Econ History Notes PDF

[Econ History Notes] [Topic 1- Origins of economic development] [Introduction] 1. [Modern economic growth] - Economic growth made us wealthier - But very different degree across world - Richest became richer, poorest mired in stagnation - Income ratio between richest 20% of t...

[Econ History Notes] [Topic 1- Origins of economic development] [Introduction] 1. [Modern economic growth] - Economic growth made us wealthier - But very different degree across world - Richest became richer, poorest mired in stagnation - Income ratio between richest 20% of the world and poorest 60% - 3:1 in 1820 - 5:1 I 1910 - 9:1 in 1950 - Three main questions for econ history 1. When and how did (modern) economic growth emerge? 2. Why did Western countries grow so much faster than others? 3. Why some countries caught up and others fell behind? 2. [The Industrial Revolution] - Origin of modern economic growth - Inaugurated technological advancements that change world - Transformed labor-intensive into machine-based economies - Why west industrialize before rest? - Conditions for economic growth changed fundamentally in western Europe during early modern period - Social structure, legal institutions, science and culture, demography, economic incentives 3. [Capitalism and constitutional rule] - Marxist theories contend that property and labor relations condition economic development - Medieval economy based on serfdom: limited labor mobility and markets (no free market for land and labor) - Industrial economy could only develop with capitalist institutions including free markets and landless working class - Liberal political economy - Parliament from of government introduced after glorious revolution guaranteed free markets and property rights - Weakness of this interpretation - Property rights were just as strong in absolutist France - English state had high levels of taxation and government debt 4. Cultural change - Protestant reformation - **Weber:** the rise of the west can be explained by western rationality, which arose from Protestant theology - weakness of this interpretation: lack of empirical support - scientific revolution - modern technology derived from modern science - scientific approach widely accepted in Europe by the 18^th^ century, but not elsewhere. Scientific methods applied to the study of technology - bourgeois dignity - mokyr and mccloskey: 18^th^ century English society held practical (land) trade or industry lost nobility privileges (Derogeance) 5. Demography - Classical economist thought that growth of living standards was held in check by population growth - Malthus: higher incomes increase fertility and reduce mortality, population growth brings living standards back to subsistence (pos check) - Higher living standards could only be maintained in societies that restricted their fertility (preventive check) - European marriage pattern (hajnal) - High average age at first marriage for women (24-26) - High percentage of women never marrying (10-25%) - High fertility in marriage - Very few births out of wedlock - Girl power - Urban jobs enabled young women to support themselves before marriage: early marriage prevented by high opportunity cost 6. Economic Incentives - Consumerism - Colonial trade and the availability of new manufactured goods increased the demand for consumer markets. - To afford these new goods, working class households increased their work effort in North-Western Europe. - Human capital - Urbanization and commercialization increased the returns to literacy and numeracy. Cities had higher human capital. - High wage economy -  **Allen:** industrial technology was the response to high wages in Britain. Scientific revolution and high literacy enhanced the supply of innovation, high wages raised the demand for it. - High wages also enabled households to invest in skills. 7. Sources of economic growth - Wealth of nations - Has little to do with the distribution of natural resources - Capital and technology matter most\ ✓ Typically the richest countries have the best trained workforce 8. Pre-Modern growth - Technological progress - Slow and discontinuous, derived from experience, trial and error - Capital - Very little, complement (and usually owned by) labor - Sources of premodern growth - Specialisation - Trade - *Smithian* growth instead of *Schumpeterian* growth 9. Adam Smith - Scottish economist and philosopher (1723-1790) - Role in the Enlightenment -  Work with David Hume -  *The Theory of Moral Sentiments* - *The Wealth of Nations* (1776) -  Bible of classical economics -  'The invisible hand' - division of labour 10. Economies of scale - Gains from specialisation and division of labour - Exchange of goods produced at a low opportunity cost for others produced at high opportunity cost - Gains from trade - Exchangeofgoodsbetweenspecializedproducers - Market size (scale) limits the division of labour - Population growth➔urbanisation➔specialisation➔GROWTH 11. Gains from specialization 12. Urbanisation in Europe - Overall trend -  Europe's population declined by half between the 5th and 8th century - Depopulation + trade disruptions ➔ De-urbanization -  9th -14th century: European population tripled, cities came back to life. - Relative changes -  Italywitnessedlittlegrowthafter11thcentury. -  Cities in North-Western Europe grew faster. - Before 1500, rate of urbanization was similar to China. 13. The limits of trade - Transport costs - Primitive transport technology, customs borders -- Road networks and trade routes - Other transaction costs - Lack of common currency➔ barter -- Heterogeneity of measures - Lack of common language - Insecurity and negative externalities 14. The silk road 15. Bubonic plague (late 1340s) 16. The Black Death 17. Growth reversal - The Black Death of 1348 - Killed between third and half of the European population -- Urbanpopulationdecimatedmostdramatically - Economic consequences - Agricultural share of the population increased again - Rate of urbanization declined - Cultural revival: the Renaissance 18. The age of discovery - The late Renaissance period brought new ideas and discoveries that changed Europe. - --  1439 : Guttenberg invents the movable type print - --  1470s : Invention of the matchlock rifle - --  1487 : Vasco de Gama sails around the Cape to India - --  1492 : Columbus discovers the Americas - --  1517 : Start of the Protestant Reformation - Consequences for growth -  New trade routes + military advantage ➔ colonization and the commercial revolution -  Book printing + reformation➔increased literacy 19. Colonization - 1492-1913: European imperialism - First two waves of colonization - **1500s:** Conquest of the Americas and African coast by Spain and Portugal, Portuguese outposts in the Indies -  **1600-1800:** British, Dutch and French colonies in the Americas and trade colonies in Asia - Imperialism through enterprise - EnglishEastIndiaCompany(1600) - Dutch East Indies Company (1602) 20. The rise of Atlantic trade 21. The little Divergence - Atlantic trade shifted the centre of the European economy from Italy to England and the Low Countries between 1500 and 1750. - Structural change - Urbanisation - Proto-industrialisation - Economic consequences - High-wage economy - Agricultural revolution - Energy revolution 22. The commercial revolution - Overseas trade made imported Asian goods cheaper - Silk cloth - Spices - Porcelain - Tea (with sugar from the Caribbean colonies) - International trade spurred a transition from dominantly agrarian to more urban and commercial economies. - Two incentives: - Imported products imitated in NW Europe become competitive over time - Households had to earn more to buy new goods 23. Proto-industrialisation - Hypothesis: demand for specialised consumer goods prompted manufacturing activities a. --  Kitchenutensil b. --  Bedding,clothing,shoemaking c. --  Furniture / cabinetry d. --  Home decoration e. --  Timepieces (i.e. clocks and watches) - Evidence : from the 17th century, probate inventories show growing number of such goods 24. Trade and growth - Before 1700, manufacturing growth spurred by trade within Europe. - Urbanization partly due to manufacturing and naval construction but mostly the consequence of trade - In 18th century, intercontinental trade grew much faster. -  Portuguese trade with the Indies overtaken by the Dutch and English - Amsterdam and London became the centres of global commerce 25. Structural change 26. The industrious revolution - Theory: new goods incentivized households to -  increase supply of labor offered on market (reduced leisure and household production) -  increase supply of home-produced marketable goods -  increase demand market goods - people **used markets more** - Labor time sold on market or, if at home, used to produce goods that could be sold on the market - Evidence: in the 18th century, number of work days increased in both England and Holland Summary: - The topic of the class 1. The origins of western economic development 2. The commercial revolution and its consequences - Main messages to take away 3. The Industrial Revolution originated from social, cultural and economic transformations in western Europe between ca. 1500 and 1750. 4. Premodern growth came from specialisation and division of labour, not capital investment or technical change. 5. Premodern economies gradually became more dynamic due to trade and proto-industrialisation. [Topic 2- Pre-Industrial Economies] Overview: [Sources of Economic Growth] 1. Investment (increases in capital stock) - More capital more productivity of labor higher living standards - Investments possible only if savings in economy as a whole 2. Specialization and Commercial expansion - Division of labour higher productivity - Need to trade to benefit from specialization 3. Scale or size effects - Economies of scale - Some investments have fixed costs (roads, universities, hospitals) that can be sustained only by large population - BUT higher population pressure on resources 4. Increases in stock of human knowledge that improves efficiency - Continuous technological change new better products and old products with fewer resources [Gains form specialization ]  [Malthusian Model] - Malthusian Model: Solutions - Population increases so much that the per **capita income decreases** and thus mortality increases - Larger population will be exposed to **dramatic event**s that raise mortality rate (e.g. famines, plagues, wars) - **Households' behaviour** aimed at reducing fertility: in pre-industrial economies delayed marriage rather than contraceptive practices  [Malthusian Model's Implications]       Population of Europe  Black Death and European Population  [Little Divergence] - Atlantic trade shifted centre of European economy from Italy to England and the Low Countries between 1500 and 1750 - Structural change - Urbanisation - Proto-industrialisation - England and Low Countries - Larger markets (more trade) - Availability of new goods - More business oriented (middle class mentality) [GDP vs real wages ] - GDP per capita - Estimates prior to 1870: scarce and inaccurate - Point estimates, no continuous series - Real wages - Better proxy of standards of living - Simpler measure, easier to construct - Direct measures based on actual historical data - More comparable - Usually collected for simple trades/professions in every country - Nominal wages are deflated using the same approach [Britain high wages] - At exchange rate, British wages: among the highest in world - British wages high relative to cost of consumer goods, so living standards were higher in Britain than elsewhere (able to buy more with their money than other countries) - Wages higher relative to price of capital in Britain than elsewhere - Wages higher relative to price of energy in Britain than elsewhere Travelers' accounts support this view: - Workers in France, Italy, China or India lived at basic subsistence - English workers enjoyed much higher living standards 'high' with respect to what? Nominal values must be deflated, i.e. account for prices. - Britain was first country to industrialize - Because labor was expensive - Economic incentives explain industrial revolution [Nominal vs. Real Wages] - Nominal wages - Average labour income from historical sources - Values in different currencies converted into common unit (silver) - Real wages - Nominal wage divided by the price level - Composite price index (cost of living) - Determine typical consumer basket (quantities) - Collect data on prices for each item in the basket - Price the basket or take the weighted average of prices in the basket [Subsistence vs "Respectability"] [Subsistence]: the level of income a typical family needed to survive - Physiological minimum nutrition in terms of calories and protein - Quasi-vegetarian diet - The cheapest available grain (not bread) - Legumes or fish for additional protein (no meat or dairy) - Small quantity of butter and