1. Introduction:Economic History

and Economic Growthand Economic Growth

Markus Lampemlampe@clio.uc3m.es

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• My office: 7.0.18• My email: mlampe@clio.uc3m.es• Office hours: Thursday 13.30-14.30(or on appointment)• Laura Maravall Buckwalter is teaching the exercise classes

Trivia

• Laura Maravall Buckwalter is teaching the exercise classeson Thursday and Friday.

• Aula Global: syllabus, reading list, presentations, etc.• Buy the pack with compulsory (code 151, Reprografía bg.

9)• Get at least one of the textbooks mentioned on slide 4

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Assessment

• 50 % final exam• 10 % three multiple-choice tests during the course• 20 % week-to-week exercises in the practical classes• 20 % final essay (essay topics will be given in due• 20 % final essay (essay topics will be given in due

course)• “second round” exam in June/July 2012: the exam can

count for 100%, but will contain comprehensive questions regarding the material of the continuousevaluation (the readings and exercises of the practicalclass)

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Course outline (what I lecture on)Week Topic

1 (today) Introduction: Economic History and economic growth in the long run2 (16-sept) Economic growth in the long run and the measurement of human development3 (23-sept) Agriculture, living standards and population in preindustrial economies 4 (30-sept) Institutions, property rights and goods and factor markets

5 (7-oct) The Atlantic Economy in the Early Modern Period6 (14-oct) What is the Industrial Revolution?

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6 (14-oct) What is the Industrial Revolution?7 (21-oct) Why did the Industrial Revolution first happen in England?8 (28-oct) The Globalization of Goods and Factor Markets in the 19th Century9 (4-nov) The Dawn of an Economic Superpower: the US in the 19th and early 20th C.

10 (11-nov) War and Disintegration: The international economy in the interwar years11 (18-nov) The collapse of the international economy and the Great Depression12 (25-nov) The Golden Age of Economic Growth13 (2-dec) The second globalization and the world economy at the beginning of

the 21st Century14 (9-dic) The International Economy in the 20th century and the Great Divergence

Revisited

What you should read• Rondo Cameron and Larry Neal. A Concise Economic History of the

World (library: in the main reading room “Sala” under S 338.1 CAM) –will give background for almost all topics – gives “historical flesh” to the synthesis presented in class.

• Robert C. Allen, Global Economic History. A Very Short Introduction, Oxford 2011 (library, “sala”, S 338.1 ALL; offers a concise and unifying Oxford 2011 (library, “sala”, S 338.1 ALL; offers a concise and unifying background, especially on measuring and comparing living standards across time and space, structure differs from our syllabus).

• Karl Gunnar Persson: An Economic History of Europe. Knowledge, Institutions and Growth, 600 to the Present, Cambridge 2010. (S 338.1(4) PER; “advanced undergraduate” textbook with very good explanations especially for the first and last topics of our course).

• Broadberry and O’Rourke: The Cambridge economic history of modern Europe (S 338.1(4) CAM (V. 1), 2 volumes with chapters on central themes of our course, good as background reading)

• See also last slide of every presentation. 5

Outline for today

• a) What are economic growth and economicdevelopment?

• b) Why is it useful to look at the past? (the richwere once poor, too)were once poor, too)

• c) What drives economic growth? An explorationof factors of production, technology, markets

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• Gross Domestic Product (GDP; output): the size of an economy (total market value added produced within a specific territory, e.g., Spain, during a period of time)

• GDP (output) per capita: the same, divided by the number of inhabitants → proxy for living standard (how much can we all

How to measure an economy

inhabitants → proxy for living standard (how much can we all consume? – only if this increases we are “better off”)

• GDP (output) per worker (or per hour worked): a proxy for productivity (how much does everyone produce?)

• Market value added produced: Market value = valued with market prices; value added = intermediate products not double-counted; produced = not second hand)

• GDP includes all residents in a country. GNP includes all Nationals of a country, incl. those abroad.

