The World Economy Study Guide (2023) PDF

Undergraduate study in Economics, Management, Finance and the Social Sciences The world economy: Industrial revolution to the present D.E. Baines, J. Claridge and K. Hutková EC2199 2023 The world economy: Industrial revolution to the present D.E. Baines, J. Claridge and K. Hutková EC2199 2023 Undergraduate study in Economics, Management, Finance and the Social Sciences This subject guide is for a 200 course offered as part of the University of London’s undergraduate study in Economics, Management, Finance and the Social Sciences. This is equivalent to Level 5 within the Framework for Higher Education Qualifications in England, Wales and Northern Ireland (FHEQ). For more information see: london.ac.uk This guide was prepared for the University of London by: Jordan Claridge, Department of Economic History, and Karolina Hutková, Department of Management, The London School of Economics and Political Science. It draws on material in the previously published editions of the guide by: Dudley E. Baines, Department of Economic History, The London School of Economics and Political Science. This is one of a series of subject guides published by the University. We regret that due to prior commitments the authors are unable to enter into any correspondence relating to, or arising from, the guide. If you have any comments on this subject guide, please communicate these through the discussion forum on the virtual learning environment. University of London Publications Office Stewart House 32 Russell Square London WC1B 5DN United Kingdom london.ac.uk Published by: University of London © University of London 2023 The University of London asserts copyright over all material in this subject guide except where otherwise indicated. All rights reserved. No part of this work may be reproduced in any form, or by any means, without permission in writing from the publisher. We make every effort to respect copyright. If you think we have inadvertently used your copyright material, please let us know. Contents Contents Chapter 1: Introduction........................................................................................... 5 1.1 What is a subject guide?........................................................................................... 5 1.2 What is this course about?........................................................................................ 5 1.3 Syllabus.................................................................................................................... 6 1.4 Aims of the course.................................................................................................... 7 1.5 Learning outcomes................................................................................................... 7 1.6 Employability outcomes............................................................................................ 8 1.7 Some important concepts......................................................................................... 8 1.8 The structure of the course...................................................................................... 13 1.9 Overview of learning resources............................................................................... 15 1.10 Examination advice.............................................................................................. 18 1.11 Summary.............................................................................................................. 19 Chapter 2: Long-run economic history from the Neolithic revolution to the Industrial revolution.............................................................................................. 21 2.1 What this chapter is about...................................................................................... 21 2.2 Introduction........................................................................................................... 22 2.3 What happened before industrialisation?................................................................ 22 2.4 The Great Divergence.............................................................................................. 26 2.5 Summary................................................................................................................ 27 Chapter 3: The Industrial revolution..................................................................... 29 3.1 What this chapter is about...................................................................................... 29 3.2 Introduction........................................................................................................... 30 3.3 First Industrial revolution........................................................................................ 31 3.4 First Industrial revolution: explanations................................................................... 33 3.5 The Second Industrial revolution, 1870–1914.......................................................... 34 3.6 Summary................................................................................................................ 35 Chapter 4: Demography and economic history..................................................... 37 4.1 What this chapter is about...................................................................................... 37 4.2 Introduction........................................................................................................... 38 4.3 Malthusian population dynamics............................................................................. 39 4.4 The Demographic Transition.................................................................................... 41 4.5 Migration............................................................................................................... 43 4.6 Summary................................................................................................................ 44 Chapter 5: Technology, innovation and systems of production............................ 45 5.1 What this chapter is about...................................................................................... 45 5.2 Introduction........................................................................................................... 46 5.3 The history of technology........................................................................................ 46 5.4 General Purpose Technologies (GPTs)...................................................................... 48 5.5 Case study: steam as a general purpose technology................................................ 50 5.6 Case study: information technology (IT)................................................................... 50 5.7 Comparing IT to steam........................................................................................... 51 5.8 Summary................................................................................................................ 51 i EC2199 The world economy: Industrial revolution to the present Chapter 6: Integration of the world economy...................................................... 53 6.1 What this chapter is about...................................................................................... 53 6.2 Introduction........................................................................................................... 54 6.3 What are the gains from Market Integration?.......................................................... 55 6.4 What caused integration?....................................................................................... 56 6.5 Market access........................................................................................................ 56 6.6 Migration............................................................................................................... 58 6.7 Summary................................................................................................................ 59 Chapter 7: Catching up, forging ahead and falling behind................................... 61 7.1 What this chapter is about...................................................................................... 61 7.2 Introduction........................................................................................................... 62 7.3 Catching up in the western world: theories............................................................. 62 7.4 Catch-up growth.................................................................................................... 63 7.5 Technology transfer................................................................................................. 64 7.6 Structural change................................................................................................... 65 7.7 Forging ahead, falling behind: European growth dynamics, 1870–1913................... 65 7.8 Forging ahead: American economic takeover........................................................... 66 7.9 Summary................................................................................................................ 68 Chapter 8: The Gold Standard and the development of the International Monetary Standard............................................................................................... 69 8.1 What this chapter is about...................................................................................... 69 8.2 Introduction........................................................................................................... 70 8.3 Gold Standard: trade and multilateral settlement..................................................... 70 8.4 The Gold Standard: how it worked.......................................................................... 72 8.5 Why did the Gold Standard work?.......................................................................... 75 8.6 Summary................................................................................................................ 76 Chapter 9: The Great Depression........................................................................... 77 9.1 What this chapter is about...................................................................................... 77 9.2 Introduction........................................................................................................... 77 9.3 O verview of the development of the international economy, 1820–1945................. 78 9.4 Historical context of the crisis................................................................................. 