vegetable oils - Very little income spent on anything but food ['Respectable' standard of living:] - Differs from [physiological minimum] in calories but also in quantity and quality of protein (bread, meat and dairy products) - Meat and cheese had high income elasticity of demand - Still, little else spent on anything but food and beverages [Subsistence ratio] - preferred measure of real wages in historical studies 1. Construct a 'bare-bone' basket of goods needed to sustain a family of four at a very modest standard 2. Subsistence (welfare) ratio: - nominal wage / price of the bare-bone basket - determines how many times larger the breadwinner wage is than what is needed for a family to survive - Ratio greater than one: **[consumer surplus]** 3. Consumer surplus - Spent primarily on better diet (respectability basket) - Residual used to purchase consumer goods [Consumer basket ] - Subsistence basket - Simple diet required to sustain an adult male at 1,900 kcal per day - Differs across countries taking into account cheapest locally available grain and source of protein - Minimal consumption of the cheapest cloth (cotton or linen) and heating fuel when necessary - Respectability basket - Based on historical household budget studies in England and Holland - Rich diet with 2,500 kcal per day: mostly bread, meat and dairy - High protein consumption necessary for heavy manual labour - Household consumption: 3.15 adult male equivalents    [Quality of life ] - With higher wages, people consumed more and better food - Skilled workers in Britain: consumed substantial quantities of meat and dairy - Alcohol consumption high and increasing in 18^th^ century - Middle class and skilled workers: consumed colonial goods like sugar and tea - Biological standard of living - Strong correlation between childhood nutrition and health and adult heights - Historical data shows great variation in European heights: 18^th^ century English recruits 8-10cm taller than recruits in France, Italy and Austria [Human Capital] - Literacy - In middle age, literacy confined to cities, so literacy correlated with rate of urbanization - Literacy increased everywhere in early-modern Europe, as printing press dramatically reduced price of books - Numeracy - Urban commerce and maritime trade required arithmetic skills beyond basic counting. Plentiful books on mathematics and geometry - Craft skills - Two-thirds of English boys acquired apprenticeship in 18^th^ century2 - Apprenticeships were expensive and required both high returns on skilled labour (incentive) and high real wages (cost of education) [What learned so far:] Lecture 1: **Nature of pre-modern growth** 1. Pre-modern economies slow progress 2. Productive gains came from specialisation and trade, not investment or technical change 3. Pre-modern economies, became more efficient with trade a. Proto-industrialisaton: share of non-agro population increased b. Consumption: more spending in traded goods, investment in skills Lecture 2: **Why real wages matter** 1. High wage economy of North western Europe 2. Measurement of historical living standards **Main message to take a way** 1. **Research findings** a. Productivity and living standards began to increase in west long before industrial revolution b. English and dutch households earned large consumer surpluses, which they spent on commercial goods and education 2. Tools of historian: historical national accounts, real wage estimates [Causes of the little divergence] - Refers to the period where Northwestern Europe started to economically outpace southern and eastern Europe - **Urban growth and trade**: Mediterranean Sea → Atlantic (Americas and East Indies). Trade and urbanization - **Agricultural improvements** - European Marriage Pattern (later age at Marriage) - Accumulation of resources - Higher female labour participation - Epidemics (different than Black Death) - In 1600s: stronger in Northern Italy than England - Accelerated economic and social changes in the Northwest, helping it pull ahead in the pre-industrial era - **Political and civil institutions** - Parliaments - Property rights - Civil rights (citizenship, tax) - Better laws - **Economic institutions** - Guilds (North abolishes, South reinforces) - Priviledged companies (EIC, VOC, BoE) - Joint-stock companies - Stock exchange markets - Religion - Protestantism → Human capital - Inquisition → Hinder science and diffusion of knowledge - **Scientific revolution and enlightment** : new ideas and technology (class dedicated) [Agriculture:] [What is the role of agriculture?] - Food is a necessity - People need food to survive. - People can start producing non-agricultural goods only if farmers produce a surplus that can be traded for these goods. - Limits of *Smithian* growth - Population (market) size depends on food production - Specialisation and division of labour depend on farm productivity Key point: Agriculture responds to the economic incentives of a high-wage economy (more and better food) by increasing productivity. In turn, more productivity releases more people for more modern sectors in urban cities: demand ↑: virtuous circle. The old view: the agricultural revolution leads to the consumerism revolution. The new view: the other way around. - Wages high-\> farmers work to produce more and better-\> less farmers needed-\> more people move to cities and work modern jobs-\> positive cycle (**virtuous cycle)** - Old idea: better farming-\> more buying and spending - New idea: more buying and spending pushed farming to improve [Agriculture and industrialization:] - Industrialisation requires resources (raw materials, [labour], [capital]) and market incentives (demand for manufactures). - These conditions depend on high agricultural productivity - Higher productivity reduces the demand for farm labour - It increases the food surplus that can feed growing cities - England and Holland: more urbanised than France and Spain (farmers more productive) - [Labour productivity]: farm output per worker - [Farm yield]: farm output per farm area [Agricultural revolution:] - Population recovered slowly after the Black Death - Land/labour ratio remained high - A larger stock of animals increased agricultural productivity ( can f.e. plow fields) - Capital intensity: more draft animals increased labour productivity - Soil quality: application on animal dung (manure) improved yields [New sources of growth] - **Capital**: harnessing animal power - Oxon 10, draft horses up to 