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• If we compare countries, official exchange rates are not a good indicator for the price differences between countries. Often, labour-intensive non-traded goods (haircuts, bread) are cheaper in countries with lower wages; http://www.expatistan.com/cost-of-living/comparison/madrid/copenhagen

Real GDP and PPPs

http://www.expatistan.com/cost-of-living/comparison/madrid/copenhagen

• We need to establish a common consumption basket and use the value of this basket in every country as exchange rates; the technical term is “Purchasing Power Parity” (PPP)

• We say “real” because it indicates whether higher incomes really can buy more stuff, in other places and compared to the past (as with the “1990 Gheary-Khamis dollars”). 8

Economic growth, development, progress• Economic growth is when (real) output increases, which might

be because of more inputs (land, labour, capital, etc.) orbecause of their more efficient use

• To make sure that income increases for the average person(and not just because there are more people working) it is a(and not just because there are more people working) it is agood idea to measure economic growth in per capita (perhead) terms

• Development is a wider concept which includes a structuraland/or organizational transformation of the economy(structural change, market economy, etc.)

• Modern economic growth is then the (relatively) rapid,permanent and continuous increase in productivity and livingstandards

• If you think this is positive, you can call it “progress” 9

A very short economic history of the world (according to Greg Clark)

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Or, according to Angus Maddison(in 1990 International Geary-Khamis dollars)

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Subsistence ratio of real wages (for labourers) in London and Beijing, according to Bob Allen

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Real wage divided by the cost of 1938 calories of cheapest food plus someclothing, soap, candles and fuel.

Modern economic growth• It is not clear whether there was no substained increase in income before

c. 1800 (as Clark suggests) or slow, but steady growth since at least the15th century, especially in Western Europe (Maddison and others, can’tuse Allen for that, he just has labour income!)

• This is because of data problems: GDP (per capita) can only be“guesstimated” for past periods“guesstimated” for past periods

• However, if we believe in these exercises, we have now on average a 10 to 16 times higher income than our ancestors in 1700 or 1800 (and, if youare a labourer in London, 50 times what you need to “just survive”).

• So, on average we produce and can consume now 10 to 16 times more “real stuff” like food, clothing, housing, education, etc., than our ancestorsin 1700 or 1800 (or before)

• But of course, we do not eat 22.5 kg of grain per day (that, is 50 times theLondon cheapest food according to Bob Allen).

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But there is even more!• If we account for innovations like air travel, television, internet,

penicillin, etc., the variety and quality of goods we can consume with an average income, is even higher

• Take the example of lighting (Nordhaus 1996): While it tookthe people painting the Altamira caves in 12000 BC 50 hoursthe people painting the Altamira caves in 12000 BC 50 hoursof work to collect the sticks (and flintstones) to generate 1000 lumen of light, and people in 1800 still had to work 5 hours topay the candles, in 1992 0.00012 hours were necessary toget nice electric light (this is 1/417000 of the effort of theAltamira painters) this is not included in the calculations of “real GDP”

• On the other hand, we might be able to buy 16 times more chairs, and even better ones, but we do not enjoy 16 times more chair-sitting pleasure (diminishing marginal utility). 14

Growth, development and possibilities• What we can measure are possibilities and capabilities,

and there are some things that might matter beyond GDP per capita and thus, consumption possibilities

• One of them is literacy, because it allows to access education, which enhances the possibilities of “self-education, which enhances the possibilities of “self-development” (what you can do in life)

• Another is life expectancy, because if you can expect to live a longer life than you would have in 1800, you have more time to explore your possibilities

• These three are included in the so-called Human Development Index (HDI) elaborated by the United Nations Development Programme

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Some countries are poorer than others

HDI from Human Development Report for 2010, graph from WikipediaGreener and darker meens more “human development”. Red and dark, less

Gaps in income and development• The country with the highest HDI (Norway) had in 2012 (data link)

– a GDP/cap. of 48,688 2005-US$ – a live expectancy of 81.3 years – a literacy rate of nearly 100% and

12.6 years of schooling per adult

• Niger had (data link)

– a GDP/cap. of 701 USD– a live expectancy of 55.1 years – a literacy rate of 28.7% and 1.4

years of schooling per adult

• According to Angus Maddison, Spain in 1820 had a GDP/cap. of ca. 1595 2005 international PPP US$, Norway 1359 US$ and Niger maybe 500 (DR Congo would even be below that today).

