AgRev_Enclosure (1) PDF - Agricultural Revolution

ECON 231: Online Course Materials Week 8 and 9: The agricultural revolution, property rights and enclosure Readings: McCloskey (1972) and Allen (1982) The British agricultural revolution: Starting during late 1600s → ↑ agricultural Q / acre and ↑ agricultural Q / worker → rapid productivity g...

ECON 231: Online Course Materials Week 8 and 9: The agricultural revolution, property rights and enclosure Readings: McCloskey (1972) and Allen (1982) The British agricultural revolution: Starting during late 1600s → ↑ agricultural Q / acre and ↑ agricultural Q / worker → rapid productivity gains in agriculture → “agricultural revolution”. Why might ↑ agricultural productivity affect IR → urban, industrial transformation of UK economy → transition to MEG? o Release L from agriculture → shift urban-industrial SL → ↓ WL. o ↑ supply of food to cities → ↓ Pfood. o ↑ rent captured by land owners (with high MPS) → shift SK → ↓ WK. Two key questions: i. Why did agricultural productivity in UK start to rise during late 1600s? ii. Could this ↑ productivity have caused the transition to MEG (ie. IR)? 2 Agricultural revolution (cont.): Example of a specific institutional ∆ that could have contributed directly to UK transition to MEG → move from communal to private property rights over land. Enclosure movement in British agriculture → move from communal property rights in open field system to private property rights on enclosed fields. Open field system → mid-1300s (Black Death) to mid-1700s (parliamentary enclosure). o Production organized at parish/village level. o Rotate four fields → fallow, grain (eg. wheat → cash crop), legumes (eg. peas or beans → nitrogen fixing), common pasture for livestock (eg. cows or sheep → fertillizer). o Every family cultivates a small private plot → vegetables, chickens/pigs. o All farmers have access to village “waste” → firewood, game. o Farmers cultivate scattered strips in each field. o All investment/planting/harvest decisions are “customary” → made communally by entire village. 3 Agricultural revolution (cont.): Open fields (cont.): o Farmers earn average product (ie. average over entire village) → incentives for effort, risk taking, investment, innovation? o Long term leases → 99 years → farmers capture surplus. o Market exists for land → land ownership highly concentrated → average farmer does not own land. o Rent paid in $ → monetized agricultural economy. o Small mobile waged L force → hire additional L during planting and harvest seasons. 4 Agricultural revolution (cont.): Enclosure movement: o Voluntary enclosures from mid-1500s to mid-1700s → requires unanimous support of village → hold-outs require financial and/or social pressure. o Parliamentary enclosures from 1750s to 1850s → legislation to incentivize enclosures → 4/5 support in village, then 3/4, then only land owners → eventually government uses police power to force last villages to enclose. o Small, scattered strips amalgamated into private large blocks. o Common pasture and waste divided up and included in private blocks. o Communal decision making ends. o Official registration and surveying of land holdings. o Blocks physically separated by fencing, hedges, drainage ditches. o Transport infrastructure (ie. RR) investments. o Long term, customary leases broken → replaced by short term leases with regular renegotiations for rent. 5 Agricultural revolution (cont.): Enclosure (cont.): o Other changes we observe that were coincident with enclosure:  ↑ rent  ↑ productivity  ↑ average farm size / scale of production  ↑ K intensity  Release L from agriculture into urban-industrial (→ women, children, poor)  ↑ seasonal waged labour → substitute farm families for mobile, seasonal waged L o Direction of causation? 