Bocconi Economic History 2024/25 Class 22

Bocconi Economic History 30067 – BIEF – Class 22 Academic year 2024/25 FRANCESCO AMMANNATI [email protected] THE HIGH-WAGE ECONOMY Bocconi Economic History – The high-wage economy September 12, 2024...

Bocconi Economic History 30067 – BIEF – Class 22 Academic year 2024/25 FRANCESCO AMMANNATI [email protected] THE HIGH-WAGE ECONOMY Bocconi Economic History – The high-wage economy September 12, 2024 Recap on previous classes Before the Industrial Revolution: changes to the European economy Smithian growth and technological change The Black Death The rise of the Atlantic trade Structural change in NW Europe The Industrial Revolution as a set of revolutions Some explanations of the industrial revolution Structural change Political institutions Cultural change Bocconi Economic History – The high-wage economy September 12, 2024 Introduction How were standards of living in pre-industrial Europe? Measuring living standards in pre-industrial times ⁻ Anecdotal evidence ⁻ Quantitative assessment Living standards across Europe Beyond economics: human capital as a measure of living standards Bocconi Economic History – The high-wage economy September 12, 2024 Economic growth and the standard of living We have already observed the impressive performance of British GDP Warning: pre-19th century data are scarce, inaccurate and derived from different ‘proxy’ indicators The per capita GDP is an average measure.  No information about the actual living conditions of population Bocconi Economic History – The high-wage economy September 12, 2024 Problems with the GDP Does not measure everything that it should  E.g., goods and services produced within households, informal and illegal activities, etc. Does not take into account other aspects of relevance  E.g., income distribution As far as economic history is concerned, it has the additional problem of requiring a loads of data!  Price data are more or less available…  …but data on quantities is more difficult to find Bocconi Economic History – The high-wage economy September 12, 2024 Economic growth and the standard of living As we have mentioned in our introductory class in the pre-industrial world living standards were very unequal Within societies Between societies Pre-industrial social scientists have largely debated about the determinants of living standards differentials across regions Adam Smith - Wages were higher in Northern Europe than in Asia as a consequence of the Atlantic trade Thomas Malthus (1766-1834) - Pre industrial wages depended on population and fertility behaviours Bocconi Economic History – The high-wage economy September 12, 2024 The Malthusian model Some preliminary definitions Birth rate: number of births per year per person (usually per 1000) Death rate: number of deaths per year per person (usually per 1000) Material living standards: ⁻ Set of consumption goods constituting the subsistence of individuals ⁻ In a sufficiently developed market economy: real wage, per capita income, etc. Three key ideas  The birth rate: increasing in material living standards  The death rate: decreasing in material living standards  The total population: decreasing in material living standards Bocconi Economic History – The high-wage economy September 12, 2024 The Malthusian model y*: subsistence income  Birth rate is equal to death rate  Population is constant at N*  Subsistence here means that the population simply reproduce itself, no growth  Why is population decreasing in material living standards? Ricardo’s law of diminishing returns  Production function with only land and labor  Land is fixed  Capital is scarce with little technological change  As population increases the marginal product from an additional worker decreases  Economic History – The high-wage economy September 12, 2024 The Malthusian model Bocconi Two mechanisms of adjustment Preventive checks - Reducing fertility - In pre-industrial economies delayed marriage rather than contraceptive practices - Households will keep the birth rate at the subsistence level Positive checks - Larger population will be checked by crises - E.g. famines and plagues According to Malthus wages were higher in England than in Asia because they adopted different mechanisms for the adjustment - England: preventive checks - Asia: positive checks Bocconi Economic History – The high-wage economy September 12, 2024 Subsistence income A more general method to define (and compare) living standards across regions is to refer to the concept of subsistence income In classical economics (Smith, Marx): what was socially agreed as the minimum income that allowed material subsistence In Malthus: the income that allowed a population to reproduce itself Here we look at the minimum income that a family needs to survive Physiological minimum level of nutrition in terms of calories and protein A diet which is sufficient to survive - Inferior quality bread - Legumes as main sources of protein - Meat only rarely consumed Bocconi Economic History – The high-wage economy September 12, 2024 Respectable standard of living More than physiological minimum More calories Includes more quality and quantity of proteins Bread, meat and diary products Still almost all the budget is spent for food and beverages What do we know from contemporary accounts about the diets of pre-modern individuals? Bocconi Economic History – The high-wage economy September 12, 2024 Pre-modern diet 18th century England - Best workers could afford a large variety of food: meat, cheese - Bread was consumed instead of ‘inferior’ cereals (oats, barley) - Consumption of medium skill workers was above subsistence Diet of the middle class in the rest of Europe - Low Countries: similar to the British standards - French workers had a much worse diet: mostly cereals, meat and milk very rare - Italian workers: declining living standards in the 18th-19th centuries Maize → large consumption of polenta → hiacin deficiency → pellagra Asia - Rice, cheapest cereals and fish (when available) as the only source of protein Bocconi Economic History – The high-wage economy September 12, 2024 Measuring living standards Anecdotal evidence and historical accounts show that the English workers enjoyed higher standards of living than workers in other European and world regions in Europe  How can we quantitatively assess that difference? Pre-industrial real wages of representative workers in a region (Real wage: measuring the wage earned compared to the cost of living) Advantages of this measure with respect to per capita GDP - Based on direct measures derived from the historical accounts of large urban institutions paying salaries and buying goods (hospitals, universities, monasteries) - Comparable across cities: wages paid in the building sector Common activity across European cities Wages were usually registered for skilled (masters) and unskilled (helpers) workers Bocconi Economic History – The high-wage economy September 12, 2024 How to reconstruct real wages? 