Lecture 2: The Big Question

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Lecture 2 The Big Question Approaches in
Economic History
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Again, what is this course about?

• Already seen the big question How did we get
  here?
• But there are probably too many answers and not
  enough time for this.
• We need to get a little more specific in this
  lecture.

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The Economic History of the World from 10,000 BC
to 1800 AD

• First, an overview of 12,000 years of global
  economic history
• Population in 10000 BC 50 million
• Population in 5000 BC 100 million
• Population in 0 AD 300 million

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The Economic History of the World from 10,000 BC
to 1800 AD

• But the shocker is if we index income per capita
  in 10,000 BC
• Y/P in 10000 BC 1
• Y/P in 5000 BC 1
• Y/P in 0 AD 1

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The Economic History of the World from 10,000 BC
to 1800 AD

• This might be a little extreme of a statement
• There were deviations around 1 at some times and
  places.
• E.g. Rome in 0 AD, Song China in 1100 AD,
  Newfoundland in 1350 AD, Tahiti in 1700 AD.

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Pre-modern Economic Growth

• In the pre-modern era (i.e., everything before
  1800 AD), the only growth was extensive growthan
  increase in the sheer numbers of humanity.
• But there were no permanent improvements in
  income per capita for over 11,000 years.

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Flash-forward to circa 2000 AD

• Global Population in 2000 AD 6 billion
• Income per person in 2000 AD 15 for the OECD
  (Western Europe, North America, Australia, New
  Zealand, Japan)
• But there are also huge deviations in 2000 AD
  across countries as well
• GDP/cap in top 20 countries 28,000 USD

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Modern Economic Growth

• In the modern era (after 1800 AD), growth was
  both
• extensive in that population grew (actually
  exploded)

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Another view of modern growth

• An even more astounding statistic to consider is
  the growth in global output (population times
  output per capita)
• Y in 10000 BC 1
• Y in 5000 BC 2
• Y in 0 AD 6

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Eras in economic history

• So, we essentially have three different aspects
  of long-run economic growth to describe and/or
  explain
• 1.) Why was there so little growth before 1800
  (week 3)?
• The Malthusian World (or Trap)?
• 2.) Why was there a turning point around 1800
  (weeks 4-10)?
• The Agricultural/Commerical/Industrial
  Revolution?
• 3.) Why was there a take-off after 1800 limited
  (week 10-13)?
• The Great Divergence?

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Eras in economic history

• Most of our time will be focused on the second
  topic, and theres a reason for that.
• If we can explain the second, the other two
  questions will be in large part answered as well.
• What we will concentrate on in the rest of this
  lecture are some of the main explanatory
  variables employed by economists and historians
  to address all of the Big Three.

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Five Big Explanations

• Technology
• Markets
• Values
• Geography
• Institutions

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Technological Fundamentalism

• Obvious importance of technology in determining
  the transition from the so-called Malthusian trap
  to the present day.
• Less obvious importance of the rise of modern
  science as the scientific process can explain
  little of the growth witnessed before, say, 1870.

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Technological Fundamentalism

• Pros for the technology approach
• It explains everything about economic growth.

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Technological Fundamentalism

• Cons for the technology approach
• It explains nothing about economic growth as
  economic growth and technological improvement are
  virtually synonymous.
• It just pushes our question from what explains
  long-run economic growth to what explains
  technological improvement.

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Markets

• This is actually one of the first theories of
  economic growth ever formulated.
• The source was Adam Smith and his book, The
  Wealth of Nations.
• Smiths theory was that over time the size of
  markets would expand.

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Markets

• When markets expanded, the degree of
  specialization could increase as well.
• And with specialization comes productivity gains.
• That is, more output could be produced from the
  same amount of inputs.
• Smiths famous example of a pin factory in
  Scotland

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Markets

• This mechanism primarily works in two dimensions
• Deepening the market
• Greater incomes stimulate more diversified
  demand.

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Markets

• A further extension you may be familiar with
• Ricardos idea of comparative advantage.
• Even if one country is absolutely better at
  producing all goods and services, there are still
  gains-from-trade possible as long as two
  countries opportunity costs in production differ.

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Markets

• Pros for the market approach
• Economists certainly like it as markets are
  something we can actually talk about, and there
  is a nice set of theory to draw from (micro,
  international, etc.)

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Markets

• Cons for the market approach
• Gains from trade that SR describe are staticno
  explanation for the dynamics of long-run economic
  growth
• Also limited by the extent of the marketin
  times of high transaction and transport costs
  (i.e. the majority of human history) the extent
  of the market is very limited.

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Markets

• Cons for the market approach
• It assumes (doesnt explain) the existence and
  evolution of markets over time, but this is
  problematic because
• Markets dependent upon outside influences
• Markets face issues of coordination cooperation
• Markets a construct of post-1800 capitalism?

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Values

• Maybe an even older explanation (see Aristotle on
  this one)
• Most of the time, this approach answers the
  question of why are we so rich and they so poor
  in two ways we are good and they are bad, or
  vice versa.
• That is, wealth associated with traits of
  individuals, nations, ethnicities, race, etc.