78 9.5 The 1920s.............................................................................................................. 79 9.6 Factors leading to the Great Depression.................................................................. 79 9.7 H ow did the combination of the factors lead to the Great Depression?.................... 81 9.8 Great Depression: why was recovery so slow?......................................................... 82 9.9 Escaping the Great Depression: What to do?........................................................... 82 9.10 Summary.............................................................................................................. 83 Chapter 10: The economics of the world wars...................................................... 85 10.1 What this chapter is about.................................................................................... 85 10.2 Introduction......................................................................................................... 86 10.3 World wars and economic factors.......................................................................... 86 10.4 How is a wartime economy different to a peacetime economy?............................. 87 10.5 The First World War............................................................................................... 88 10.6 The Second World War.......................................................................................... 90 10.7 Summary.............................................................................................................. 92 Chapter 11: Women and economic history............................................................ 95 11.1 What this chapter is about.................................................................................... 95 11.2 Introduction......................................................................................................... 96 11.3 Women and the labour market.............................................................................. 96 11.4 Female labour force participation.......................................................................... 97 ii Contents 11.5 What has technology done for women?................................................................ 99 11.6 Summary............................................................................................................ 100 Chapter 12: The Golden Age of Economic Growth.............................................. 103 12.1 What this chapter is about.................................................................................. 103 12.2 Introduction....................................................................................................... 104 12.3 Ideas from growth economics............................................................................. 105 12.4 The Golden Age of Economic Growth in Europe: causes....................................... 106 12.5 The post-Golden Age slowdown and the era of the new economy........................ 109 12.6 Summary............................................................................................................ 109 Chapter 13: Import substitution industrialisation and economic development in Latin America............................................................................ 111 13.1 What this chapter is about.................................................................................. 111 13.2 Introduction....................................................................................................... 112 13.3 Development around the globe........................................................................... 112 13.4 Latin America.................................................................................................... 115 13.5 Summary............................................................................................................ 119 Chapter 14: Export promotion and the development strategies of Japan and The East Asian Tigers.................................................................................... 121 14.1 What this chapter is about.................................................................................. 121 14.2 Introduction....................................................................................................... 122 14.3 Rise of Japan..................................................................................................... 122 14.4 Rise of the NICs.................................................................................................. 126 14.5 Summary............................................................................................................ 129 Chapter 15: Development under communism: Russia and eastern Europe........ 131 15.1 What this chapter is about.................................................................................. 131 15.2 Introduction....................................................................................................... 132 15.3 Russia and economic development..................................................................... 132 15.4 Soviet bloc: success and failure of its development path...................................... 134 15.5 Central and eastern Europe and economic policies of sovietisation...................... 135 15.6 Summary........................................................................................................... 137 Chapter 16: New economic powers: India and China.......................................... 139 16.1 What this chapter is about.................................................................................. 139 16.2 Introduction....................................................................................................... 140 16.3 India: economic development in the long-run...................................................... 140 16.4 China: state vs market........................................................................................ 144 16.5 India and China: comparisons and future prospects............................................ 147 16.6 Summary........................................................................................................... 148 Chapter 17: Africa: historical legacies, geography and growth.......................... 149 17.1 What this chapter is about.................................................................................. 149 17.2 Introduction....................................................................................................... 150 17.3 Growth in Africa................................................................................................. 150 17.4 Is Africa simply ‘unlucky’?................................................................................... 151 17.5 Climate and disease environments...................................................................... 151 17.6 How important is Geography?............................................................................ 152 17.7 The impacts of European colonialism................................................................... 152 17.8 Human capital.................................................................................................... 153 17.9 Infrastructure...................................................................................................... 154 17.10 Summary.......................................................................................................... 154 iii EC2199 The world economy: Industrial revolution to the present Chapter 18: Financial crises in the post-war period........................................... 155 18.1 What this chapter is about.................................................................................. 155 18.2 Introduction....................................................................................................... 155 18.3 Institutions in the international economy – Bretton Woods.................................. 156 18.4 Post-Bretton Woods era...................................................................................... 158 18.5 Financial crises: varieties, frequency and models since 1973................................ 159 18.6 Summary............................................................................................................ 163 Chapter 19: Inequality......................................................................................... 165 19.1 What this chapter is about.................................................................................. 165 19.2 Introduction....................................................................................................... 166 19.3 Wealth and income inequality............................................................................. 166 19.4 Inequality and history: theory.............................................................................. 167 19.5 How is inequality measured?.............................................................................. 168 19.6 Inequality within and between countries............................................................. 168 19.7 Other inequalities............................................................................................... 169 19.8 Summary............................................................................................................ 170 Chapter 20: The economy and the environment................................................. 171 20.1 What this chapter is about.................................................................................. 171 20.2 Introduction....................................................................................................... 172 20.3 Economic theory and the environment................................................................ 172 20.4 Economic value and nature................................................................................. 175 20.5 Climate change and adaptation strategies........................................................... 177 20.6 Summary............................................................................................................ 178 Chapter 21: The future of economic history....................................................... 181 21.1 What this chapter is about................................................................................. 