There are lots of implications to this…Agriculture Industry Services

US 31,178 78.2 2.3 7795 1.2 21.9 76.9 82 542 / 847 <1

Switzerland 25,104 81.7 3.6 3719 1.3 27.6 71.0 73 662 / 1072 <1

Norway 28,500 80.2 3.1 5934 2.1 39.5 58.3 77 430 / 1122 <1

United Kingdom 23,742 79.4 2.2 3918 1.2 23.8 75.0 90 554 / 1185 <1

Spain 19,706 80.9 3.2 3228 3.3 26.8 70.0 77 459 / 1207 2.1

Japan 22,816 82.6 2.0 4040 1.6 21.9 76.5 66 402 / 842 <1

High-income economies

Middle-income economies

GDP Distribution (%)PIB/cap.

(1990 USD)

Life expectancy at

birth

Physicians per 1,000

population

Energy consumption

per capita (kgoe/a)

Urbanization

rate (%)

Tel. lines/mobile

phones per 1,000

Adult

illiteracy (%)

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Inspired by Cameron and Neal (2003), Table 1.2 (figures updated to c. 2007-2009 from Nationmaster.org, HDI, CIA World Factbook, Wikipedia, Maddison 2010; England (1600) derived from Maddison (2010), Wrigley and Schofield (1989), Allen (2009), Wrigley (1985), Clark (2007), Broadberry et. al. (2010), Humphrey and Stanislaw (1979)

Bolivia 2,959 65.6 1.2 504 11.3 36.9 51.8 66 74 / 357 9.3

Costa Rica 8,032 78.8 1.3 880 6.4 24.9 68.7 63 348 / 364 4.1

Belarus 12,607 69.0 4.6 2631 9.2 41.8 49.0 73 378 / 613 <1

Hungary 9,500 73.3 3.2 2595 2.8 34.7 62.5 68 327 / 1108 <1

Indonesia 4,428 70.7 0.1 757 15.3 47.6 37.1 52 76 / 349 8

Mexico 7,979 76.2 1.5 1533 4.3 32.9 62.8 77 182 / 628 7.2

Chad 706 50.6 0.04 ? 47.2 6.5 45.1 27 1.3 / 93 68.2

China 6,725 73.0 1.51 1138 10.6 46.8 42.6 43 276 / 414 6.7

Ethiopia 867 43.0 0.03 278 43.5 13.4 43.1 17 11.5 / 16 64.1

Niger 514 56.9 0.03 ? 39 17 44 16 1.7 / 70 71.3

India 2,975 64.7 0.60 512 17.0 28.2 54.9 29 45 / 258 34

Honduras 2,323 69.4 0.57 522 12.2 27.1 60.6 48 97 / 305 16.4

England (1600) 974 c. 39 ? c. 200? (1700) 40 22 38 c. 8-11 none! 75?

Middle-income economies

Low-income economies

Over time

• Differences are getting bigger, not smaller• Difference in income per capita between UK and India in

1500 was maybe 30 % (1.3:1).• Difference between poorest and richest country in 1960

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• Difference between poorest and richest country in 1960 was 30 to 1

• In 1990 it was 70 to 1 (the ratio of Norway to Zimbabwetoday is 69:1, Norway to DR Congo (319$) is 153:1).

• Most countries that are rich today, were already rich in 1800 or even 1500 (Western Europe). Japan, first, thenEast Asia, and now China and India became and are becoming exceptions.

Why are some nations rich and others poor?

• Easily speaking: because they– produce more stuff per head - which means, they have

higher productivity per worker, probably because of the most advanced stuff they produce with the most advanced most advanced stuff they produce with the most advanced technology

– have higher literacy rates - which should be the result of a better educational system

– enable their population to live longer lives - because of better nutrition, health care systems, sanitary conditions and/or disease environments

• But why is this, and why is it that the poor aren’t rich? –That´s what this course is about!

Production factors, technology, markets

LABOR

Demographicbehavior Education

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BLACKBOX

LABOR

CAPITAL

InputsOUTPUT

AVAILABLE TECHNOLOGIES

Saving

LAND

• That’s us – everyone who produces• Until c. 11,000 BC – that is for 99% of human history – humans

were nomadic hunter-gatherers, that means collected or killedthe resources of a large plot of land (c. 8-200 km² per head, depending on climate)

Labour (and Land)

depending on climate) • In the neolithic revolution man started to become a food

producer (agriculture and livestock breeding); until at least the17th Century (in most cases much longer) the vast majority of humans worked in agriculture

• Changes in the number of people (due to higher or lower birthor death rates) affect the resources (land!) per person, and therefore their productivity

• Different composition of the population (age distribution, lifeexpectancy and activity rate) are also important 22

• Is the sacrifice of consumption today to increaseproduction in the future, so it’s an investment.

