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Introduction: Economic History and Economic Growth

Markus Lampe mlampe@clio.uc3m.es

Trivia
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 on Thursday and Friday. Aula Global: syllabus, reading list, presentations, etc. Buy the pack with compulsory (code 151, Reprografa bg. 9) Get at least one of the textbooks mentioned on slide 4

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 course) second round exam in June/July 2012: the exam can count for 100%, but will contain comprehensive questions regarding the material of the continuous evaluation (the readings and exercises of the practical class)
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Course outline (what I lecture on)

Week 1 (today) 2 (16-sept) 3 (23-sept) 4 (30-sept) 5 (7-oct) 6 (14-oct) 7 (21-oct) 8 (28-oct) 9 (4-nov) 10 (11-nov) 11 (18-nov) 12 (25-nov) 13 (2-dec) 14 (9-dic) Topic Introduction: Economic History and economic growth in the long run Economic growth in the long run and the measurement of human development Agriculture, living standards and population in preindustrial economies Institutions, property rights and goods and factor markets The Atlantic Economy in the Early Modern Period What is the Industrial Revolution? Why did the Industrial Revolution first happen in England? The Globalization of Goods and Factor Markets in the 19th Century The Dawn of an Economic Superpower: the US in the 19th and early 20th C. War and Disintegration: The international economy in the interwar years The collapse of the international economy and the Great Depression The Golden Age of Economic Growth The second globalization and the world economy at the beginning of the 21st Century The International Economy in the 20th century and the Great Divergence Revisited
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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 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 ORourke: 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) 5 See also last slide of every presentation.

Outline for today

a) What are economic growth and economic development? b) Why is it useful to look at the past? (the rich were once poor, too) c) What drives economic growth? An exploration of factors of production, technology, markets

How to measure an economy

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 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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Real GDP and PPPs

If we compare countries, official exchange rates are not a good indicator for the price differences between countries. Often, labourintensive non-traded goods (haircuts, bread) are cheaper in countries with lower wages;
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).

Economic growth, development, progress

Economic growth is when (real) output increases, which might be because of more inputs (land, labour, capital, etc.) or because 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 good idea to measure economic growth in per capita (per head) terms Development is a wider concept which includes a structural and/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 living standards 9 If you think this is positive, you can call it progress

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

Real wage divided by the cost of 1938 calories of cheapest food plus some 12 clothing, 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 the 15th century, especially in Western Europe (Maddison and others, cant use Allen for that, he just has labour income!) This is because of data problems: GDP (per capita) can only be 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 you are 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 ancestors in 1700 or 1800 (or before) But of course, we do not eat 22.5 kg of grain per day (that, is 50 times the London 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 took the people painting the Altamira caves in 12000 BC 50 hours of work to collect the sticks (and flintstones) to generate 1000 lumen of light, and people in 1800 still had to work 5 hours to pay the candles, in 1992 0.00012 hours were necessary to get nice electric light (this is 1/417000 of the effort of the Altamira 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 14 more chair-sitting pleasure (diminishing marginal utility).

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 selfdevelopment (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 Wikipedia Greener 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
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
(data link)