25 times as powerful as humans - More draft animals reduced demand for farm labour - **Technology**: use of natural fertilisers - Animals fed by nitrate-fixing fodder crops - nitrates returned into the soil from dead roots and stock - application of manure increased soil nitrogen levels - **Self-sustaining growth** (another virtuous circle) - Higher farm wages left more money for farmers to invest in livestock - **More draft** animals (horses or oxen) more draft power and **more manure** higher labour **productivity and yields** even **higher wages** [Institutions: Changing land tenure] - Before Black Death: dominant form of land tenure in Europe was **open-field system:** - Fields divided up between villagers into narrow strips (usually grains) - As demand for grain fell and demand for English wool in Flanders increased, English lords enclosed open fields (enclosed: taking shared land and making it private with fences to improve farming) - **1500:** 45% of land enclosed - **1750:** nearly two-thirds of land enclosed - **1760-1830**: Parliamentary enclosures - In 18^th^ century, English agriculture dominated by consolidated landholdings rented to capitalist farmers  [New landowners] **Albany Wallis** - Prominent London solicitor - Served as member of Parliament - His son, Albany Charles attended Westminster School - Both father son were burried in Westminster Abbey [The impact of enclosures (old view)] Since the parliamentary report of **Lord Ernle** (1912), English historians have explained the rise of English agriculture with the enclosure of open fields. - Inefficient open fields - Villagers forced to cooperate hard to innovate - Peasants had separate and often far away holdings - Lands rotated among villagers no incentive to invest - Efficient enclosed fields - Large consolidated holdings economies of scale - Tenant farmers invest in capital to economise on labour - No rotation but long lease tenants interested in improving or maintaining yields [Enclosure and growth] - Traditional view - Enclosures reduced the demand for farm labour ↓ and increased the food surplus ↑, which fuelled urban growth ↑. Larger urban population greater specialisation & trade [Farm output] - Difficult to find evidence: No historical production data - No agricultural census - Output estimated from consumption 1. **Oldest approach**: backward projection of output assuming constant food consumption per capita (assuming people always ate same food amount) 2. **New approach**: adjust consumption to income levels based on price and income elasticities of demand in developing countries (looks at how much people ate by considering income and food prices **3 phases:** 1500s to 1730s -- fast growth \[changing land use\] 1740 to 1800 -- slow growth 1800 to 1850 -- rapid growth \[industrialisation\] [Enclosure versus open field] - Technology - Adoption of new crops and rotations - Land use - Shift from arable (growing crops) to grassland (more diverse use) - Crop yields - Geographical differences - Type of crops - Labour productivity [Incentives for growth] - Von Thünen (1826) - **Urban demand** ↑ raised the **price of farm products** that were too **expensive to transport** ↑ - Therefore, these goods were produced near the city - Evidence - Farms **near London** shifted **from arable production to pasture** to supply meat and dairy products - Grain production, by contrast, was spread out  [Incentives: wages and prices] - The impact of city growth - Agricultural wages fell behind urban wages (urban \> rural wages) - City jobs paid more - Fast urban growth increased the relative price of food - Consequences for farmers - High urban wages pulled farmers into the city - High food prices lured capital into agriculture (attracted money to farming, investment) - **Enclosures**: consolidated land holdings close to cities - Impact on productivity - Increased land-labor ratio (farms became bigger) - Induced innovation: farmers had to innovate (and become more efficient) to keep up with rising urban wages [Timing] - Farm yields grew only after 1630 - Until 1620, high food prices kept rural wages high - Farmers had no incentive to improve land - Farmers did not loose farm workers - How did farmers maintain high wages after 1630? - Small farmers left for London to earn higher urban wages. - Land holdings close to cities consolidated by buying up of small farms. - Large farms close to cities converted arable land to pasture in response to changing demand and labor scarcity. [Little test:]  Topic 2- Pre-industrial economies [Recap: The rise of the west] - Atlantic trade shifted the centre of the European economy from Italy to England and the Low Countries between 1500 and 1750. - Structural change - Urbanisation - Proto-industrialisation - Economic consequences [Recap: High wage economy] - Northwest Europe began to diverge from the rest of the world in real incomes from the 17^th^ century. - Origins of the high-wage economy a. **Commercial revolution:** trade spurred specialisation and urbanisation b. **Agricultural revolution**: high farm productivity supported urban growth - *And vice versa, not just a supply story -- but also a demand story* - Consequences of high-wage economy c. Proto-industrialisation: small scale production in rural homes, which set stage for later industrial revolution d. Industrious revolution: people started working more efficiently, producing more goods e. Skill accumulation, rising literacy: workers gained more skills f. Innovation in agriculture: new farming methods [Why Britain?] - The commercial and agricultural revolutions and their consequences were shared by both **England** and the **Low Countries.