• It depends on the costs and benefits to be obtained; skill-premium and subjective discount rate: if life

Human capital (education)

skill-premium and subjective discount rate: if lifeexpectancy is low, a year of education might mean muchmore forgone earnings (and hence be “more expensive”) than if life expectancy is high

• Also referred to as “labour quality”• Does not only include formal education (schooling), but

also other factors, from health via experience to learningby doing and other informal ways of study

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• Is the sacrifice of consumption today to increase production in the future (another investment)

• It can be savings (in money) or production time invested to make tools, etc. yourself (not so common today)

• Again it depends on cost and benefits

Physical capital

• Again it depends on cost and benefits• Includes formally buildings, non-residential capital

(machines, tools, other equipment) and inventory stock• Technological change often is transmitted by renewing

the “stock” of capital (e.g., use of “better” machines)• Residential capital (and also land) became less

important as history moved on, equipment becomes more important

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An example: Spinning

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• Is everything that increases the productivity of the otherfactors of production (land, labour, capital)

• It is not only (better) machines, but also betterorganization of the production process, more effientinstitutions governing production, and also better

Technological progress

institutions governing production, and also betterorganization of markets

• It is the only factor that allows for long run economicgrowth (intensive growth vs. extensive growth, which ismore output just because of more inputs)

• In the short-term, we can take tastes, institutions andtechnologies as constant, but in the long run (economichistory!) they become the major variables

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Clothing

Outward movement of the frontier

The production possibility frontier

Food0

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Technological progress allows to produce more of both goodswith the same amount of resources. That is why some (e.g., Mokyr) call it “a free lunch”.

• If we increase the quantity of each factor of production by a some number of units, the total output increases less then the increase in inputs.

Extensive growth and the law of diminishing returns

increase in inputs. • Technological progress allows to escape

the law of diminishing returns → an increase in the quantities of inputs leads to a more than proportional increase in output

• Without technological and institutional innovations a society stops to develop, might decrease income per capita, etc. 28

So, what does ultimately determine economic growth?

• An obvious candidate is the number (and importance) of inventionsand innovations, which leads to better techniques of production

• Today, this mainly depends on investment in research and development, that is science and its application, and in general theeducation of the population

• But in the past (until maybe 1850), the most important inventions (likethe mouldboard plough, wind and water mills, blast furnaces, steamengine, the “spinning jenny”) were invented not by scientists, butthrough trial-and-error

• The Greek and the Romans produced few technological progress, buthad a lot of theoretical knowledge

• The Middle Ages introduced many new technologies, but are seen as the “Dark Ages” for human knowledge

• So, there might be something behind the “innovative capacity” of a society…

So, what does ultimately determine economic growth?

• An obvious candidate is the number (and importance) of inventionsand innovations, which leads to better techniques of production

• Today, this mainly depends on investment in research and development, that is science and its application, and in general theeducation of the population

• But in the past (until maybe 1850), the most important inventions (likethe mouldboard plough, wind and water mills, blast furnaces, steamengine, the “spinning jenny”) were invented not by scientists, butthrough trial-and-error

• The Greek and the Romans produced few technological progress, buthad a lot of theoretical knowledge

• The Middle Ages introduced many new technologies, but are seen as the “Dark Ages” for human knowledge

• So, there might be something behind the “innovative capacity” of a society…

Culture, values and institutions• System of shared beliefs, values, customs, behaviours,

that the members of a society use to cope with the worldand with one another and that are transmitted generationthrough generation.

• They serve to integrate a society, they provide elements

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• They serve to integrate a society, they provide elementsof continuity and stability, without which societies woulddisintegrate, but may also serve as barriers to change

• One example might be religion, others are specificvalues or forms of organization

• We may call this more broadly the “socioeconomic and institutional matrix of a society”

• Note that many of these aspects are interconnected!