6 Agricultural revolution (cont.): McCloskey (1972): o Not just a classic article on enclosure, but one of the first examples of cliometrics in economic history. o 2 questions: What determined the timing of enclosure? Could enclosure have supplied K for IR → causal mechanism? o Enclosures occur when PV E(net benefits) > 0.  Net benefits = total value of enclosing – opportunity cost (ie. value of remaining open) – costs of enclosing.  Subject to an income constraint → costs must be paid at t=0.  Open fields dominant from 1300s-1500s, then slow trickle of enclosures. Open fields survive in direct competition with enclosed fields for over 200 years. No examples of private investors buying up land to enclose.  Very rapid ↑ share of land enclosed during early/mid-1700s. 7 Agricultural revolution (cont.): McCloskey (cont.):  What changed?  Opportunity cost → ↓ advantages of open fields  ↓ costs of enclosure  Income constraint eased  Total benefits under enclosure: Did disadvantages of open fields ↑ ? Did productivity gains from enclosure ↑? 9 Agricultural revolution (cont.): McCloskey (cont.): o Disadvantages of open field system:  Scattered strips → K and L must be moved between strips → transport infrastructure poor and transport costs high.  No physical separation between strips → negative externalities (ie. weeds, disease, poor drainage) spread easily through village.  Weak incentives → rewards for good decisions and penalties for poor decisions spread through entire village.  Public goods → free riding possible → shirkers cannot be denied access to village public goods (eg. drainage, water, sewage, transport…).  Communal decision making has very high transactions costs → almost all decisions are customary and conservative. 10 Agricultural revolution (cont.): McCloskey (cont.): o If disadvantages to open fields were so big, why did they survive for so long? o Advantages of open fields:  Economies of scale and L and K coordination → man-power required for most investment projects exceeds capacity for any one family → constrained access to K for individuals.  Equitable distribution of returns to farming across families in village, family members, and because of long leases, even between farmers and land owners.  Farming is very high risk, with limited opportunities for risk spreading → open fields spread risk across village → ↓ variance in outcomes at expense of lower average returns. Decision to enclose involves trade-off between lower risk and lower average returns. 11  Valuing Risk U U=Y1/2 E(U(YO))= E(U(YE)) Y YEL YOL X E(YO) E(YE) YOH YEH Open risk premium Enclose risk premium Agricultural revolution (cont.): McCloskey (cont.): o Theoretically we could measure PV E(net benefits) to determine if timing of enclosures for each village was optimal.  Problem → data to measure PV E(net benefits) unavailable (at least in 1972 when McCloskey was writing): Prices for inputs and outputs in open and enclosed fields. Output/productivity differences. Legal, surveying, infrastructure costs. Appropriate discount rates. Formation of expectations into indefinite future.  What changed during early 1700s → ↑ PV E(net benefits) and/or ↓ PV E(costs)? Were changes exogenous to transition to MEG? 13  Agricultural revolution (cont.): McCloskey (cont.): o Timing of enclosures (cont.):  Costs of enclosure ↓ → as more parishes enclose, transactions costs ↓. Learning by doing. Specialized services for enclosure develop → legal services, surveying, registration systems… Jurisprudence on conflicts while enclosing becomes more consistent → need for legal services ↓.  Political interests of land owners and urban-industrial K owners align → ↑ political influence of urban K owners. Link to MEG? Government willingness to spend to encourage enclosure.  