** - But, the Industrial Revolution started in Britain - Flanders followed the lead of England. - The Netherlands lagged behind, even though it had the highest wages, most productive agriculture, and highest literacy. - So, what made England unique? [Coal (crucial energy source)] - attributed the British industrial revolution to early development of coal mining in England. - '**Britain was first because Britain had coal'** - By 18^th^ century, Britain produced most of world's coal - Southeast Belgium the only other region of significant production - Rest of the world continued to use traditional energy sources - The 'timber crisis' theory (Nef 1932) -- old view (superseded) - By 17^th^ century, England had cut down its forests for heating fuel and material for shipbuilding. - Timber shortage wood and charcoal had **to be replaced by coal** - Coal mining increased 66-fold between 1560 and 1800 [Importance of coal] - Shift from 'organic' to 'mineral-fuel' economy (**higher efficiency**) - **First modern industry** - Geographic concentration (northeast) - Large scale production - High investment (capital) requirements - Strong industry linkages (finance, insurance, shipping) - **Technological spinoffs** - Steam engine - **Mass production of iron and steel** - Railways [Allen's argument in a nutshell] - Robert C. Allen, a prominent economic historian known for research on British industrial revolution and global economic history - Early development of coal made Britain the world's cheap energy economy, which empowered the industrial revolution. - **Demand mattered, not supply** - Several nations possessed large reserves of coal, but only Britain developed a large coal industry before 1800. - Growth of coal industry driven by **growth of London** 1. **Booming demand for cheap heating fuel** 2. Innovation in heating technology driven by housing boom - Spillover effects - Once coal-burning house was invented, it spread to smaller towns, giving rise to coal industry in western Britain and Scotland. - **Urban growth in the periphery created further demand** for fuel and thus spurred the meteoric rise of coal mining. **Virtuous cycle core-periphery** [Fuel shortage] - Evidence for 'timber crisis' - Price of wood increased dramatically after 1550s until 1700s. - Timber shortage developed in England at least a century earlier than in France or the Netherlands. - Real prices - **Price increased** 1550-1650 largely due **to inflation** - **Real prices show very different picture** 1. Increase in price of wood not dramatic until mid 1600s 2. In the 1660s, prices exploded - Price gap between wood and coal much bigger in 1700s than in 1600s - This situation pushed England to shift from wood to coal as a primary energy source [Growth of London] - **Pre-modern growth** turned London into the **biggest city in Europe** - Population history (Wrigley 1985) - Early 1300s: app. 75-100,000 - 1520: app. 55,000 - 1600: 200,000 - 1700: half a million (biggest city in the West) - 1800: one million (biggest city in Europe) - Energy supply - Traditional energy sources were dispersed around the country. - As fuel demand of London grew, timber had to be supplies from more remote areas, and fuel prices rose with the cost of transport. [Price of coal] - The real puzzle is not why wood prices increased with the growth of London but **why the price of coal did not!** - Properties of coal - **Coal is not a clean source of energy** - Both households and industry (e.g. chinaware) preferred charcoal - **Coal could only be sold as fuel with substantial discount (**because people did not prefer it) - 'Backstop technology' - **Energy source that provides [infinite power at constant unit cost]** - At pre-industrial levels of demand, supply of coal was unlimited (so price did not rise) - Timing of transition - Coal trade took off when **London got big enough to drive up wood price**s enough to **make coal mining profitable** in the Northeast. [The energy revolution] - The transition to a **coal-based economy** required **revolutionary innovation** in heating technology. - Coal as **thermal energy** - Already by 1700, half of British coal consumption used for heating - **By 1800, almost all thermal energy derived from coal** - **Technological constraint** - **Coal consumption was limited** because medieval heating technology was incongruent with the properties of coal. (coal produced different kinds of smoke and heat compared to wood, old heating systems could not handle this safely) - Medieval house design: - Central open fireplace to provide smoke filled kitchen for curing meat and maximise warmth in the house - Burning coal in open hearth **inefficient and dangerous** because of sulphurous smoke [New house design] - Burning coal required **new house design:** - **Closed fire place** or metal chamber for high-temperature combustion - Tall narrow chimney to keep smoke away - Timing of transition - By the late 17^th^ century, houses designed around central chimney and back to back fireplaces had become the norm. - Precise chronology hard to establish: - Chimneys (vertical structures to carry smoke and gasses outside) became common about the same time the coal trade took off in Southeast - The rebuilding of London after the fire of 1666 already based on new design. **Reconstruction was major driver of coal boom.** [The great fire ] - Complete destruction - Five sixths of the city, app. 13.000 buildings destroyed - 80% of the population rendered homeless - *London was, but is no more. (John Evelyn)* [Coal in the periphery (areas away from the central regions)] - Fuel prices in western Britain very different from London - **All forms of heating fuel were much cheaper** than in London throughout the early modern period. - Coal was vastly available, but so was firewood until late 1600s. - What changed? - Two tiers system - **Coal very cheap in the periphery** - Technological innovations [Global perspective] - **Coal mining in northern and western Britain** provide the **cheapest energy** in the world, which induced the industrial revolution. - In 1800, Britain produced most pig iron in the world. - By 1800, almost 2,000 steam engines installed in Britain, only a handful on the continent. - **Energy prices elsewhere** (including London) **remained much higher** at later medieval levels. - **London price stable due to coal** - Elsewhere no real fuel shortage [Belgium:] - The **Low Countries** developed the **first high-wage economy** in Europe and were the most urbanised. - Amsterdam and Antwerp were **great centres of global commerce** - **High farm productivity** and **high degree of proto-industrialisation** - English story 'in miniature' - Growth on Antwerp **increased fuel demand**, which spurred **growth of coal mining in the southeast.** - **Cheap coal** around Liège led to **early introduction of industrial technology** from Britain. - But, Antwerp was small and in decline since the 17^th^ century, **which limited the market for coal.** [Why not Holland?] - **Core-periphery** - Like London, Amsterdam grew fast in the 17^th^ century and **Dutch Republic** had the **largest urban population** in Europe. - Vast coal reserves in the Ruhr valley accessible through the Rhine - **The 'Dutch disease'** - Dutch cities were running short of traditional fuel, but they did **not need coal** because of **cheap peat.