The socioeconomic matrix of a society• Includes demographic, economic, cultural and

sociological factors like– Age distribution, family structure, population mix and

life expectancy of the population– Fluidity of social classes (social mobility)

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– Fluidity of social classes (social mobility)– Education and Health (human capital, which not only

serves to produce better, but might as a “spill-over” create new inventions)

– Geography (soil fertility, climate, species, availability of resources and natural transport ways)

– Religious or ideological proclivities of the dominant groups or classes and masses (openness to change, gender equality, attitudes towards minorities)

– Infrastructure, e.g. for transport, trade, and

Socioeconomic matrix (II)

– Infrastructure, e.g. for transport, trade, and communication

– Political and legal system, property rights– Openness to trade and competition– Prevailing standard of living and income distribution

(poverty, nutrition)

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Example I: Geography• Access to the sea makes

transport easier; this widens the “extent of the market”, and hence allows for more trade and specialization. This might on the one hand lead to more efficient use of existing technology (“smithian growth”) and on the other hand to contact with different people and ideas,

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the other hand to contact with different people and ideas, which help to develop new technologies

• Land-locked countries have higher transport costs and more difficult access to main markets (Niger!, Mali, Burkina Faso, Afghanistan, Laos, Mongolia, Bolivia, Paraguay, but also Switzerland!)

• Deposits of minerals and fuels might help development, since the use of mineral fuels (coal, oil) gives much more and cheaper energy than organic fuels (be it human and animal labour or wood, etc.), but without adequate technology they are (almost) useless

• Mokyr (1990) argues that in general the attitudes of religions towards change are not very different, but in the long run small differences can lead to large divergence

• Judeo-christian religions believe that God created Man to be the center of the universe, and to manipulate and to utilize the earth’s resources. This might explain why knowledge slowly, but constantly accumulated in Europe.

Example II: Religion

might explain why knowledge slowly, but constantly accumulated in Europe.• Weber thesis: The protestant ethic and the spirit of Capitalism: Protestantism

favours individual freedom and responsibility, this promotes literacy, education and entrepreneurship (see also the Cistercians, who promoted hard work and constructed watermills)

• In change, hinduism and its classification of men into “varna” (caste) sustained that “promotion” from one class into another only was possible after reincarnation through an obedient and austere life, which does not exactly promote change in society

• But of course, religion is not the factor behind growth, in part because the adoption of religions also depends on economic, political, social, military factors

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Example III: Property rightsand the state

• North and Thomas (1973): “Efficient economic organization is the key to growth. It entails the establishment of institutional arrangements and property rights that create the incentive to channel individual economic effort into activities that bring the private rate of return close to

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rights that create the incentive to channel individual economic effort into activities that bring the private rate of return close to the social rate of return … if a society does not grow it is because no incentives are provided for economic inititative.”

• This means that if you own something you must be able toassure that you can decide what to do with it and earn theprofits it creates (on markets); the same is true for inventions

• According to institutional analysis main threat are the rulers. They might be strong enough to protect property rights, but also have the force to confiscate resources (which causes insecurity!)

Conclusions

• Relationships between institutions (culture, values, state), technology, resources and population are complex, interdependent and potentiallyunpredictable

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• The biggest question in economics (Why somecountries are rich and others poor?) has not yetbeen answered definitely

• This is good news! The question is still open and attracts the best minds in the profession…

• In this course, we will at least try to understandsome of its aspects.

Executive summary

• The standard of living can be measured (in real PPP adjusted GDP per capita)

• There are rich and poor countries, and in the past, most people were poor, by modern standards

• Today, rich countries produce more (per person) and have higher incomes than poor countries for several reasons

• The course will explore their development and by that chooses an historical approach to the understanding of economic development

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Next week

• Measurement of economic growth (more indicators)

• Phases of economic growth in Western Europe and changes in economic leadershipand changes in economic leadership

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References• Allen, ch. 1; Cameron and Neal, ch. 1• Angus Maddison, The World Economy. Paris: OECD, 2006• Deirdre McCloskey, Bourgeois Dignity and Liberty: Why Economics

Can’t Explain the Modern World, Chicago: Chicago UP, 2010, chs. 5-7.

• Gregory Clark, A Farewell to Alms, Princeton: Princeton UP, 2007, ch. 1.

• Nordhaus, William D.: “Do Real-Output and Real-Wage Measures Capture Reality? The History of Lighting Suggests Not”, 1996 (http://www.nber.org/chapters/c6064.pdf)

• Mokyr, Joel, The Lever of Riches, Oxford UP 1990, ch. 10.• North, Douglass C., and Robert P. Thomas, The Rise of the

Western World: A New Economic History, Cambridge: Cambridge University Press. 1973, chs. 1-2.

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