Policy ∆ → ↓ required support for enclosure from 100% to 80% to 75% → ↓ costs to enclose. 14  Agricultural revolution (cont.): McCloskey (cont.): o Timing of enclosures (cont.):  Income constraint eased → costs of enclosure very high → requires access to K to cover costs at t=0. Financial intermediation/banks spread into rural areas → Link to willingness to lend to cover costs of enclosure (ie. in anticipation of MEG? ↑ productivity). Farmers’ income rising → domestic saving rates ↑ → less borrowing required to cover costs. 15 Agricultural revolution (cont.): McCloskey (cont.): o Timing of enclosures (cont.):  Opportunity cost ↓ → other mechanisms for risk spreading → ↓ main advantage of open fields. Agricultural/crop insurance spreading. Government social service expenditures ↑ (ie. education, poor relief, even health care). Link to L market diversification → L market opportunities outside MEG? agriculture, and seasonal opportunities in agriculture. Domestic market integration → ↓ price volatility, particularly for food → ↓ risk of famine. What have we learned? o Rate of enclosure ↑ after 1700 mainly because advantages of open fields ↓ and costs of enclosure ↓. 16 Agricultural revolution (cont.): McCloskey (cont.): o Consequences of enclosures → could ↑ returns from enclosure finance K accumulation required for transition to MEG?  Did enclosure fund industrial revolution?  What was the source of the ↑ returns from enclosure → ↑ productivity or redistribution from farmers to land owners? o Use a simplified general equilibrium (GE) model to calculate UK income gain due to enclosure.  Model assumptions: No ∆ input or output prices with enclosure. No land improvements with enclosure. All leases are short term and set on competitive land market → rent = VMPLand before and after enclosure. All neo-classical assumptions hold for UK in 1700s. 17 Agricultural revolution (cont.): McCloskey (cont.): o Consequences (cont.):  Model structure: 2 sectors: 𝑄𝑄𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀 = 𝑓𝑓(𝐿𝐿𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀 , 𝐾𝐾𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀 ) 𝑄𝑄𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴 = 𝑓𝑓(𝐿𝐿𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴 , 𝐾𝐾𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴 , 𝑀𝑀𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴 ) Closed economy with perfect competition in domestic markets. CRS Cobb-Douglas production. Land (𝑀𝑀𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴 ) is a fixed factor in production. 𝐺𝐺𝐺𝐺𝐺𝐺 = 𝑃𝑃𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀 𝑄𝑄𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀 + 𝑃𝑃𝐴𝐴𝐴𝐴 𝑄𝑄𝐴𝐴𝐴𝐴 = 𝑊𝑊𝑊𝑊𝑀𝑀𝑎𝑎𝑎𝑎𝑎𝑎 𝐿𝐿𝑀𝑀𝑎𝑎𝑎𝑎𝑎𝑎 + 𝑊𝑊𝑊𝑊𝑀𝑀𝑎𝑎𝑎𝑎𝑢𝑢 𝐾𝐾𝑀𝑀𝑎𝑎𝑎𝑎𝑎𝑎 + 𝑊𝑊𝑊𝑊𝐴𝐴𝑔𝑔 𝐿𝐿𝐴𝐴𝑔𝑔 + 𝑊𝑊𝑊𝑊𝐴𝐴𝑔𝑔 𝐾𝐾𝐴𝐴𝑔𝑔 + 𝑊𝑊𝑊𝑊𝐴𝐴𝑔𝑔 𝑀𝑀𝐴𝐴𝑔𝑔 ∆𝐺𝐺𝐺𝐺𝐺𝐺 due to enclosure: ∆𝐺𝐺𝐺𝐺𝐺𝐺 = ∆𝑊𝑊𝑊𝑊𝑀𝑀𝑎𝑎𝑎𝑎𝑎𝑎 𝐿𝐿𝑀𝑀𝑎𝑎𝑎𝑎𝑎𝑎 + ∆𝑊𝑊𝑊𝑊𝑀𝑀𝑎𝑎𝑎𝑎𝑎𝑎 𝐾𝐾𝑀𝑀𝑎𝑎𝑎𝑎𝑎𝑎 + ∆𝑊𝑊𝑊𝑊𝐴𝐴𝑔𝑔 𝐿𝐿𝐴𝐴𝑔𝑔 + ∆𝑊𝑊𝑊𝑊𝐴𝐴𝑔𝑔 𝐾𝐾𝐴𝐴𝑔𝑔 + ∆𝑊𝑊𝑊𝑊𝐴𝐴𝑔𝑔 𝑀𝑀𝐴𝐴𝑔𝑔 18 Agricultural revolution (cont.): McCloskey (cont.): o Model structure (cont.):  Integrated p. competitive input markets: 𝑊𝑊𝑊𝑊𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀 = 𝑊𝑊𝑊𝑊𝐴𝐴𝐴𝐴 and 𝑊𝑊𝐾𝐾𝑀𝑀𝑎𝑎𝑎𝑎𝑎𝑎 = 𝑊𝑊𝐾𝐾𝐴𝐴𝑔𝑔 ∆𝐿𝐿𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀 = −∆𝐿𝐿𝐴𝐴𝐴𝐴 and ∆𝐾𝐾𝑀𝑀𝑎𝑎𝑎𝑎𝑎𝑎 = −∆𝐾𝐾𝐴𝐴𝑔𝑔 ∴ ∆𝐺𝐺𝐺𝐺𝐺𝐺 = 𝑊𝑊𝑊𝑊∆𝐿𝐿𝑀𝑀𝑎𝑎𝑎𝑎𝑎𝑎 + 𝑊𝑊𝑊𝑊∆𝐾𝐾𝑀𝑀𝑎𝑎𝑎𝑎𝑎𝑎 − 𝑊𝑊𝑊𝑊∆𝐿𝐿𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀 − 𝑊𝑊𝑊𝑊∆𝐾𝐾𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀 + ∆𝑊𝑊𝑊𝑊𝐴𝐴𝑔𝑔 𝑀𝑀𝐴𝐴𝑔𝑔 = ∆𝑊𝑊𝑊𝑊𝐴𝐴𝑔𝑔 𝑀𝑀𝐴𝐴𝑔𝑔  Change UK GDP = change in agricultural land rents following enclosure. 19 Agricultural revolution (cont.): McCloskey (cont.): o Evidence on UK land rents following enclosure (time series):  14 million acres enclosed.  