieval guilds. Institutional structure for

preserving and diffusing productive knowledge.

Institutional structure for coordinating commitments and enforcing contracts.

Decline of guilds. Competition from rural

industry. State policy weakens

guilds in England and the Netherlands, strengthens them in France.

Rembrandt, The Syndics of the Clothmaker's Guild (The Staalmeesters) 1662. Rijksmuseum, Amsterdam.

Medieval guilds integrated insurance, safety-net, and other functions.

Mercantilism.

Microeconomic. System of

economic regulation

Macroeconomic. Regulation of

international trade and finance.

System of economic thought.

A sea depot in Amsterdam, 1750.

Association of state power with economic

power.

Patents and Monopolies.

Creation of “artificial” property rights. Right to exclude others

from competition.

Monopoly transfers wealth from consumers to producers (PS) Merchants willing to

pay monarch up to PS for right to monopoly.

Dead-weight efficiency loss (DWL).

MC, AC

DWL loss represents foregone gains from trade.

Patents and Monopolies.

Origin of the word patent. Typical Elizabethan

monopolies: Saltpeter, gunpowder, salt,

paper. In 1603, Elizabeth declares

monopolies contrary to common law. In re: playing cards. Pressure from merchants and

courts. Statute of monopolies (1625).Queen Elizabeth I (1533-1603). Ruled 1558-1603. Attributed to Nicholas Hilliard. The Tate Gallery, London.

Trade and monetary policy.

Control of export of bullion.

Staple policy. Town as entrepôt.

Policy of provision. Tariffs, etc., to

retain or attract certain goods.

Sumptuary laws.A sea depot in Amsterdam, 1750.

Balance of trade.

Mercantilism as a system of ideas.

Analogy with individual account. From Italian

accounting practices. Fallacy of composition.

Struggling to understand growth in a zero-sum framework.

Adam Smith attacks “the mercantile system.”

A sea depot in Amsterdam, 1750.

Balance of trade.

Institutions and economic growth.

Why did some countries create efficient institutions?

Why did others create inefficient institutions?

France.

Charles VII takes over a destroyed country after Hundred Years War, 1422.

Medieval sources of revenue depleted by war.

Creating nation state requires large and growing revenues.

Jean Fouquet, portrait of Charles VII of France, c. 1444. The Louvre, Paris.

France.

Charles effective in restoring order.

Estates General must approve levies. Estates anxious to

restore order. Special right to levy

turns into a permanent right.

Excluding nobles and clergy from taxation.

France.

Guilds become fiscal agents for the crown. Taxation more

effective. Compare JP system

in England. Strengthens guilds.

Administrative bureaucracy.

Colbertism.

Jean-Baptiste Colbert. Finance minister under Louis

XIV (1661-83). Colbertisme synonymous

with mercantilism. Economic reforms.

Efforts to reduce “particularism.”

But favored state monopoly and industrial control. Origin of laissez faire.

Frustrated by royal need for revenue.

Prohibitive tariffs lead to war with the Netherlands.

Spain in 1492.

Reconquest ends with capture of Granada, last Moorish stronghold. Unification and consolidation of

power. Cortes grant taxing power.

Taxes increase 20 times between 1470 and 1540.

Expulsion of the Jews (and then Moriscos in 1609). Loss of artisanal, commercial,

and agricultural skills.

Columbus sets sail.Queen Isabella of Spain. Ruled 1479-1504.

The Mestas.

Sheep guild. Granted Royal privilege

in 1273. Transhumance rights in

exchange for funds to finance reconquest.

Decree of 1501 reserves in perpetuity all land on which sheep have ever grazed.

Effect on enclosure. Price controls on cereals.

Consulado of Burgos.Transhumance routes in Spain.

The Spanish empire.

Bullion and Inflation. Looted and mined gold and

silver floods Spain and Europe.

Prices increase by more than a factor of three in Spain, and a factor of five in Brabant and England.

Monopoly control. Casa de Contratación. Prohibition of colonial

industry.