** - Peat vast vastly available in the North, an **easy substitute for wood** - Once demand for fuel grew large enough, cheap coal could already be shipped from Newcastle, while Ruhr coal had not been developed.  [Coal and wages] - **Benefits of cheap coal** - Unlimited supply of **coal supported urban growth** and though that the **growth of wages** in England. - [Cheap energy around the coalfields provided **the incentive to invent** the steam engine and coal-based metallurgy]. (incentive to invent new technologies) - **Secondary effects** - Relatively **cheap energy** in Britain allowed manufacturers **to pay relatively higher** **wages** and **still be competitive.** - Relatively **high wages** induced British firms to **develop labour saving technologies** leading to the **Industrial Revolution.** [What we have learned:] - The topic of the class 1. The energy revolution in Britain 2. The role of technological change - Main messages to take away 3. Research findings i. **Britain benefited from cheap coal, but only in the context of the high wage economy.** ii. The **growth of London** increased the demand for fuel but also **supported innovation** necessary for an **energy revolution.** iii. **Early development of coal** mining gave **Britain a first-mover advantage** in the Industrial Revolution. 4. Key concepts: collective invention, backstop technology [Topic 3- The industrial revolution] [The first industrial nation:] - **Industrial Revolution: most remarkable growth transition in human history** and the most studied topic in economic history. - First time modern economic growth - **Population and GDP grow at the same time**, escaping the Malthusian trap - No longer just specialisation and trade, **but technological change** and **capital accumulation** - Why it originated in Britain has been the million dollars question. - Why not France, the birthplace of Enlightenment? - Why not the Netherlands, the most advanced economy of the time? - If England, why not London, why the remote North? - What made Britain special? - Factor endowments \[Robert **Allen**\] - Institutions and culture \[Joel **Mokyr**\] - Easy answer: coal [Proper answer: Demand & supply of technology] "**High wages** increased the ***supply* of British technology** as well as the **demand** for it. High wages meant that the population at large was better placed to buy education and training than their counterparts elsewhere in the world. The resulting **high rates of literacy** and **numeracy** contributed to **invention and innovation**" (Allen, 2009, p.137) [Theory of technology] - Habakkuk (1962): countries **chose technologies** that **best fit** their **factor endowments** - Countries with **abundant labour** but **insufficient capital** or natural resources adopt **labour-intensive technologies.** - **Capital and resource rich** countries adopt **labour-saving technologies.** - Allen: industrial technology was labour-saving - First adopted in Northern Britain, where **the relative price of labour** (to energy) was very **high**. - Initially, it did not spread to areas where labour was relatively cheap. - BUT, over time, **micro-inventions** made **industrial technology so efficient** that productivity gains **outweighed factor-price differentials**. (even in areas were labour was cheap, new technology was so efficient that they adapted it everywhere)   [Technological change & industrial revolution] - Technological innovation *Invention is 1% inspiration and 99% Perspiration.* (Thomas Edison) - **Process of innovation** 1. **Macro inventions**: entire **new technologies** that set in motion new technical advances and generate **leaps (**sprünge**) in productivity** 2. **Micro inventions**: incremental **improvements on existing technologies** that enhance their application and **increase their efficiency** - **Nature of innovation** 3. ***Inspiration***: scientific discovery and **new knowledge** may be culturally determined or **matter or 'luck'** -\> knowledge sometimes depend on cultural factors or luck 4. ***Perspiration***: innovation requires **research and development** that is costly and thus depends on economic **incentives** -\> requires research and development, this effort driven by economic reasons, f.e. money [Lifecycle of Inventions:] - Distinct phases of Industrial Revolution inventions: - **Conception** and difficult birth: new inventions started, struggling to develop - **Youth** phase with British **biases:** inventions mainly used in Britain, shaped there - Maturation and **adaptation** to various circumstances: inventions adjusted in other places - **Global** diffusion: inventions spread to rest of the world - Timespan: Approximately 150 years - **Two** main stages: - **Birth and youth of great inventions** - Useful primarily in **Britain** - Not cost-effective elsewhere - **Maturation into globally** useful technologies - **Spread** from Britain to other countries - Initial British advantage due to local economic conditions - Gradual adaptation made technologies globally applicable - **Process illustrates technological diffusion patterns** (how inventions spread) [Engine of productivity: changing energy use] - From muscles to machines to fossil fuels... to green energy? - Early factories still used traditional power sources - **First textile factories** built along rivers to exploit **water power** (still used traditional energy sources) - Most **pig iron** produced using **wood and charcoal**, not coke - **First railway** carts and trams pulled by **horses** - **Transition to coal was gradual** - Britain, where prices of wood and charcoal began to rise sharply after 1650, pioneered this transition, Britain switched to using coal - **Improvement in technology**: Coal consumed per horsepower-hour by a steam engine fell by a factor of 45 between 1730 and 1875 - as technology improved, steam engines more efficient, less coal was used - **they used less coal to do the same work, as technology improved** [The role of relative factor prices] - **Relative factor prices** - Not the nominal price of factors, but their **price relative to the price** **of other** factors of production. - E.g. **relative price of labour**: **nominal wages relative** to **the price of capital** or price of resources (land, fuel) - **Technology choice** - Depends on relative factor prices - Firms maximize profits by minimizing factor costs - Producers apply