Lecture 2

NOW THAT YOU HAVE DEVELOPED LET ME DEVELOP

Theory and practise

• Competition and free trade. Theory prescribes that every partner gains.

• True from a static point of view• Hamilton’s policies in the newly-born U.S.• Germany to the fore: wheat from the Eastern

provinces (Prussia and Pomerania) in exchange for British machines?

• Frederic List and protected development.

The importance of a unified market

• The Zollverein• Given a large domestic market, develop it!!• Tariffs to allow for a catching up process.• Protecting infant industries to allow

industrialisation to hatch and plant its roots.• Protection to reach up to the technological

frontier.

Germany: a new paradigm

• The state does intervene.• Industrialisation and effective demand• From a world of peasantry to a world of

factories.• Development means industry and industry

means technological progress.• Whence the involved capabilities?

The second industrial revolution

• The development of the heavy industry: machine making industries, iron and steel, transport industries.

• The development of vocational schools, technical schools, universities and polytechnics.

• The link between the above and the factories.• Science and technology take the front seat

The rise of the new industries

• Household names: Alfred Krupp, Johan Friedrich Thyssen, Jacob Meyer in steel-making; Gottlieb Daimler, Karol Benz in the early auto industry; Baron Von Siemens in the early electrical industry

• The foundation of some of the well known firms: Badische Anilin und Soda Fabrik (BASF); Allgemeine Electricitats Gesellschaft (AEG); Hanoversche Machinen Hanomag, (Man), etc.

• Germany is well placed to take advantage of the XIX century great scientific break-through

The new sectors

• Chemistry.• Electricity• Automobiles• Precision machining• Innovations in the steel-making industry • The pride was in iron and steel artefacts: steel

structures as forms of art: be them useful or not.

...useful: Paddington Street Station

...not useful: La Tour Eiffel

Policies and politics

• Policies and State intervention: from industry to finance

• The so-called ‘omnibus’ model of banking• Short-term liabilities and long-term assets:

more, shares of capital sometimes the majority stock.

• The implicit guarantee offered by the State: it stood ready to bail out banks should the necessity arise.

A major figure: Bismark

The relevance...

• Easy long-term credit extended to politically sensitive sectors.

• Industry-finance overlapping• Favouring strategic sectors: the arms race.• Germany on the technological frontier: sound

quality, high specialisation, highly competitive.• Withstanding the crisis • Is credit important in the process of

development?

Competitiveness and productivity

• Competitiveness depends on productivity• But more important than its level, it is its

growth rate that matters.• The question: why is a country productive?• It depends on what and how it produces and

how ‘costly’. • The latter point is can be summed up by the

ratio of the average wage rate over labour productivity.

Is the level of the wage rate important?

• It is sometimes held that development requires a low level of the wage rate.

• Labour rich countries should concentrate in producing labour intensive products paying a low wage rate. Right?

• Historical experience tells otherwise!! • German development was hallmarked by

sectors that can be defined as capital intensive• Wages were, comparatively speaking, low.

Other experiences

• The U.S. experience was characterised by high protection and, initially, by traditional products.

• Wages, on the contrary, were comparatively higher than in Europe. It was a labour scarce country.

• The key is productivity and its growth. Wages can be high but if productivity is high labour costs can be low.

Some key points• Germany’s was a fast catching up process• Initially, it was a matter of transfer of technology• Rapid growth of productivity• Static comparative advantage vs. Dynamic

comparative advantage• Protection, high tariffs.• Tariff protection to be relaxed if trade is

amongst countries with the same degree of development

A quick glance at the U.S. experience

• It was clear from the outset that the role of the colonies was to supply raw materials.

• From the British point of view American colonies were to be predominantly agricultural and support British industrialisation.

• Independence meant protection through high tariffs of the small industries, mainly textiles and other current implements, mainly in the New England area.

....continued

• Effective demand was generated by the increase in the size of the market

• A decentralised process with little State intervention: the westward shifting frontier.

• High wages and high productivity: scale economies more than economies of scope.

• After the Civil War, protection was enhanced to support the growth of the new industries.

Towards the end of the century

• New protagonists appeared on the international scene

• Not just Germany but also France • The worry that the fast pace of industrialisation,

iron and steel, would run short of raw materials.• The thirst and quest for an Empire: the great

African scramble. Grabbing land, almost for the sake of it.

• The first economic crisis: the 1873-1890 cycle

The rise of a new theoretical economic mainstream

•From a ‘Production Theory’ to an ‘Exchange Theory’.•Value is sought in trading not in production• The labour theory of value is abandoned • The rise of marginalism.• The production function.• The concept of equilibrium.

The new century

• By 1914, the U. S. is the first industrial country in the world.

• A shaky power balance• A globalised financial world led by Great

Britain. • Great Britain finds a new way to colonise the

world: British financial capital in Latin America