The Spanish empire.

Index of silver imported to Seville, 1501-1660. (1591-1600=100). Source: John H. Munro, “The Monetary

Origins of the ‘Price Revolution.’”

The decline of Spain.

Revenues. Americas less than 20

percent. Netherlands largest source.

Costs. Far exceed revenues. Hapsburgs spend on military

and wars to expand empire. Effects.

Borrowing and bankruptcy. Fiscal spiral.

Confiscation, monopoly, sale of titles.

Titian, Charles V Seated (1548). Pinakothek Munich.

The Netherlands.

Passes from Burgundy to the Hapsburgs (1477).

Both Burgundians and Hapsburgs encourage growth and trade. Small taxes on many

items in exchange for secure property rights.

Discourage monopolies, guilds.

The goose that lays the golden eggs?

The Netherlands in 1543.

The Netherlands.

Increased exactions lead to successful rebellion (1572-1581). Antwerp sacked; commercial

leadership moves to Amsterdam.

By 17th century, Dutch become commercial leaders of Europe. Economic diversification. The Dutch East India Company

(1602).

“The First Modern Economy.”

Replica of Henry Hudson’s schooner, the Half Moon.

England.

Government funded as an extended household.

Expenditures exceed revenues from Crown lands.

Sale of land to meet shortfall. Elizabeth sells 25 per cent after

1588 war with Spain. James I sells another 25 per cent. Charles I (1625-1641) sells the

Parliament controls taxes and customs.

King James I (ruled 1603-1625).

Stuart England.

New customs impositions. Sale of monopolies. Expansion of peerage.

Packing the House of Lords. James: a baronet for £1,095; price

later falls to £220. Loans secured under threat. Purveyance.

Charles I seizes £130,000 of bullion stored in the Tower of London (1640).

King Charles I (ruled 1625-1641).

Stuarts seek revenue outside parliamentary control.

Stuart England. Parliament withholds

revenues. Demands respect for traditional

property rights. Common Law courts oppose

monopolies. Coke invokes Magna Carta.

Charles responds with Royal Prerogative. Prerogative courts. Special laws for individuals. Star Chamber. Fires Coke and other judges.

Sir Edward Coke (1552-1634).

The English Civil War.

Coalition builds against the Crown. Marginal incentive to

support the king declines as costs of other people’s privileges mount.

Unlike continental monarchs, English king has no standing army.

Execution of Charles I (1649).

The English Republic.

Star Chamber Abolished. Restrictions against

monopolies enforced. Regular standing parliament. Royal administrative

mechanisms abolished. Act of 1660 abolished feudal

tenures, effectively making England a fee simple society.

Oliver Cromwell (1599-1658).

The Restoration.

Cromwell unable to find a stable form of government. Son proves a poor successor.

Stuarts restored to power (1660).

Royal abuses begin again. “Rechartering” the Whigs out

of parliament.

James II turns on his own followers (1686-88).

King Charles II (ruled 1660-1685).

The Glorious Revolution.

Parliament welcomes invasion by William of Orange and Mary, Protestant daughter of James II.

Parliamentary supremacy.

Fiscal revolution underpins political revolution.

A self-enforcing constitution.

William III (ruled 1689-1702.

Mary II (ruled 1688-1694).

A self-enforcing constitution.

Required parliament’s assent for major policy changes. Allowed wealth-holders to veto what

wasn’t in their interest.

Ways of reneging unilaterally eliminated. Limited Crown sources of funds. Audit expenditures. Prerogative courts abolished. Judicial tenure.

Self enforcing. Credible threat of dethronement.

John Locke (1632-1704 ). Published Two Treatises of Government (1690).

The fiscal revolution.

Parliament agrees to put government on sound financial footing in exchange for veto power.

Evidence: lenders now willing to supply funds. After 1688, government

has access to unprecedented funds.

Tenfold increase, 1688-1697.

William III (ruled 1689-1702.