181 21.2 Introduction...................................................................................................... 182 21.3 The future of technology.................................................................................... 182 21.4 The impact of new technologies......................................................................... 183 21.5 Are (some) jobs a thing of the past?................................................................... 183 21.6 Technology in the thinking of classical economists.............................................. 183 21.7 Views on technology in the interwar period........................................................ 184 21.8 How is this time different to the First Industrial revolution?................................ 185 21.9 What does the future hold for labour?............................................................... 185 21.10 What about the environment?......................................................................... 186 21.11 Summary......................................................................................................... 187 iv Chapter 1: Introduction Chapter 1: Introduction 1.1 What is a subject guide? This subject guide is intended to: provide a framework for the study of the course introduce you to the relevant subject material guide you towards appropriate learning resources encourage you to take an active approach and to undertake learning activities encourage participation in discussion via the VLE. This subject guide, as its name suggests, is designed to guide you through the material. You must use it alongside the suggested the Essential and Further reading. The subject guide is not intended to replace these readings. If you work your way through the subject guide and follow the readings, you will be ready to take the examination. The subject guide has 20 chapters, each of which considers a large question or series of questions about the development of the international economy. 1.2 What is this course about? This course surveys the development and integration of the world economy, from the Industrial revolution to the present day. It focuses on the major processes that have determined economic growth: technological change, Demographic Transitions, trade and finance, and institutional development. It also explores the unique paths of development for different regions of the world. The course asks some of the most important questions in economic history. For example, why are some parts of the world rich and others not? How have some countries managed to catch-up, and in some cases overtake, leading economies? Yet, economic growth has not been experienced equally across the globe. Therefore, we also ask how the profound economic changes since the Industrial revolution have altered the wealth and health of human populations. Why does inequality persist, both between and within countries? Why have some economic polices been more successful than others in achieving growth? Finally, we look towards the future. What constraints to growth do modern economies face? Can economies continue to grow at historic rates? What new constraints might emerge? 1.2.1 What is economic history? The first question to answer is this: what do we mean in this course by ‘economic history’? Here is our definition: Economic history is the study of history using economic concepts. Come back and remind yourself of this definition from time to time. Before going further, let us look a little closer at this definition. Economic history explains how economies have developed. Although its subject matter is in the past it is rather different from the history which you may have encountered at school. Economic history is less concerned with explaining what individuals (kings, prime ministers) did, which is what ‘political history’ does. Rather, economic history is more concerned with large groups of people (industrial workers, farmers) and with explaining technological change or how business worked, or 5 EC2199 The world economy: Industrial revolution to the present with analysing the effects of institutions, such as governments or trade associations, on the economy. Economic history is also concerned with quantities: tonnes of steel, kilowatt hours of electrical power or statistical constructions like gross domestic product or total factor productivity. But the main difference between political and economic history is that economic history uses more theory, and in particular economic theory. This is why economic history is considered to be a part of the social sciences as opposed to a part of the humanities. Economic history is also different from economics because economics is more likely to use abstractions (e.g. assumptions like ceteris paribus ‘all other things being equal’). Abstractions allow economics to give very powerful explanations, but these explanations are not always easy to apply to the ‘real world’. For example, economic prediction for any period of more than a few years is very difficult. This is because a whole host of circumstances, and human behaviour, are constantly changing. Economic history is also different from economics because, like for all history, we in fact know what happened next. In other words, we can apply the theory to real circumstances that in fact happened. Of course, in economic history we do not know anything like as much about the past as we do about the present. Also, economic history will never give us a blueprint to tell us what will happen to the economy in the future; history rarely repeats itself. But what it does teach us is the importance of understanding the historical context. For example, why was it possible for governments to follow a particular policy in some years and not in other years? If you have some knowledge of economic history, you will not only know how the present world economy was created, but you will also have acquired a tool that will help you understand economics and the other social sciences. 1.3 Syllabus Topics covered include: 1. Long-run economic history to the Industrial revolution 2. The Industrial revolution 3. Demographic regimes 4. Technology, innovation and systems of production 5. Integration of the world economy 6. Catching up, forging ahead and falling behind 7. The Gold Standard and the development of International Monetary Systems 8. The Great Depression 9. The economics of world wars 10. Women and economic history 11. The Golden Age of Economic Growth 12. Import substitution industrialisation and economic development in Latin America 13. Export promotion and the development strategies of Japan and the East Asian Tigers 6 Chapter 1: Introduction 14. Development under communism: Russia and eastern Europe 15. New economic powers: China and India 16. Africa: historical legacies, geography and growth 17. Financial crises 18. Inequality 19. The economy and the environment 20. The future of economic history The up-to-date course syllabus for EC2199 The world economy: Industrial revolution to the present can be found in the course information sheet, which is available on the course VLE (virtual learning environment) page. 1.4 Aims of the course The objectives of this course are: familiarise students with fundamental economic concepts in historical contexts to explore how the world economy has developed since the Industrial revolution study fundamental changes in trade, finance, economic organisation and policy explore the processes of globalisation and its effects on economic growth and inequality. 1.5 Learning outcomes At the end of this course, having completed all Essential readings and activities, students should be able to articulate nuanced and evidenced arguments about: how economic growth can be shaped by markets, states and geography how the process of globalisation has unfolded how some countries managed to ‘catch-up’, and in some cases overtake, leading economies what role technological change has played in the development of economies how the organisation of economies has changed over time why inequality persists, both between and within countries why some economic polices have been more successful than others how financial crises emerge, spread and recede. 1.5.1 Skills By the end of the course students should have acquired the following skills: the ability to read, summarise and synthesise information about economic development the ability to articulate arguments based on this information employ fundamental economic theory to explain specific economic events and processes the ability to identify and select appropriate evidence for substantiating economic arguments. 7 EC2199 The world economy: Industrial revolution to the present 1.6 Employability outcomes Below are the three most relevant skill outcomes for students undertaking this course which can be conveyed to future prospective employers: 1. communication 2. persuasion and negotiation 3. complex problem-solving. 1.7 Some important concepts Economic historians use a range of concepts to analyse the past; many are taken from economics. You will learn to use these concepts as you work your way through the course. The main ones are summarised here. Catch-up and social capability: These are very important concepts in economic history. They are often used to explain why poorer countries take such a long time to catch-up with the income levels of richer countries. Social capability includes, among other things, the skill level of the labour force and the nature of the government. For example, if a government cannot guarantee the rule of law, entrepreneurs will not invest since they have no guarantee that they will benefit from the investment. You may wonder if this means that only a democracy has the social capability to increase total factor productivity and grow richer? The answer is no. There are many examples of rapid growth in undemocratic countries. The People’s Republic of China is one such example. Comparative advantage: The concept of comparative advantage is used especially in the theory of international trade. It can make economic sense for a country to import products (A) even though it could produce A cheaper itself. This is because although the country has a cost advantage in producing A, it has an even greater cost advantage in producing B and importing A. By specialising in producing B and exporting some of its production of B, the country can obtain more A (by imports) than it can by trying to produce both A and B. We may say that the country has a ‘comparative advantage’ in the production of B compared with other countries. Similarly, for the other