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

US Switzerland Norway United Kingdom Spain Japan Bolivia Costa Rica Belarus Hungary Indonesia Mexico Chad China Ethiopia Niger India Honduras England (1600) PIB/cap. Life expectancy at Physicians per 1,000 Energy consumption GDP Distribution (%) Agriculture Industry Services (1990 USD) birth population per capita (kgoe/a) High-income economies 31,178 78.2 2.3 7795 1.2 21.9 76.9 25,104 81.7 3.6 3719 1.3 27.6 71.0 28,500 80.2 3.1 5934 2.1 39.5 58.3 23,742 79.4 2.2 3918 1.2 23.8 75.0 19,706 80.9 3.2 3228 3.3 26.8 70.0 22,816 82.6 2.0 4040 1.6 21.9 76.5 Middle-income economies 2,959 65.6 1.2 504 11.3 36.9 51.8 8,032 78.8 1.3 880 6.4 24.9 68.7 12,607 69.0 4.6 2631 9.2 41.8 49.0 9,500 73.3 3.2 2595 2.8 34.7 62.5 4,428 70.7 0.1 757 15.3 47.6 37.1 7,979 76.2 1.5 1533 4.3 32.9 62.8 Low-income economies 706 50.6 0.04 ? 47.2 6.5 45.1 6,725 73.0 1.51 1138 10.6 46.8 42.6 867 43.0 0.03 278 43.5 13.4 43.1 514 56.9 0.03 ? 39 17 44 2,975 64.7 0.60 512 17.0 28.2 54.9 2,323 69.4 0.57 522 12.2 27.1 60.6 974 c. 39 ? c. 200? (1700) 40 22 38 Urbanization Tel. lines/mobile rate (%) phones per 1,000 82 73 77 90 77 66 66 63 73 68 52 77 27 43 17 16 29 48 c. 8-11 542 / 847 662 / 1072 430 / 1122 554 / 1185 459 / 1207 402 / 842 74 / 357 348 / 364 378 / 613 327 / 1108 76 / 349 182 / 628 1.3 / 93 276 / 414 11.5 / 16 1.7 / 70 45 / 258 97 / 305 none! Adult illiteracy (%) <1 <1 <1 <1 2.1 <1 9.3 4.1 <1 <1 8 7.2 68.2 6.7 64.1 71.3 34 16.4 75?
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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)

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 was 30 to 1 In 1990 it was 70 to 1 (the ratio of Norway to Zimbabwe today 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, then East Asia, and now China and India became and are becoming exceptions.
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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 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 arent rich? Thats what this course is about!

Production factors, technology, markets

Demographic Education behavior LABOR Inputs LAND CAPITAL Saving AVAILABLE TECHNOLOGIES
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BLACK BOX

OUTPUT

Labour (and Land)

Thats 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 killed the resources of a large plot of land (c. 8-200 km per head, depending on climate) In the neolithic revolution man started to become a food producer (agriculture and livestock breeding); until at least the 17th 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 birth or death rates) affect the resources (land!) per person, and therefore their productivity Different composition of the population (age distribution, life 22 expectancy and activity rate) are also important

Human capital (education)

Is the sacrifice of consumption today to increase production in the future, so its an investment. It depends on the costs and benefits to be obtained; skill-premium and subjective discount rate: if life expectancy is low, a year of education might mean much more 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 learning by doing and other informal ways of study
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Physical capital
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 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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Technological progress
Is everything that increases the productivity of the other factors of production (land, labour, capital) It is not only (better) machines, but also better organization of the production process, more effient institutions governing production, and also better organization of markets It is the only factor that allows for long run economic growth (intensive growth vs. extensive growth, which is more output just because of more inputs) In the short-term, we can take tastes, institutions and technologies as constant, but in the long run (economic history!) they become the major variables 26

The production possibility frontier

Clothing

Outward movement of the frontier

Food

Technological progress allows to produce more of both goods with the same amount of resources. That is why some (e.g., Mokyr) call it a free lunch. 27

Extensive growth and the law of diminishing returns

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. 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.

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So, what does ultimately determine economic growth?

An obvious candidate is the number (and importance) of inventions and 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 the education of the population But in the past (until maybe 1850), the most important inventions (like the mouldboard plough, wind and water mills, blast furnaces, steam engine, the spinning jenny) were invented not by scientists, but through trial-and-error The Greek and the Romans produced few technological progress, but had 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 inventions and 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 the education of the population But in the past (until maybe 1850), the most important inventions (like the mouldboard plough, wind and water mills, blast furnaces, steam engine, the spinning jenny) were invented not by scientists, but through trial-and-error The Greek and the Romans produced few technological progress, but had 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 world and with one another and that are transmitted generation through generation. They serve to integrate a society, they provide elements of continuity and stability, without which societies would disintegrate, but may also serve as barriers to change One example might be religion, others are specific values 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!
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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) 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)

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Socioeconomic matrix (II)

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 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, 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 34 are (almost) useless

Example II: Religion

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 earths resources. This 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 35 factors

Example III: Property rights and 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 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 to assure that you can decide what to do with it and earn the profits 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!)
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Conclusions
Relationships between institutions (culture, values, state), technology, resources and population are complex, interdependent and potentially unpredictable The biggest question in economics (Why some countries are rich and others poor?) has not yet been 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 understand some of its aspects.
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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 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 Cant 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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