Mary II (ruled 1689-1694).

The Industrial Revolution.

When? 1780-1830.

Was it a “revolution”? No: Cameron. Yes: Landes.

Industrialization vs. economic growth. U. S. wealthier than Britain in 1800, but little

industrialization. Growth can come from improvements in

traditional activities, e.g., agriculture.

Per capita growth not “revolutionary” during industrial revolution. Steady balanced growth. But denominator growing rapidly.

Increased output sustains rapid population growth. Did growth in “new” sectors contribute to growth

in “old” sectors?

Technological transformations. Energy: animal to

water and steam power.

Materials: wood to iron and steel.

Organizational Transformation. The factory system.

James Watt’s steam engine, 1769.

Qualitative transformation

Britain in 1700.

Population on England and Wales: 5.2 million. Would grow to 9.1

million by 1800. Would almost

double again to 17.8 million by 1850. Ogilby’s Britannica (1675)

Britain in 1700.

English peasant ate better than continental counterpart. Spent lower proportion of income

on food. Implies increased demand for

manufactured goods. Lower tolls and improved

transportation. Canals and turnpikes.

More urban. By 1800, 25% in cities larger

than 5,000 persons. Compare with 10% in France. Cities centers of commerce.

Britain in 1700.

Increased extent of the market. Large internal market. Merchant fleet spurs

international trade. Relative wealth of

peasantry. Focus on standardized, low-

cost items. Useful also in trade with

Asia, Africa, and Americas. Quantity not quality: search

for lower costs.

Manufacture in 1700.

Local crafts shops. But pressure on urban guilds

from rural industry. The putting-out system.

Woolens dominate. 70% of English exports in 1700.

50% in 1770. Not localized: spread all over

England. Link to labor freed by

enclosure.

The putting-out system.

Merchant clothier. Commissions spinners and weavers. Provides wool. Hires workers for finishing and dyeing.

Cottagers. Own tools: handloom, spinning wheels. Division of labor within household.

Men weave, women spin. Children and hired labor.

Paid on piece-rate basis. May have garden, cows, etc.

Continue to participate in agriculture.

Also called the “domestic”

system.

Early textile innovation.

John Kay’s flying shuttle (1733).

Wyatt-Paul spinning frame (1738).

Spinning becomes a bottleneck.

Never technologically successful.

Difficulty of wool as material.

The cotton textile industry.

Cotton arrives in Britain from India. Efficient, skill-intensive hand production.

Instant popularity of colorful calicoes. Woolens industry clamors for protection.

Act of 1700 forbids import of printed fabrics. Act of 1719 forbids wearing calicoes.

British entrepreneurs seize opportunity. Using linen for warp and cotton for weft. Ancient right to produce fustian.

Wall hanging (detail). Painted and dyed cotton. Madras-Pulicat Region c. 1640-50.

The cotton textile industry.

Import prohibitions encourage development of indigenous British cotton textile industry.

Originally, cotton cloth produced by domestic system, on woolens model. Rise of the “fustian masters.”

Tendency of weaving to concentrate. Manchester and Lancashire.

Favorable ground for mechanical invention. Cotton more easily mechanized than wool.

Trajectory of mass production.

Innovation in cotton spinning.

Hargreaves’ jenny. Patented 1770. Basically a multi-spindle

spinning wheel. Powered by a single human.

Arkwright’s water frame. Based on Wyatt-Paul

and thus not patentable. Uses two rollers. Designed for non-human

power.

Hargreaves’ machines smashed by angry spinners.

Patent held invalid. Hargreaves flees to

Nottingham and dies in 1778.

By 1788, 20,000 jennies in England.

Completely ousts spinning wheel in Lancashire, which gives up wool for cotton.

Itinerant barber and hair merchant.

Persuades Nottingham hosiers to back large-scale water-driven factories.

Makes strong warp thread, allowing all-cotton cloth.

Arkwright dies with a fortune of £500,000.