Mean rent / acre pre-enclosure ≈ 10 s. Mean rent / acre post-enclosure ≈ 20 s.  Total ∆ rent following enclosure ≈ £7 million  Recall: PV stream $X every year into indefinite future = X / discount rate.  UK discount rate = 0.10  PV ∆ rent following enclosure = £70 million  Total cost to enclose ≈ £2 / acre × 14 million acres ≈ £28 million  Net ∆ UK GDP due to enclosure ≈ £70 million - £28 million ≈ £42 million 20 Agricultural revolution (cont.): McCloskey (cont.): o Is a net gain in GDP of £42 million enough to finance IR?  Total ∆ K ≈ £450 million  Assume MPS out of ↑ GDP = 1 → at most ∆ rent due to enclosure could have financed about 10% of the total investment that occurred in UK during industrial revolution. Is this a lot, or a little? Necessary and sufficient for MEG? Exogenous cause of transition? 21 Agricultural revolution (cont.): Allen (1982): o Another classic paper on UK enclosure. o What if McCloskey’s assumptions were wrong?  Did enclosure → ↑ agricultural productivity → ↑ rent → ↑ GDP? o Test McCloskey’s three assumptions: i. Competitive land markets → rent = VMPLand pre- and post-enclosure. ii. Input and output prices unaffected by enclosure. iii. No change in land quality with enclosure. 22 Agricultural revolution (cont.): Allen (cont.): o Some definitions:  Ricardian surplus = total return on land = VMPLand × M = PQ – WL L – WK K  Ricardian surplus captured by farmers, land owners, government (and church). Ricardian surplus = farmer’s surplus + rent + taxes and tithes.  Farmer’s surplus = PQ – WL L – WK K – rent – taxes and tithes. o Evidence → Arthur Young’s journals from his tours of UK country-side.  Cross-section evidence from open and enclosed villages (1765-1770). 23 Agricultural revolution (cont.): Allen (cont.): o Cross-section of UK farms (cont.): Ricardian surplus/acre Rent/acre Taxes/acre Farmer’s surplus/acre Open £2.16 £0.73 £0.21 £1.22 Enclosed £1.00 £0.65 £0.12 £0.24 Rent+Tax/Total Surplus Farmer’s Surplus/Total Surplus Open 0.47 0.53 Enclosed 0.77 0.23 o These numbers leave us with some questions: i. Why was rent/acre so low on enclosed farms? Did enclosure ↓ productivity? ii. Why was surplus/acre so low on enclosed farms? iii. Why did land owners capture so much more of the surplus on enclosed farms? 24 Agricultural revolution (cont.): Allen (cont.): o Does this evidence call into question McCloskey’s assumptions? i. Were prices the same for open and enclosed farms? ii. Was land quality the same for open and enclosed farms?  Unlikely that farms randomly enclose → Do high or low land quality farms enclose first? iii. Were enclosed farms more productive? o Note: If Allen’s open farms became enclosed → redistribution → rent+tax ↑ to capture 77% of total surplus.  Hypothetical enclosed rent+tax / observed open rent+tax = £1.66/0.94  Point: Allen’s cross-section hypothetical rent ↑ ≈ McCloskey’s time series rent ↑ post-enclosure.  Allen’s point → this rent ↑ not necessarily due to productivity ↑. 25 Agricultural revolution (cont.): Allen (cont.): o Measure open relative to enclosed productivity differences: Let R = Ricardian Surplus 1 𝛾𝛾 𝑃𝑃𝑖𝑖 ∏ 𝑂𝑂 1 𝛾𝛾 𝑅𝑅𝑂𝑂𝑂𝑂𝑂𝑂𝑂𝑂 𝑃𝑃𝐸𝐸𝑖𝑖 𝐴𝐴𝑂𝑂 𝑅𝑅 = 𝑗𝑗 × 𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸 𝑊𝑊 𝐴𝐴𝐸𝐸 ∏ 𝑂𝑂 𝑗𝑗 𝑊𝑊𝐸𝐸 Price contribution TFP contribution to surplus to surplus TFP Contribution Price Contribution 𝑅𝑅𝑂𝑂𝑂𝑂𝑂𝑂𝑂𝑂 𝑅𝑅𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸 1.30 1.01 26 Agricultural revolution (cont.): Allen (cont.): o Input and output price contribution to Ricardian surplus virtually identical for open and enclosed farms → McCloskey was correct → prices are the same for open and enclosed farms. o Were open farms 30% more productive than enclosed farms?  