country (the trading partner), the comparative advantage lies with A and the disadvantage lies with B. Contagion: This is a situation in which a collapse of a major bank or banks affects other banks which are otherwise ‘healthy’. This is because since all banks have large funds with other banks, the collapse of one bank is likely to lead to the collapse of other banks. When this happens, the government then needs to step in to protect the banking system. The collapse of Lehman Brothers in 2008 was a major example of this. The US government allowed Lehman Brothers to go bankrupt but compensated those banks (or other institutions) who were owed money by Lehman Brothers. In other words, nowadays, contagion makes it very close to essential that the government will step in. (This usually means that the government will increase money supply.) In some circumstances the government may nationalise, or partly nationalise, the banks. Elasticity: Elasticity shows the effect of a change in one variable on another variable. It has many forms. Price elasticity, for example, shows how much more of a commodity will be purchased if the price falls and how much less will be purchased if the price rises. If a 10 per cent fall in the price leads to more than a 10 per cent rise in 8 Chapter 1: Introduction purchases, demand is said to be ‘price elastic’ (e.g. the sale of textiles in a relatively poor country). On the other hand, if a 10 per cent fall in the price leads to less than a 10 per cent rise in purchases, the demand is said to be ‘price inelastic’ (e.g. the demand for food in a relatively rich country). Note what happens to ‘total revenue’ (price X quantity). When price increases, total revenue falls if demand is price elastic. In contrast, when price increases, total revenue rises if demand is price inelastic. ‘Elasticity’ may also relate to income. If a rise in income of 10 per cent leads to an increase in sales of more than 10 per cent, then demand for that good is said to be income elastic. An example would be the demand for health care in rich countries. Endogenous factor: One that is internal to a system or model. Endogenous factors are often determined by other aspects of a system or model. Entrepreneurs: Entrepreneurs are people who take risks to make a profit. They are not the same as inventors, although they may use inventions. Entrepreneurs must see a market, raise finance and organise production. Usually the main incentive is profit, but governments have often engaged in entrepreneurial behaviour. Obtaining and using capital is an important part of the risk an entrepreneur takes. Exogenous factor: Something that is external, or otherwise originates from outside a system or a model. External economies: These are different to ‘internal economies’ – those affecting the plant directly. Cost, and therefore efficiency, is also affected by external economies. One example is that of a so-called ‘thick’ labour market where there are many people with similar skills; another is the existence of particularly good transport links. External economies are the main reason why industries tend to cluster together and the main reason for the growth of cities. This means that to ‘catch- up,’ an economy needs to do more than import technology. Factor endowment: Factors of production (land, labour and capital) that any given place possesses at any point in time. Natural resources (like coal or oil) are frequently discussed as factor endowments. Gains from trade: If two countries have comparative advantages in the production of something, then there are gains from trade. World output rises because the same resources are used to make more goods than if there was no trade. A good historical example would be the gains from the exports of (frozen) beef from Argentina to the UK in the early 20th century. The Argentine meat farmers gained, as did those involved in the trade, like railway companies. The British consumers gained because the price of meat fell. But the other Argentine farmers lost because the land became more expensive, American meat farmers lost because they lost the UK market and British meat farmers lost. Note that there is no automatic mechanism to even out the gains and losses from trade, and these may continue for some time. Gross domestic product (GDP): This is a slightly different measure from GNP, GDP has been commonly used in recent years. GDP only measures the output made within the country. That is, it includes exports but not money made from overseas investments, like profits from overseas factories. Until recently GDP and GNP were not very different. Gross national product (GNP): This is a measure of the total output or size of an economy. GNP includes all the output of goods 9 EC2199 The world economy: Industrial revolution to the present (e.g. manufactures), all the output of resources (e.g. oil), all the output of services (e.g. transport and universities) and all exports. It also includes all the money returned to the country from overseas investments. GNP is easier to measure now than in the past. Nevertheless, we have good estimates for most countries from about 1870. Hedge funds: The rationale of a hedge fund is to lead the market. For instance, in a depression a hedge fund will sell the local currency with the aim of forcing a devaluation, then changing the money back again at a profit. This happened in the Thailand devaluation in 1997. (There are, of course, many more sophisticated versions of this.) Hedge funds have become much more dominant in recent years, possibly because globalisation has made it easier to finance. Hedge funds usually say that the desired effect (that is, devaluation) would have happened anyway. But many people deny this. Human capital: The concept of human capital means the skills embodied in the labour force. At its simplest level this means the extent of literacy and formal schooling, but historically many skills are ‘embodied’. They are learned on the job. For example, most of the skilled workers in Britain before the First World War learned their skills at work rather than by formal training. Increasing returns to scale: This is a simple concept. It means that the cost of a product is related to the scale of production. Increasing returns means that if you double the scale and use double the inputs, you more than double output. As a result, unit costs fall. Increasing returns occur because the cost of the technology involved can be spread over a greater amount of output. It is easier to achieve scale economies in manufacturing if the market is large enough. However, it is important to remember that economies in production are not the only economies. There can be economies in marketing, for example, or in purchasing raw materials. These types of economies, which only affect plant, are known as ‘internal economies’. Liquidity trap: A liquidity trap is the situation in a depression where very few people are willing to risk putting their money into investment. So, the economy stagnates. With liquidity preference, people are more likely to hold cash or government bonds. This usually comes about because the interest rate on investment is low; low relative to the risk involved in investment. In more normal times there is a premium for investment which compensates so that people do not put excessive funds into cash. The ‘solution’ usually involves (extra) government expenditure, often paid out of borrowing. But if liquidity preference is high, government expenditure will not lead to an increase in income level. Liquidity preference will mean that individuals will save their money rather than spend it. Negative external economies: An example of a negative external economy is pollution coming from industry. Pollution raises costs for a firm; for instance, workers are less healthy and less productive. (This was a particular problem in the USSR and eastern Europe in the 1960s and 1970s.) In general though, there are more positive external economies than negative ones. Non-tariff barriers: These can be more protective than tariffs. For example, a state railway might have very unusual technical standards to which its electric trains must conform. This might aim to stop foreign makers of railway locomotives competing with local firms. 10 Chapter 1: Introduction Another example is a refusal to recognise foreign qualifications to reserve jobs for locally trained people. This might be to protect local colleges and teachers against foreign competition, and to preserve jobs for locals. It is a barrier to trade in services. Non-tariff barriers are frequently used when tariff barriers are low or non-existent. (Both these examples are from the recent history of the EU.) Opportunity cost: This is the cost of the next best alternative. For instance, if I can employ a group of workers at wages of £1,000 per month. If I do not employ them, instead I can lend the money I would have paid on wages to someone else and receive interest of £10 per month. The opportunity cost of employing the group of workers is £1,010 per month. In other words, £1,010 is the opportunity I forgo by employing the group of workers. Hence, I will not employ them unless they make me more than £1,010 per month. Principal-agent problems: In the early years of economic development, before modern communications existed, it was difficult for governments and businesses, the ‘principals’, to monitor the performance of their ‘agents’ who were working a long way away. For example, would a Dutch trader be able to be sure that the captain of the ship he had sent to the Indies was not stealing from him? The easiest way to deal with this problem was to use his relatives, who could be disinherited if things went wrong, but this strategy was obviously limited. The development of modern transport and communications improved matters, as it allowed agents to be monitored. Quantitative easing: In a depression, quantitative easing is a way of increasing money supply. It applies to a country with an independent central bank. The government sells an additional tranche of government stock which the bank buys. The government now has a currency which it can use. The central bank does not market the government stock. Of course, quantitative easing may not work if the money is saved – that is, it does not increase money supply, for example if liquidity preference is very high. Rational expectations: The idea of rational expectations is very important in modern monetary economics. Simply put it says that people can anticipate what government policy will be in the future. This makes it very difficult for government policy to be effective. For example, there may be inflation, which the government wishes to control. So, it increases interest rates. But if the population anticipates that this is what the government are going to do, they now spend as much as possible. Also, if they can, they will borrow at the old interest rate before the rate goes up. This means that inflation increases. Government finds it harder to control and there will probably have to be a second interest rate rise, which is also subject to rational expectations and could be damaging to the economy. Tariff barriers: One way to protect a country from imports is to erect a tariff. This is a charge on goods entering the country. Tariffs are either a fixed payment per unit, say £1 per bottle of wine, or a proportion of the price, say 30 per cent. A proportional tariff is called an ad valorem tariff. A fixed tariff is the same whatever the price of the import. However, an ad valorem tariff varies according to the price of the import. If wine falls in price from £3.00 to £1.50, a 30 per cent tariff falls from £0.90 to £0.45. A fixed tariff of £1 does not change. 