1) First step: collect nominal wages Average labor income from historical sources Values reported in the different currencies and converted into silver grams equivalent 2) Second step: deflate the nominal wages by an index of prices summarising the cost of living Define a basket of consumption (food, beverages, clothes, energy, housing) Collect prices of each good in the basket Compute the cost for the whole basket and use it as a deflator of the nominal wage Bocconi Economic History – The high-wage economy September 12, 2024 Nominal wages Nominal wages similar across Europe up to the 16th century England and Netherlands took off in the second half of the 16th century Note: inflation due to increased silver stock might explain only part of the increase Bocconi Economic History – The high-wage economy September 12, 2024 Real wages and subsistence ratios Real wages are usually derived from nominal wages as a ratio, in each period, between nominal wages and the basket of consumption However, a preferred measure to capture the real value of wages with respect to subsistence is to compute subsistence ratios The formula used is the following Estimated number of working days in Daily wage X 250 pre industrial Europe Average number of adults Yearly cost of basket of consumption X 3.15 equivalent in a household You can think of it as the household’s Yearly total earnings / Yearly total cost of living Bocconi Economic History – The high-wage economy September 12, 2024 Why do we prefer the subsistence ratio Straightforward economic interpretation: the subsistence ratio can be = 1, total earnings are just sufficient for the consumption > 1 total earnings are above the cost of consumption < 1 total earnings are not sufficient for consumption Possible to quantify the consumer surplus: - how much workers are above subsistence - If they can use their wages for better food and/or other consumer goods But how is the subsistence ratio informative about living standards? - It depends on the composition (and the cost) of the basket of consumption Bocconi Economic History – The high-wage economy September 12, 2024 Consumer baskets Subsistence basket Simple diet sufficient to sustain an adult male at 1,900 kcal per day Varying across countries to take into account of different availability of grains and cereals Very little consumption other food: some cheap cloth and fuel Respectability basket Based on historical accounts of English and Dutch household behaviours 2,500 kcal per day including expensive food: meat, bread, cheese Consumption other than food: clothing, fuel, beer. Bocconi Economic History – The high-wage economy September 12, 2024 Subsistence baskets Bocconi Economic History – The high-wage economy September 12, 2024 European respectability basket Bocconi Economic History – The high-wage economy September 12, 2024 Subsistence ratio Increasing after the Black Death and then declining during the 16th century English and Dutch workers much above subsistence (3-4 times) in the 17th- 18th century Southern and central Europe very close to bare subsistence Bocconi Economic History – The high-wage economy September 12, 2024 Respectability ratio Similar trends Confirming that English and Dutch workers were not only above subsistence but also above respectability Workers in southern Europe and Asia could not afford the same living standards Bocconi Economic History – The high-wage economy September 12, 2024 New England Atlantic trade - North American economies based on exports of primary goods to Europe - High land-to-labor ratio: attracting settlers from England - Commercial agriculture → high wages Structural change - Mainly a rural economy with largest cities similar in size to English county towns - After independence: growth of manufacturing and urbanization Bocconi Economic History – The high-wage economy September 12, 2024 Real wages after 1750 Bocconi Economic History – The high-wage economy September 12, 2024 Real wages in Britain Bocconi Economic History – The high-wage economy September 12, 2024 Skilled wages in Europe Bocconi Economic History – The high-wage economy September 12, 2024 Quality of life Higher income meat more food consumption but also… Consumption of better food - Meat and diary - Alcohol consumption increased during the 18th century - Sugar, tea now consumed by the middle class Did higher wages improve the quality of life of the British middle class? Biological standard of living - Measured through adult height (correlated with childhood nutrition) - Mean height across 18th recruits in different part of Europe: British recruits were on average 10cm taller than recruits in France, Italy and Austria Bocconi Economic History – The high-wage economy September 12, 2024 Income and social structure Bocconi Economic History – The high-wage economy September 12, 2024 Human capital Literacy - In the Middle Ages: limited to urban centres and to those involved in trade activities and public services - As we have seen in the previous class, the printing press, the spread of Protestantism and a new attitude towards scientific knowledge increased the literacy rate across Europe Numeracy - New skills required by maritime trade. Spread of knowledge of arithmetic and geometry Craft skills - The spread of apprenticeship - Young workers paid in order to learn practical skills from a master. This system required  High incentives: returns on skilled labor should have been high  Capability to pay the cost of the apprenticeship - The high wage economy provided both incentives and initial income (parents’ income) Bocconi Economic History – The high-wage economy September 12, 2024 Evidence on literacy Bocconi Economic History – The high-wage economy September 12, 2024 Summary Historical accounts show that pre-industrial living standards (proxy: diet and food habits) were heterogenous across Europe Nominal wages and prices series might help to quantitatively compare living standards in pre industrial societies Subsistence ratio as a measure of the standard of living that workers could guarantee to a household above subsistence British and Dutch workers earned much more than subsistence and they could afford more food different types of food (above subsistence) other consumption goods Education  Economic History – The high-wage economy September 12, 2024 Next class Bocconi September 18, 2024 Allen, R. C. (2009), The British Industrial Revolution in Global Perspective, Chapter 3: ‘The agricultural revolution’. DO NOT NEED section “How did open field farmers modernise” (pp.67-74) Focus on Why is agriculture important for industrialisation? Measuring farming productivity Why did agricultural productivity increase in England before the Industrial Revolutions