Mather Brown, Portrait of Sir Richard Arkwright (1790). New Britain Museum of American Art.

Sir Richard Arkwright (1732-1792)

Combined principles of water frame and jenny. Produced thread with fineness of jenny and

strength of water frame. A “dominant design”: improved but never

superseded until the late nineteenth century.

Crompton’s mule (1779)

Mule spinning, mid-nineteenth century.

Innovation in weaving.

Power loom: Edmund Cartwright (1787). Catches on slowly as

engineering standards improve.

Speed/breakage tradeoff.

Technical advantage of 7.5:1 by 1820. Single operative tends

more looms rather than increased output per loom.

The British textile industry.

Import substitution turns into export powerhouse.

Leads British economic growth into 19th century.

Surpasses woolen trade as principal export by 1803. More export oriented than

woolens. Britain surpasses India in

1790 as largest exporter of calico, not to be overtaken until 1933 (by Japan).

Date £ (thousands) % total exports

1784-86 766 6.0

1794-96 3,392 15.6

1804-06 15,871 42.3

1814-16 18,742 42.1

1824-26 16,879 47.8

1834-36 22,398 48.5

1844-46 25,835 44.2

1854-56 34,908 34.1

British exports of cotton textiles.

Organizational transformation.

Crafts production. The putting-out

system. The factory

system.Jedediah Strutt’s Milford mills.

A paradox?

The enclosure movement. Move way from collective

“team” working of village land.

Unbundling of joint-ownership rights.

The factory system. Move to collectively

organized modes of production.

Ownership rights to capital unified in joint-stock company.

The factory system.

What is a factory? Expensive or

indivisible technology.

The concentration of workers in a single location.

Close monitoring or supervision of work. “Factory discipline.”

Monitoring and supervision.

The putting-out system. Contractor relationship. Product monitoring. Pecuniary incentives.

The factory system. Employee relationship. Process monitoring. “Factory discipline.”

The factory system in cotton.

Factory workers

Handloom weavers

Factory workers and handloom weavers in Britain, 1806-1862 (in thousands).

Source: B. R. Mitchell, British Historical Statistics. Cambridge University Press, 1988, p. 376.

Power loom perfected.

The factory system in cotton.

By 1784, key position in spinning goes to adult males. The multicellular mill.

Recreating the cottage contracting system within factories. Master spinner responsible for supervision, hiring. But doesn’t own tools (machines). Majority of child labor employed by masters, not capitalists.

Early factory workers. Women and children.

Oldknow employs men in agriculture.

Poorhouses. Need to build dormitories.

The rise and decline of Britain.

Aspects of British industrial success. Industrial organization.

Industrial districts. International trade.

The British Empire. Free trade.

The debate over British industrial decline. Did Britain decline? Theories of decline.

Culture. Technological trajectories and timing.

Industrial organization in Britain.

When an industry has thus chosen a locality for itself, it is likely to stay there long: so great are

the advantages which people following the same skilled trade get from near

neighbourhood to one another. The mysteries of the trade become no mysteries; but are as it

were in the air, and children learn many of them unconsciously. Good work is rightly

appreciated, inventions and improvements in machinery, in processes and the general

organization of the business have their merits promptly discussed: if one man starts a new idea, it is taken up by others and combined

with suggestions of their own; and thus it becomes the source of further new ideas. And

presently subsidiary trades grow up in the neighbourhood, supplying it with implements

and materials, organizing its traffic, and in many ways conducing to the economy of its

material.

— Marshall, Principles of Economics, IV.x.3.

Alfred Marshall, 1842-1924

Industrial districts.External economies.

Lancashire.

Poverty. Pastoral farming lends itself to

small-scale enterprise. Indigenous textile tradition.

Woolens under Yorkshire influence and linens under Irish influence.

Climate. Cotton “hydroscopic.” An east wind reduces output and

quality by 10 per cent. Water and coal. Lack of institutional constraint.

Manchester a new town. Grows from 7th largest in 1775 to 3rd

largest in 1801.