11 EC2199 The world economy: Industrial revolution to the present Tariffs: Tariffs prevent countries from following their comparative advantage in trade. Why? Because tariffs change the price of goods, A and B, when these goods are traded. An import tariff means that it may no longer be worthwhile for a country to specialise in B and export B while importing A. Terms of trade: The calculation of the terms of trade can be complicated, but at their simplest they show the prices a country obtains for exports compared with the prices for imports. If the latter is rising compared with the former, it is said that the terms of trade are moving against the country. This may not mean that the country is worse off, of course, since that will depend on the volume of exports and imports. It is also possible to talk of the terms of trade faced by different producers (e.g farmers). The prisoner’s dilemma: The prisoner’s dilemma is commonly encountered in economics. At its simplest it explains why it is often very difficult to make agreements. This is because one party may not be able to predict what the other will do. For example, two farms are alongside a river. The river will flood unless £1,000 is spent on flood control. Both farmers will lose if it floods. The best way is for both farmers to pay £500. But each knows that if the other farmer paid £1,000, they would get the work for nothing. So, each farmer waits for the other to pay £1,000. In the meantime, the river floods, costing each farmer more than £500. It may be necessary for governments to force cooperation in the best interests of the parties. The production function: This is a way of measuring the ‘inputs’ that go into making goods (goods that are otherwise known as the ‘outputs’). For example, a farmer could use a little capital (e.g. machinery) and a lot of labour or they could use a lot of capital and a little labour. We will see that in the late 19th century United States’ farmers used relatively more machinery and relatively less labour than European farmers. But remember, this does not tell us which combination was the more ‘efficient’, because the cost of machinery and the cost of labour were different in Europe and the USA. Total factor productivity (TFP): The concept of TFP is a way of measuring efficiency. It calculates the amount of each input (labour, capital and other resources) that are used and the price of the inputs to the producer. This shows how well (or how efficiently) the producer (and ultimately the whole economy) is using the factors at its disposal. There is usually an unmeasured part which is the ‘residual’. This is a rough measure of changes in technology; that is, the increase in output, which is not accounted for by more labour, more capital or more resources. Alternatively, it may include the effect on output if the quality of inputs increases. A good example is the effect of better education on the quality of workers. In most modern economies, TFP growth is usually more important than the increase in resources, labour or capital. Transactions costs: One way to look at the process of economic development may be seen as a continuous reduction in the cost of making deals, including making payments. For instance, the cost of raising government revenue was initially very high. It cost a lot of money (paying for tax-gatherers) to raise a little. Nowadays, tax- gatherers cost relatively little money, but taxes raise a lot. So more of government expenditure can be used for beneficial purchases rather than paying for tax-gathering. In recent years information technology (IT) has reduced transaction costs to very low levels. Another point to 12 Chapter 1: Introduction remember is that nowadays, there are large parts of the service sector whose purpose is to reduce transaction costs (lawyers who make and enforce contracts, for instance). 1.8 The structure of the course This subject guide covers the syllabus, across the following 20 chapters. Chapter 2 Long-run economic history from the Neolithic revolution to the Industrial revolution introduces you to economic history in the long-run. The chapter explores some of the explanations for why humans are generally wealthier today than in the past, and why certain parts of the world are more developed than others. Chapter 3 The Industrial revolution explores one of the key topics in economic history, the Industrial revolution. It is so significant because it marks the start of modern economic growth and meant a large-scale change to both economic and social life. Chapter 4 Demographic and economic history explores how changes in human populations have impacted economies. It focuses on the Demographic Transition; a transition from a world with very high mortality and fertility towards a demographic regime of low mortality and fertility. Chapter 5 Technology, innovation and systems of production looks at technology, which is often seen as a key aspect in explaining economic growth. We will focus on the fact that it is very hard to define and measure the precise contribution of technology to growth. We will devote time to General Purpose Technologies (GPTs); technologies that are pervasive and bring revolutionary changes to economic systems. Chapter 6 Integration of the world economy studies globalisation and Market Integration in the 19th century. The period 1870 to 1914 is seen as the first era of globalisation. We will explore the factors that have driven globalisation, such as trade policies, improved technologies, and voluntary and involuntary migration. Chapter 7 Catching up, forging ahead and falling behind explores the process of ‘catching up’ a situation in which a country or a group of countries achieves levels of economic growth that allows it to achieve the same level of economic development as the previous economic leader. In this chapter we will study how European countries and the US caught up with the UK, the first industrial country. Understanding this process is very important for understanding economic development in emerging markets. We will explore social capabilities, abilities to adapt technology to domestic factor endowments and capacity for structural change as explanatory factors. Chapter 8 The Gold Standard and the development of International Monetary Systems examines the Gold Standard between 1870 and 1914; a system of fixed exchange rates that allow multilateral settlements between trading countries in the first era of globalisation. We will study the mechanisms that allowed the Gold Standard to function and the role Gold Standard had for facilitating globalisation. Chapter 9 The Great Depression looks at the international economic crisis of 1929–1933. We examine the spread of the crisis through the world economy, its causes and why recovery took so 13 EC2199 The world economy: Industrial revolution to the present long. We will explore the role of factors such as lack of international cooperation in the aftermath of First World War and changes in the composition of production, the operation of the labour market, lack of adherence to the rules of the game of the Gold Standard and changes in the pattern of international settlements. Chapter 10 The economics of world wars looks at the economic history of the world wars and explores the role of economic factors for winning ‘total wars’ (wars of increasingly mechanised nature). Chapter 11 Women and economic history focuses on women in an economic history context and covers the topics of discrimination in labour markets and the effects of technological change. Chapter 12 The Golden Age of Economic Growth explores the Golden Age of growth between 1950 and 1973 during which European countries achieved historically unique high levels of growth, which enabled them to catch up with the USA. We will look at the theories that explain this miracle growth including the role of the social contract, Sectoral Shifts out of agriculture, enhanced social capabilities, and an increase in market size leading to Schumpeterian growth. Chapter 13 Import substitution industrialisation and economic development in Latin America is the first chapter that explores economic development in emerging markets in the period after the Second World War. We will first study the theories explaining late development and the various strategies countries did historically adopt. We will then assess the success and failure of the Latin American model of development based on the import substitution industrialisation (ISI) in the post-war era. Chapter 14 Export promotion and the development strategies of Japan and the East Asian Tigers explores the development strategies of Japan and then the East Asian Tigers, focusing on the factors that underpinned the success of their outward looking model of development based on labour-intensive industrialisation. Chapter 15 Development under communism: Russia and eastern Europe studies the Soviet model of development based on central planning and command economy. We will explore reasons behind the high growth levels in period 1928–1970, and the reasons why the growth stalled in 1970s and the USSR failed to catch-up with western Europe. We will examine factors, such as structural inefficiencies, misallocation of resources, weakened incentives and limited growth of productivity under the planned economy, which have been suggested by economic historians as explaining the slowdown in the post-1970 