Control for land quality → soil quality, rainfall, growing days.  Control for open field farmers’ access to common pasture and waste → no rent paid for use of common or waste in open field villages. Farmers in enclosed villages must pay rent on land used for pasture and waste. o Proxy for access to common and waste → # sheep/acre.  TFP correlation: 𝐴𝐴𝑖𝑖 = 𝑓𝑓(𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝑖𝑖 , 𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿 𝑞𝑞𝑞𝑞𝑞𝑞𝑞𝑞𝑞𝑞𝑞𝑞𝑞𝑞𝑖𝑖 , 𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶 𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑖𝑖 ) 27 Agricultural revolution (cont.): Allen (cont.): o Results:  After controlling for land quality and access to common/waste → dummy on enclosure ≈ 0. There is no statistically distinguishable difference between the productivity of open and enclosed field farms in Arthur Young’s cross section of UK farms. There is no productivity ↑ due to enclosure. The least productive (lowest land quality) farms enclosed first. 28 Agricultural revolution (cont.): What have we learned? o Rents do ↑ after enclosure, but according to Allen this is entirely due to redistribution of Ricardian surplus from farmers to land owners.  Long term leases broken → land owners’ share of total surplus ↑ → farmers’ share total surplus ↓. o Both McCloskey and Allen agree that enclosure → ↑ rent → ↑ K accumulation in industrial revolution.  Enclosure contributed to IR by shifting SK and ↓ WK.  McCloskey argues that ↑ rent was due to ↑ productivity.  Allen argues that ↑ rent was due to redistribution. o Was enclosure an exogenous causal factor → did transition to MEG encourage enclosure? 29 Agricultural revolution (cont.): Clark (1998): o Problems with McCloskey and Allen’s arguments:  Land market in UK was competitive and financial intermediaries were available long before 1700.  If enclosure → ↑ productivity or redistributed surplus, why did open fields survive for so long → why did land owners wait?  If the advantage of open fields for farmers was no rent on common or waste, why didn’t the number of acres of farm land paying rent ↑ after enclosure?  If the advantage of open fields for farmers was access to common and waste, and common and waste were common property resources, then shouldn’t overuse → VMPLand on common = 0?  If risk ↑ with enclosure, then farmers must be compensated with ↓ rent after enclosure → observed ∆ rent (net of risk premium) may be an underestimate of productivity ↑ (= ↑ E(Y)). 30 Agricultural revolution (cont.): Clark (cont.): o Clark argues that to explain timing of enclosure → both the Allen and McCloskey views require a change in either market structure (more competition) or farmer and land owner rationality.  ↑ competitive pressure and/or ∆ preferences. No evidence of ∆ in competition, institutions, or social norms. o Re-estimate ∆ rent following enclosure.  Real rent → control for inflation.  Adjust for ∆ risk (↑) and ∆ aversion (↓).  Control for taxes and tithes.  Control for ∆ cost to enclose / acre (↓). o Calculate the internal rate of return on enclosure and compare to opportunity cost of investment funds → real discount rate. 31 Agricultural revolution (cont.): Clark (cont.): o Results:  Net return on enclosure slowly ↑ during late 1600s, and opportunity cost of funds slowly ↓.  Enclosure internal rate of return > 0 for first time around 1700. Rapid ↑ enclosed acres matches timing of ↑ IRR. ↑ IRR coincident with ↓ cost to enclose and ↓ opportunity cost. o No need for large productivity ↑ or redistribution. o No need for ∆ institution, rationality, market structure. What have we learned? o Enclosure motivated by rational decision making in competitive markets. o At best enclosure made a fairly small positive contribution to IR. 33