An Industrial Landscape in 1833: Swainson, Birley and Co., near Preston, Lancashire, England.

Original advantages.

Lancashire.

Transportation. Port of Liverpool develops with

Manchester. Canals, turnpikes, and railways.

World’s first passenger railway. Later, telegraph and telephone turn

Manchester into communications center.

Markets. Cotton exchanges create thick

market for worldwide imports. Power loom and mule adapted to

wide variety of cotton types and quality.

Worldwide network of commissioning agents.

The Manchester Cotton Exchange.

External economies.

Lancashire.

Vertical specialization. Low barriers to entry. Tens of thousands of establishments. Specialization by type of yarn or cloth. One firm may lease space in several

mills and one mill may contain several firms.

“Flexible specialization.” Subsidiary industries.

Textile machinery industry. Banking and finance. Transportation and communication.

An Industrial Landscape in 1833: Swainson, Birley and Co., near Preston, Lancashire, England.

External economies.

Lancashire.

International trade. Percent value of cotton exports

1820 1850 1896

Europe 65.5 34.3 18.9

America

26.1 29.1 18.5

USA 7.2 8.9 3.6

Latin 17.8 18.0 15.0

Levant 2.5 9.2 7.9

Asia 5.2 24.3 43.4

India 18.5 26.6

China 3.6 8.5

Africa 0.6 1.7 5.3

Sales worldwide, but especially to subtropical areas of India, China, Latin America.

The British Empire.

Beginnings in Mercantilist trading monopolies. East India Company (1600).

Trading companies take on political and military functions. Creating trading institutions and

preserving openness of markets.

British government takes over functions of trading companies. East India Company nationalized

1773. Monopoly abolished 1813.

Britain and Free Trade.

Smith’s Wealth of Nations attacks mercantilism.

The Corn Laws. Import controls after Napoleonic

wars. Ricardo discovers comparative

advantage. Anti-Corn-Law League founded in

Manchester, 1836. Corn Laws repealed, 1846. Reflects shift of economic power

from agriculture to manufacture. Anglo-French commercial treaty

(1860) virtually eliminates tariffs.David Ricardo (1772-1823).

Image courtesy of the Warren J. Samuels Portrait Collection at Duke

University.

The decline of Britain.

Relative or absolute decline? Timing of decline.

The Crystal Palace, site of the Great Exhibition of 1851, which showcased British technology to the world.

1820 1870 1900 1913 1950 1973 1992

Germany

GDP per capita in 1990 dollars.

Source: Angus Maddison, Monitoring the World Economy, 1820-1992. OECD, 1995, p. 23-24.

Britain retains lead in traditional industries. Textiles, textile

equipment, shipbuilding, cable.

Britain cedes lead to US and Germany in new areas. Organic chemicals,

electrical products, steel.

A Bessemer steel converter. Kelham Island Museum, Sheffield, England.

The decline of Britain: hypotheses.

Culture. Sons of nouveau riche capitalists

study classics at Oxford and Cambridge.

Culture of the gentleman: anti-technology and anti-business.

Educational system. Britain relies on on-the-job training. No system of technical education.

Costs of empire. Civil service drains off talent.

The decline of Britain: hypotheses.

Institutional inertia. The

“disadvantages” of an economic head start.

Technological trajectories. The case of the ring

spindle.

The ring spinning frame.

“Neoclassical” growth theory.

Y = f(K, L)Robert Solow (1924-)

But: growth in capital and labor don’t account for growth in GDP. The “residual.”

Y = f(K, L; )Robert Solow (1924-)

But: growth in capital and labor don’t account for growth in GDP. The “residual.”

Y = f(K, L; )Robert Solow (1924-)

But: growth in capital and labor don’t account for growth in GDP. The “residual.” Or else K and L have “improved.”

Either way: something is missing. Knowledge.

1 Economics 201 European Economic History Fall 2004 MWF 9-9:50 Castleman 212 R. N. Langlois...

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