period. Chapter 16 New economic powers: India and China studies economic development in India and China. Both countries were leading economies in the early modern period, but both failed to grow rapidly until the 1980s. We will explore the factors that underpinned their development experience. We will explore the reforms that set both countries on the path of economic growth paying particular attention to the 1978 economic reforms in China. Chapter 17 Africa: historical legacies, geography and growth examines economic development in Africa. We will focus on the various explanations for Africa’s slow economic growth for most of 14 Chapter 1: Introduction the 20th century, such as geographical endowments, colonialism and institutional explanations. Chapter 18 Financial crises in the post-war period explores the Bretton Woods system and the post-Bretton Woods period. The Bretton Woods system represents the post-war solution to the Macroeconomic trilemma allowing for fixed exchange rates and domestic monetary policies but no free flow of capital. The post- Bretton Woods period is on the other hand a period of floating exchange rate and free capital movement. This chapter will look at the frequency and severity of financial crises in both these periods. It will also look at models of financial crises and examine the 1997 East Asian Financial Crisis as an example. Chapter 19 Inequality explores the phenomenon ‘inequality’ that has recently come to the fore due to current policy concerns about rising income and wealth inequality, and its economic effects. We will explore the economic factors related to inequality, the tools used to measure inequality and the evolution of inequality from a historical perspective. Chapter 20 The economy and the environment studies how different economic theories considered the environment in different ways over time. We will explore the Natural Capital theory which argues that the services provided by the environment need to be included in production functions and national accounts. We will also look at climate change and adaptation strategies. Chapter 21 The future of economic history explores the future of economic growth. We will examine ‘de-growthing’ theory and doughnut economics, the impact of technology and questions arising from the concerns about environmental degradation. 1.9 Overview of learning resources 1.9.1 The subject guide For each chapter, read through the text. Read the Essential reading and, for topics that interest you more, also the Further reading. As you read, think about the questions that are raised in the text. The Pause and think features and activities in each chapter are designed to help you to understand particularly important questions. However, also think about any other questions that suggest themselves to you. Do not be afraid to use economic concepts and theory with which you may be familiar, as well as insights and concepts from other social sciences. Look at the exercises in the VLE. They are designed to help you improve your understanding of the crucial concepts. Try to link the subject guide chapters together as you study. The chapters are designed to introduce you to the most important and interesting parts of the subject. If you follow the subject guide all the way through, you will have thought about most of the important parts of the syllabus and the main features of the development of the world economy. The chapters are not self-contained. It would be a mistake to think of each chapter as a discrete piece or as an answer to a particular question that might come up in an examination. For example, the development of the international financial system is explored in Chapters 8, 9 and 18. 15 EC2199 The world economy: Industrial revolution to the present You do not need to learn lots of historical facts by heart for the examination, as it is not necessary to remember a great deal of factual information to pass the examination. It is much more important to use simple economics. For example, if you are considering why the prices of agricultural products sometimes rose and sometimes fell, it is important to consider the conditions that determined the supply of and demand for agricultural products. The concept of elasticity is of particular importance. You should be able to use this concept which was introduced in section 1.5. Of course, you need more than knowledge of economic theory to follow Economic history. But you do not need to know the details of the historical record, only the broad outlines. Nor is there any need to remember long lists of statistics, such as car or steel output in different countries, or details of trade and exchange rates. Rather than specific figures, all you need to know are the broad trends. For example, you need to remember that the Chinese growth rates were among the highest in the world in the period 1980s to 1990s or that miracle growth period applies to post-war Europe and Japan, but not to Latin America. 1.9.2 Essential reading This course uses an array of academic articles and book chapters, as detailed in the Essential reading list for each chapter. Some suggestions for background reading are: Broadberry, S. and K. O’Rourke (eds) The Cambridge economic history of modern Europe volume 2: 1870 to the present. (Cambridge: Cambridge University Press, 2012) [ISBN 9780521708395]. Available in the Online Library via Cambridge Core. Broadberry, S. and K. Fukao (eds) The Cambridge economic history of the modern world volume 2: 1870 to the present. (Cambridge: Cambridge University Press, 2021) [ISBN 9781107159488]. Eichengreen, B. Globalizing capital: a history of the international monetary system. (Princeton, NJ: Princeton University Press, 2019) 3rd edition [ISBN 9780691193908]. Detailed reading references in this subject guide refer to the editions of the set textbooks listed above. New editions of one or more of these textbooks may have been published by the time you study this course. You can use a more recent edition of any of the books; use the detailed chapter and section headings and the index to identify relevant readings. Also check the VLE regularly for updated guidance on readings. 1.9.3 Further reading Please note that as long as you read the Essential reading you are then free to read around the subject area in any text, paper or online resource. You will need to support your learning by reading as widely as possible and by thinking about how these principles apply in the real world. Every chapter has a suggested Further reading but to help you read extensively, you also have free access to the VLE and University of London Online Library (see section 1.8.4). Other useful texts for this course include: Feinstein, C.H., P. Temin and G. Toniolo The world economy between the world wars. (Oxford: Oxford University Press, 2008) illustrated edition [ISBN 9780195307559]. 16 Chapter 1: Introduction Graff, M., A.G. Kenwood and A.L. Lougheed Growth of the international economy 1820–2015. (London: Routledge, 2014) 5th edition [ISBN 9780415476102]. Krugman, P. The return of depression economics and the crisis of 2008. (London: Penguin Books, 2008) [ISBN 9781846142390]. Mosk, C. Japanese economic development: markets, norms, structures. (Abingdon: Routledge, 2008) [ISBN 9780415771580]. Naughton, B.J. The Chinese economy: transitions and growth. (Cambridge, MA: The MIT Press, 2006) [ISBN 9780262640640]. Unless otherwise stated, all websites in this subject guide were accessed in May 2023. We cannot guarantee, however, that they will stay current and you may need to perform an internet search to find the relevant pages. 1.9.4 Online study resources (the Online Library and the VLE) In addition to the subject guide and the Essential reading, it is crucial that you take advantage of the study resources that are available online for this course, including the VLE and the Online Library. You can access the VLE, the Online Library and your University of London email account via the Student Portal at: https://my.london.ac.uk You should have received your login details for the Student Portal with your official offer, which was emailed to the address that you gave on your application form. You have probably already logged in to the Student Portal in order to register! As soon as you registered, you will automatically have been granted access to the VLE, Online Library and your fully functional University of London email account. If you have forgotten these login details, please click on the ‘Forgot password’ link on the login page. The VLE The VLE, which complements this subject guide, has been designed to enhance your learning experience, providing additional support and a sense of community. It forms an important part of your study experience with the University of London and you should access it regularly. The VLE provides a range of resources for EMFSS courses: Course materials: Subject guides and other course materials available for download. In some courses, the content of the subject guide is transferred into the VLE and additional resources and activities are integrated with the text. Readings: Direct links, wherever possible, to Essential readings in the Online Library, including journal articles and ebooks. Video content: Including introductions to courses and topics within courses, interviews, lessons and debates. Screencasts: Videos of PowerPoint presentations, animated podcasts and on-screen worked examples. External material: Links out to carefully selected third-party resources. Self-test activities: Multiple-choice, numerical and algebraic quizzes to check your understanding. Collaborative activities: Work with fellow students to build a body of knowledge. Discussion forums: A space where you can share your thoughts and questions with fellow students. Many forums will be supported by 17 EC2199 The world economy: Industrial revolution to the present a ‘course moderator’, a subject expert employed by LSE to facilitate the discussion and clarify difficult topics. Past examination papers: We provide up to three years of past examinations alongside Examiners’ commentaries that provide guidance on how to approach the questions. Study skills: Expert advice on getting started with your studies, preparing for examinations and developing your digital literacy skills. Note: Students registered for Laws courses also receive access to the dedicated Laws VLE. Some of these resources are available for certain courses only, but we are expanding our provision all the time and you should check the VLE regularly for updates. Making use of the Online Library The Online Library (http://onlinelibrary.london.ac.uk) contains a huge array of journal articles and other resources to help you read widely and extensively. To access the majority of resources via the Online Library you will either need to use your University of London Student Portal login details, or you will be required to register and use an Athens login. The easiest way to locate relevant content and journal articles in the Online Library is to use the Summon search engine. If you are having trouble finding an article listed in a reading list, try removing any punctuation from the title, such as single quotation marks, question marks and colons. For further advice, please use the online help pages (https://onlinelibrary. london.ac.uk/resources/summon) or contact the Online Library team using the ‘Chat with us’ function. 