technologies that economize on the most expensive factor inputs -\> **choose technologies that help use less of most expensive resources or production inputs**     [Factor substitution:] - **Industrial technology substituted capital for labour** - High and rising wages induced **demand for labour saving technology** - **Cheap capital** and **low energy prices** in northern Britain made the application of **machinery** most **profitable**. - Mechanisation reduced the demand for labour per unit of output, thus increased the productivity and the wage of labour -\> **mechanisation made workers more productive, less workers were needed, but more valuable because able to produce more goods with help of machines, companies afford to pay higher wages because less labour was needed** - Macro inventions - **First machines** were technologically **inefficient** and **wasteful of energy**. - **Mechanisation** sensitive to factor prices: **only profitable in Britain** where wages were very high relative to the price of fuel [Why Britain and not Asia?] - **Pomeranz: 'Britain was first because it had coal'** - More precisely, Britain had coal where industry was concentrated. - China had coal, too, but thousands of **miles nort**h from the Yangzi delta. - Japan had coal deposits, but **very far** from Kyoto and Edo. - **Allen**: **cheap coal mattered** because of **expensive labour** - British manufacturers developed **energy intensive technologies** that were **labour saving** because [labour] was **[relatively expensive]**. - China and Japan **retained labour** intensive technologies that used little inanimate energy because **[labour] was [relatively cheap].** [Why not France: the pin factory] - [Adam Smith]**: English pin factories** were more **efficient** because of the **division of labour** - [Allen]: English and French factories were both **highly mechanised** - **French** factories relied on **humans** to **power their machines** - **English** used a combination of **water power** and **steam pumps** to assure constant stream of water**: substituted cheap energy for expensive labour** [Biased technical change] - A biased technical change **saves one input disproportionally** and reduces cost the most where that input is most expensive (helps save money on thing that costs most, by using technology that reduces need for it) - Technical change is **neutral** when it improves the productivity **capital and labour** **proportionately**. - I**ndustrialization** was **biased technical change**. 1. Macro inventions were **biased toward capital**. They disproportionately saved on labour and increased labour productivity. 2. **Machines** made **Britain** more **competitive**, even if wages increased faster than elsewhere. 3. High wages and high literacy increased the demand and supply for industrial innovation. 4. Labour-saving technology was only adopted where wages were relatively high and not where they were relatively low [Technology choice]   - Flatter line: cost structure for a low-wage country, where labor is cheaper relative to capital - Steeper line: cost structure for high-wage country, where capital cheaper relative to labor - T is not on Y, but its on a lower iso-cost line, meaning it achieves the same output as Y at lower cost - It reflects a cost reduction due to technological change, not a change in output   - Small improvements in technology (micro inventions) help to reduce the use of capital and labor, making production cheaper - These make it possible for the technology represented by T to be used in cheaper labor economies (like the one near X), where wages are lower because the cost savings from the micro inventions make it profitable to adopt this technology even in places where labor is cheap [Why was it British?] - The Industrial Revolution was a product of **induced innovation** responding to **relative** **factor prices** - Allen: British invented industrial technology because it was profitable given the relative factor prices that prevailed in Britain - English **wages relatively high** - **Capital relatively cheap** - **Energy extremely cheap** - Labour-saving technology made Britain more competitive. **Other countries** only adopted industrial technology once it had been **perfected** and **efficiency** **gains** were high enough to **make it profitable** [Topic 3- The Industrial Revolution] [Micro Inventions] - **Neutral (**not biased) technical change - **Micro inventions** are typically **factor neutral**: increase the productivity of all factors proportionately - **Reverse factor bias**: when improvements save on the input that the macro invention used most intensively (e.g. coal in steam engines) - **Local learning** - Innovation takes place in the context of one industry, where inventors are already users of the technology they **aim at perfecting**. - Any **reduction in cost improves profitability** no factor bias - **Collective invention** - **Information sharing** makes **micro-inventions cheap**, reducing the need for financing and patents. [Neutral technical change] - Technical change is neutral if it **improves the productivity** of all factors **proportionately.** 1. **Macro inventions** were **biased toward capital**. They disproportionately saved on labour and **increased labour productivity**. 2. They were not adopted in countries with low wages. 3. At a **'tipping point',** **micro inventions** made the new technology cost efficient even in **low-wage economies.** 4. **Low-wage** economies adopted the **latest industrial technology**, which induced **rapid catch-up** in productivity. - Micro inventions **first enhanced** but then **destroyed** the competitive **British advantage** of the first industrial nation. [Steam power:] - The use of steam form heated water to create energy that powers machines - Galileo suspected the atmosphere had weight. Toricelli invented the barometer. - 1712: Newcomen invented **'atmospheric' steam engine** to pump water from mines. - Induced by coal-mining in North England - 1765: James Watt developed the separate condenser. - Made high-pressure steam power transferable and became widely applied in factory industry. - Steam is a truly **general purpose technology** like electricity or computing - Steam power started with early experiments and became a key technology in the industrial revolution, powering many industries Watch eventually - Steam engine: - (from min 1.29 to 7.28) - (steam-powered locomotive) [Coke and Iron] - Coke