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The Protestant Work Ethic

• Most famous thesis relating values and growth is
  Webers idea of a protestant work ethic which
  runs like this
• Protestant theology stressed the role of Gods
  grace in salvation, but this created uncertainty.
  So believers became single-minded in their
  devotion and had no room for diversion (i.e. an
  ascetic character).

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The Protestant Work Ethic

• Also stressed the necessity of hard work the
  goodness of labor (i.e. a calling)
• Together, this justified the pursuit of profit as
  an appropriate activity for Christians and
  instilled workers with a capitalist ethic
• Thus, the goals of personal salvation and
  personal enrichment became wrapped up.

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Values

• Pros for the values approach
• It is undeniable that the values an individual
  possesses are going to have some effect on things
  like their attitude and approach to work, life,
  and others.

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Values

• Cons for the values approach
• Economists dislike it because it leaves the
  explanation of economic growth in the realm of
  cultural studies, history, and (God forbid)
  anthropology.
• It is hard to describe the values of a nation or
  society beyond superficialities, much less draw
  reliable conclusions about the effects of values
  on economic growth.
• Supposed values like laziness are an effect of
  the economy itself.
• It is easily reconciled with stereotypes
  motivated by religion, racism, nationalism,
  etc.moreover, it can lend support to dubious
  causes

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Geography

• Another obvious candidate
• Determines such factors as
• agricultural productivity,
• disease vectors,
• natural disasters,
• defense from enemies.

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Geography

• But at the same time, how far does this get in
  explaining differences in income per capita
  today?
• Geography is, for all intents and purposes,
  fixed, permanent.

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Geography

• The only way for geography to influence growth
  outcomes is in its interaction with other
  variables/determinants.
• This has become an area of increasing interest
  and research lately (Jeff Sachs, Bono, and the UN
  Millenium Project).
• Their bottomline is that geography matters.

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Geography

• Categories of geographic arguments
• very long run (Diamond),
• long run (Jones),
• medium run (Sachs).

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Geography

• In the very long run
• Geography might determine the basic agricultural
  technology available to a society.
• For Diamond, this explains the disparity between
  the Eastern and Western hemispheres at the point
  of contact circa 1500.
• The lack of domesticatable animals and plants
  limited population levels and density.

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Geography

• In the long run
• Geography might determine the general technology
  available to a society.
• For Jones, this explains the disparity between
  the Europe and Asia from 1500.

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Geography

• In the long runcontinued
• But Europe was blessed with many natural
  barriers the Carpathian Alps, the Alps, the
  Pyrenees, the Danube, the Rhine, etc.
• This provided natural borders and aided the
  growth of multiple European states.
• Their struggle for dominance led to an openness
  to innovation, especially in the military sphere
  but also political and technical (those who put
  the blinders down suffered, witness the
  Ottomans).
• This lack of openness hindered East and South
  Asian nations in the race to follow.

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Geography

• In the medium run
• Geography might determine the degree of trade
  opportunities available to a society.
• For Sachs (1999), this explains the much of the
  disparity in economic performance across nations
  after 1950.

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Geography

• In the medium runcontinued
• Lower levels of trade are associated with
• lower levels of competition,
• lower levels of scale in production,
• lower levels of embodied technological change,
• and most likely, lower levels of foreign direct
  investment.

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Geography

• Pros for the geography approach
• It obviously has big level effects across
  countries, and with interaction effects, can have
  big growth effects as well.
• It is a particularly value-free approach to
  economic history and development witness the
  success of Diamonds book (if geography is the
  key, no one should feel superior or inferior to
  another person/society/culture/continent/)

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Geography

• Cons for the geography approach
• It is not obvious whether geography is all that
  exogenous (the example of the United States in
  1900).
• It can easily fit the data too well, e.g.
  Diamonds thesis has no way of being falsified.

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Institutions

• First, we need to define an institution, and
  well go the source on this one (North).
• Institutions are the humanly devised constraints
  that structure political, economic, and social
  interaction and consist of both informal
  constraints (sanctions, taboos, customs,
  traditions, and codes of conduct), and formal
  rules (constitutions, laws, property rights).

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Institutions

• Together with the standard constraints of
  economics they define the choice set and
  therefore determine transaction and production
  costs and hence the profitability and feasibility
  of engaging in economic activity
• Specifically, they provide the incentive
  structure of an economy as that structure
  evolves, it shapes the direction of economic
  change towards growth, stagnation, or decline.

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Institutions

• Second, an example of an institution, its
  possible effects, and its evolution
• Usury laws set the maximum amount of interest
  which can legally be charged on certain types of
  loan
• Usury law in Europe used to be dictated by the
  Catholic church which ruled that since it was
  sinful to gain from the misfortune of another
  (i.e., someone in need of a loan), so it was
  sinful to charge interest on a loan

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Institutions

• Usury, continued
• But without interest (i.e. a very high
  transaction cost), there is no market in loanable
  fundsfunds which could be employed in profitable
  enterprises and maybe spur growth

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Institutions

• Pros for the institutions approach
• We can potentially explain economic growth in
  terms of economic variables.

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Institutions

• Cons for the institutions approach
• Sometimes bad institutions change over time and
  sometimes they persist.
• Why? Cultural, distributional, and political
  issuesbut what determines these?
• Susceptible to post hoc ergo propter hoc
  reasoning (after this, because of this)?