1.10 Examination advice Important: the information and advice given here are based on the examination structure used at the time this guide was written. Please note that subject guides may be used for several years. Because of this we strongly advise you to always check both the current Programme regulations for relevant information about the examination, and the VLE where you should be advised of any forthcoming changes. You should also carefully check the rubric/instructions on the paper you actually sit and follow those instructions. Here are some important points to remember: When you sit down to take the examination, make sure that you read through the whole examination paper before you begin to write. Make sure that you read the questions carefully. The examiners take relevance very seriously. A common mistake is for students to see particular words/phrases in a question, ‘American railroads’ for example, and to write about the economic history of American railroads, when the question asked the student to write about the effect of the development of American railroads before the First World War on the British and other economies. Make sure that you allocate your time correctly. Give equal time to each question. Examiners cannot give marks for blank pages. If you 18 Chapter 1: Introduction only write three answers when you are asked to write four, you will have lost a large proportion of the marks. Remember, it is important to check the VLE for: up-to-date information on examination and assessment arrangements for this course where available, past examination papers and Examiners’ commentaries for the course which give advice on how each question might best be answered. 1.11 Summary You do not have to read every word of the Essential reading textbooks or the Further reading mentioned in the guide. You may do more work on some chapters rather than others, as you choose. But it is important for you to remember that the subject guide has been designed only to introduce you to a very big subject. Remember also that this subject guide is not a set of examination notes. It does not, on its own, contain sufficient material to enable you to pass the examination. 19 EC2199 The world economy: Industrial revolution to the present Notes 20 Chapter 2: Long-run economic history from the Neolithic revolution to the Industrial revolution Chapter 2: Long-run economic history from the Neolithic revolution to the Industrial revolution 2.1 What this chapter is about This chapter will introduce you to the discipline of economic history. It will tell you what kinds of questions economic historians typically grapple with and why they are important. It will then take you through two case studies of significant developments in the economic history of the world, leading up to the Industrial revolution. 2.1.1 Aims of this chapter The aims of this chapter are to: understand and be able to define the Neolithic revolution understand the long-term implications of the Neolithic revolution and why there is debate about this in the literature understand and be able to define the Great Divergence and discuss its implications. 2.1.2 Learning outcomes By the end of this chapter, and having completed the Essential readings and activities, you should be able to: define economic history as a discipline explain why a long-run perspective is important for understanding modern economic history explain the long-run trajectory of global economic development explain the Great Divergence and its consequences for the global economy understand changes in living standards over the long run debate the main factors that underpinned the Great Divergence. 2.1.3 Essential reading Gupta, B. and D. Ma ‘Europe in an Asian mirror: the Great Divergence’ in Broadberry, S. and K. O’Rourke (eds) The Cambridge economic history of modern Europe volume 1: 1700–1870. (Cambridge: Cambridge University Press, 2012) [ISBN 9780521708388] pp.264–85. 2.1.4 Further reading Dennison, T. and S. Ogilvie ‘Does the European marriage pattern explain economic growth?’, The Journal of Economic History 74(3) 2014, pp.651–93. Diamond, J. ‘The worst mistake in the history of the human race’ (1999) www.discovermagazine.com/planet-earth/the-worst-mistake-in-the-history- of-the-human-race 2.1.5 References cited Alesina, A., P. Giuliano and N. Nunn ‘On the origins of gender roles: women and the plough’ The Quarterly Journal of Economics 128(2) 2013, pp.469–530. 21 EC2199 The world economy: Industrial revolution to the present Clark, G. A farewell to alms: a brief economic history of the world. (Princeton, NJ: Princeton University Press, 2010). Diamond, J. Guns, germs and steel: a short history of everybody for the last 13,000 years. (New York: W.W. Norton, 1997). Koyama, M. and J.T. Rubin How the world became rich: the historical origins of economic growth. (Cambridge: Polity Press, 2022). Mokyr, J. A culture of growth: the origins of the modern economy. (Princeton, NJ: Princeton University Press, 2018). North, D. C. and B.R. Weingast ‘Constitutions and commitment: the evolution of institutions governing public choice in seventeenth-century England’, The Journal of Economic History 49(4) 1989, pp.803–32. Pomeranz, K. The Great Divergence: China, Europe, and the making of the modern world economy. (Princeton, NJ: Princeton University Press, 2000). 2.2 Introduction In the most general terms, economic history seeks to offer explanations for two key stylised facts: 1. People today are generally wealthier than their ancestors were in the past (see Figure 1.1 in Clark, 2010). 2. This has been achieved through economic growth experienced throughout the preceding centuries. Economic historians try to explain why and how this economic growth happened (or, in some cases, did not happen) in the past. This economic growth has not, however, been distributed equally across the globe. Some places experienced economic growth much earlier than others and the trajectories of growth around the world are very different. Ultimately, this has led us to the situation today where certain parts of the world are wealthier (or more economically developed) than others. Economic historians also try to understand and explain why economic growth has been so uneven. 2.3 What happened before industrialisation? Some important turning points in human history: The move out of Africa (about two million years ago) Homo erectus migrates out of Africa The Neolithic revolution (10,000 to 13,000 years ago) Foraging increasingly replaced by farming domesticated crops and animals The Industrial revolution (mid to late 19th century) Increased technological development and mechanisation; workers move out of agriculture into industry and out of the countryside and into cities. In exploring the economic history of the pre-industrial world, we will focus on two developments which are argued in the literature to have been significant in shaping economies and societies leading up to industrialisation. These are the Neolithic revolution and the Great Divergence. The reasons for the Neolithic revolution, and whether it had positive or negative effects for societies and living standards, at least in the short term, is subject to some debate. The Neolithic revolution also serves as a good example of how scholars can disagree and debate historical events. Several explanations for the Great Divergence, in which western European 22 Chapter 2: Long-run economic history from the Neolithic revolution to the Industrial revolution societies grew rich while the rest of the world remained comparatively poor, have been put forward which include geographical, cultural and institutional explanations. Finally, the Industrial revolution provides a demand-side explanation for the Great Divergence. It argues that, as workers began to desire newly-available consumer goods (and more of them), they chose to work harder to purchase these. 2.3.1 The Neolithic revolution Guiding question Why did human societies begin to shift from hunting and gathering to agriculture? Aims Understand how and why humans shifted from nomadic hunter- gathering societies to sedentary agricultural societies. Understand the implications of such a transition. The Neolithic revolution (also known as the Agricultural revolution or the Neolithic Transition) is one of the earliest key events in economic history. It happened between 10,000 and 13,000 years ago when humans abandoned hunting and gathering as a subsistence strategy and adopted sedentary agriculture instead. Our understanding of this important event in human history is based on archaeological data and the study of modern tribes of hunter-gatherers that still exist today. For the first 200,000 years of human existence, humans survived by foraging and hunting. By 14,000 BCE, humans had migrated from Africa to all continents (except Antarctica) and survived by hunting and gathering. 2.3.2 The organisation of hunter-gatherer societies Hunting and gathering is generally only possible when groups are nomadic or semi-nomadic. As no single place can provide enough food, people can only survive when they keep moving. So, before the Neolithic transition, human settlements were generally temporary and people lived in small groups, maybe bands of 15 to 50 people, typically related by kinship, and they moved frequently in search of food. Interestingly, individuals did not always stay in the same group year-round and social organisation was relatively egalitarian compared to the later period of settled farming. The leadership in hunter-gathering societies was also often relatively informal. During this period, human behaviour acquired many of its modern characteristics: culture developed, humans make art technological innovations occurred languages developed burial practices developed. 2.3.3 Possibilities of progress This subsistence strategy would have made many of prerequisites for economic growth that we appreciate today difficult. For example, it is difficult to accumulate physical capital in hunter gatherer societies, as the nomadic paradigm means that you can only own what you are able to carry. So, many of the things (literally) that we know can help improve economic output, especially in agricultural societies, like tools or shelters and other potentially labour-saving technologies would have been hard to acquire. The need for mobility also would have made it difficult to enlarge the labour force. The need to carry young children would have limited the 23 EC2199 The world economy: Industrial revolution to the present ability to work of those who carried them. Ultimately, until about 12,000 years ago, all humans lived this way. 2.3.4 Move to farming About 12,000 years ago, people start farming. This change, which would turn out to be monumental in human history, started relatively simply. An increasing number of crops and animals started to become domesticated. These domesticated species of plants and animals then began to adapt to human assistance and became more productive. This process could advance quite quickly with things like complex irrigation systems. 2.3.5 Where does agriculture take off? The shift to sedentary agriculture occurred first in the Middle Eastern ‘Fertile Crescent’ (which encompassed parts of modern-day Iraq, Syria, Lebanon, Palestine, Israel, Jordan and Egypt), but then the same shift occurred, independently (rather than diffusing out from the Middle East), in six other places. Ultimately, seven independent societies made the shift from foraging to farming. (For an illustration of this, see Figure 2 from Matranga, A. ‘The ant and the grasshopper: seasonality and the invention of agriculture’ MPRA Paper 76626 University Library of Munich, Germany 2017.) In terms of watershed moments in human history, this is different from, the Industrial revolution for example, which diffused out from an epicentre in western Europe. The pattern of adoption suggests that an exogenous factor, like climate change, influenced this shift. 2.3.6 What caused the move out of agriculture? Why did this happen when it did? Given that we know this was ultimately such an important change in human behaviour we need to understand what caused the move out of agriculture and why this shift from foraging to farming happened when it did. There is a lot of evidence the points to climate as a decisive factor. The most likely answer is that it coincided with changes in the Earth’s climate. The move to agriculture coincides with the end of the last Ice Age. Did warmer weather make farming easier than it was previously? Rising temperatures lead to growth of a range of new crops that were easily domesticated. These included wild barley, rice and millet. Perhaps drier conditions made hunting and gathering more difficult. Another mechanism may have been that increased climate volatility incentivised humans to accumulate more agricultural knowledge. 2.3.7 Human agency? An obvious question is whether humans actively made a choice to shift from foraging to farming, or if it was rather a slow process of adaptation that unfolded over many centuries. If we assume there was human agency, the decision would have probably boiled down to a choice between two possibilities: 1. remain as foragers, but limit population, or… 2. …increase food production by shifting to farming in order to raise population levels. Obviously, humans took the latter course, which may have resulted in lower standards of living in the short term, which is why some authors have (rather provocatively) proposed that it was a ‘bad’ decision (Diamond, 1999). 24 Chapter 2: Long-run economic history from the Neolithic revolution to the Industrial revolution 2.3.8 Consequences of the move out of agriculture There were many consequences from the shift out of agriculture. An assumption we have to make is that farming was triggered by a desire for greater average food consumption, but many people ended up eating less. In the short term at least, consumption per capita seems to have decreased, as anthropometric studies reveal that hunter-gatherers were taller than early agriculturalists. There is also more evidence of malnutrition and disease in early agricultural people, compared to hunter- gatherers. Ultimately, hunting and gathering was perhaps lucrative but risky, while farming, on the other hand, had lower average per capita returns, but was more stable. Sedentary farming makes different demands on the human body, compared to foraging. In the long-run, natural selection will privilege a different set of traits. Ploughing, for example, which is one of the most labour-intensive aspects of farming, requires upper body strength. The shift from foraging to farming, therefore may have contributed to the gender division of labour because men typically had more upper body strength relative to women (Alesina et al., 2013) Pause and think 2.1 1. What are the advantages and challenges of hunting and gathering as a subsistence strategy? 2. What are the advantages and challenges of sedentary agriculture? What makes agriculture bad? in the short term, perhaps a fall in the average per capita standard of living increased sedentism decline in dental health more carbohydrates in diet more cavities and tooth loss decline in nutritional quality agriculturalists consume narrower range of foods less animal protein perhaps less equal society. What is good about agriculture? standard of living becomes more stable and predictable ultimately, much greater possibility for growth of population and per capita wealth. 2.3.9 What can we learn from hunter-gathering societies? The shift from foraging to farming is one of the most significant events in the economic history of the world. It is difficult to debate the decision because it is nearly impossible to conceive of a counterfactual; what would the world be like today if humans had remained hunter-gatherers and not shifted to agriculture? However, there are still a number of concerns wrapped up in the Neolithic revolution that we can keep in the back of our minds as we move forward and consider other epochs of economic history. 25 EC2199 The world economy: Industrial revolution to the present Activity 2.1 Brainstorm some responses to the following prompts. 1. What was the Neolithic revolution? 2. Why can it be argued that the shift to agriculture led to a decline in lifestyle for historical populations? 3. How far do you agree that the invention of agriculture was ‘the worst mistake in the history of the human race’? If you had a time machine and could stop humans from inventing agriculture, would you? 2.4 The Great Divergence We are skipping ahead several millennia to discuss another major event in economic history, the Great Divergence. The Great Divergence is the name given to the phenomenon that happened sometime between 1400 and 1900 CE (economic historians still actively debate exactly when the turning point was), the economies of some parts of the world, namely western Europe, started to grow significantly faster than the rest of the globe. In 1400, Europe and the rest of the world had broadly similar levels of wealth. By the 19th century, however western Europe was very wealthy and most other places were still quite poor by comparison. This resulted in a situation where the average person in western Europe was significantly wealthier than the average person in most other places in the world. This is a historical phenomenon that many scholars have long been aware of and a range of explanations have been offered. European colonialism is a significant factor. Columbus arrived in the New World in 1492 and this kicked off a European expansion of colonies around the world whereby Europeans stripped those colonies of natural resources, precious metals and labour. This inhibited the development of other parts of the world while bolstering European economies. Jared Diamond has pointed to environmental factors, arguing that Europe was endowed with a range of plants and animals that were easily domesticated and a population developed that was immune to many diseases. These factors, it is argued, allowed Europeans to achieve higher productivity and higher population density than other parts of the world (Diamond, 2018). However, it was not until the year 2000 that this concept was crystalised in a book called The Great Divergence by Kenneth Pomeranz (Pomeranz, 2000). Indeed, it was this book that gave this event the name we are all familiar with today. This book was a significant landmark in the historiography because, at the time it was published in 2000, very few economic historians had considered the different economic trajectories of Europe and Asia alongside each other. Pomeranz made a case that divergence between the two countries happened later than previously thought (so, much closer to 1900 than 1400). He argued that the gap really started to emerge in the 19th century largely because of the factor endowments Europe possessed in terms of coal and the colonies they acquired in other parts of the world with imperial expansion. The methodology was also innovative for the time. It is difficult to compare Europe and Asia in a straightforward way. For example, China is much bigger than any European countries. To solve this issue, Pomeranz used the method of ‘reciprocal comparison’ which compared the most economically vibrant part of Europe at the time, England, with the most 26 Chapter 2: Long-run economic history from the Neolithic revolution to the Industrial revolution productive part of China. the Yangtze Delta. This method allowed him to home in on what he thought were the most significant differences between the two places in order to see what had allowed England’s economy to flourish before China’s. That said, Pomeranz did focus on some specific types of evidence. Types of evidence used by Types of evidence not used by Pomeranz: Pomeranz: real wages/consumption warfare GDP estimates institutions state capacity demography (e.g. The European Marriage Pattern) farm yields. Enlightenment/science. Since The Great Divergence was published, scholarship that examines this phenomenon through the lens of global comparative research has flourished. There are now a wide range of impressive theses offered to explain how Europe was able to

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