is a **residue of hard coal** obtained at high temperature in closed furnaces. It is used to decompose iron ore. - In 1709, Darby built first blast furnace using coke - By 1750, only 5% of British pig iron was produced with coke, charcoal still the dominant source of fuel - In 1784, Henry Cort invented puddling and rolling - Pudling: converting pig iron into wrought iron by subjecting it to heat and frequent stirring in a furnace with oxidizing substances - Rolling: semi-molten iron run through grooved rollers to squeeze more impurities and give shape - **These micro-inventions finally made the mass production of iron possible**. - **Geology helped England once again; coal and iron ore mines were often quite close** - Helped make iron production more efficient because it reduced transportation costs and made resources easier to access - Gave England major economic advantage during industrial revolution , and become leader in industrial revolution [Cotton textiles] - From prehistoric times, spinning performed by repetitive, precise movement of women's fingers - **[Mechanical spinning]**: major macro invention to replicate the motion of the human hand - Spinning Jenny: Hargraves (1764) - **Successive micro inventions in both spinning and weaving** transformed cotton textiles into the poster child of the Industrial Revolution. - Spinning frame: Arkwright (1775) - Spinning mule: Crompton (1779) - With the application of **steam power and higher quality iron**, the **cotton industry** became more and more **mechanized.** - Power loom: Cartwright (1784) - Self-acting mule: Roberts (1825) [What's special about these three?] - Steam: power, new source of energy - Carbon-coke: cheap iron - Cotton: mechanisation of production [Why technological wave did not exhaust as in the past?] - Inventions (steam engine, carbon coke/cheap iron, mechanised cotton textile) response to specific Britain economic environment, but think about the consequences for the rest of the world - Question: why technological wave did not exhaust as in the past? - [Mokyr]: **Scientific knowledge increased** enough to make this **process permanent** - [Allen]: disagree, scientific knowledge important only late XIX century (post 1900). It's the **transformative nature** of pre 1815 tech that **explain the process** - These early innovations were so powerful that they kept driving progress forward, even before scientific knowledge became a big factor later on - Allen: British IR raise of first **mechanised industry** and **machinery production** a. General mechanisation of industry, machinery b. Railroad c. Steam-powered iron ships - \(a) **raise productivity** (2^nd^ half XIX century, half labour productivity growth explained by steam; (b) & (c) **true globalisation** (lower transport costs) and allow global division of labour. **Lower prices better living standards**. - **In simple terms**: technological advances in machinery, railroads, and ships kept the wave of progress going, leading to cheaper goods and better living conditions around the world In short: - Mokyr says new knowledge kept things going - Allen says early inventions (like steam engines) were what really made the difference [Technological change IR] - **Engineering industry** of 1^st^ IR are all spin-off of coal industry (developed from coal industry), and depend on two things: - **Steam engine** (invented to pump water out of coal mines) - **Cheap iron** (required substitution of charcoal with carbon coke, i.e. cheap coal) - **Railways** - First used close to coal mines (first from mines to waterways, canals and rivers), cart pulled by horses - Rail tracks **required cheap iron** - Uneven terrain in coeval roads no demand for road vehicles powered by steam. So**, demand to invent a steam engine** to power vehicles comes from **coal mines** - **Cotton** - Price elasticity of textiles very large: **opportunity for Britain** which was not a producer before IR. Huge potential market size - **Mechanisation of cotton industry** then **inspire other industrial sectors** - Coal drove key technologies like steam engines and cheap iron, which helped expand railways and mechanize industries like cotton, leading to wider industrial growth [Uniqueness of the British Industrial Revolution] - **British inventions** were **responses** to **unique economic environment** - **Coal and steam power** were **central** to Britain\'s **success** - **Specificity** of British inventions and innovation (unlike French inventions and innovations) led to **mechanization** and **improved transport** (steam engine applied to ships and railways) - Only one route to **20th century industrialization** - through **northern Britain** (Allen's view) [Early followers and latecomers] - Latecomer advantage (Gerschenkron) - **The later the country or economy starts to industrialize, the faster it can improve its productivity by using the most advanced technology already developed by other countries** - The more backward (less developed) an economy is the later it will industrialise; - BUT, the more dramatic the **productivity gains from adopting the latest industrial technology** will be. - By 1870, **industrial revolution** spread through **Europe and North America**, bringing dramatic increase in productivity - Western **regions** with hard-**coal** deposits industrialised **first**: - Belgium, Rhineland, Northeast France, Czech lands, Appalachian - **Southern and Eastern Europe** began to adopt industrial technology in late 19^th^ century, with **imported coal** and more **efficient steam engines**. - Until 1914, industrialisation had spread to South America, Japan, and the Middles East. [Topic 3- The industrial Revolution ]  [The role of factor endowments] - **Allen:** Industrial Revolution was the product of **biased technical change** responding to **relative factor prices** in Britain -- **then micro inventions 'correct' the biases** and Industrialization spread to Europe and the USA - Britain developed new technologies to save money where labour or resources were expensive, and small improvements made these technologies better, which eventually spread to other parts of the world - Why were British factor prices unique? - **Commercial revolution**: British **success in global trade** raised real wages and the demand for manufactured goods **expensive labour** (pp. 18-20) - **Agricultural revolution**: **higher farm productivity** supported **urbanizatio**n and **proto-industrialisation** - **Energy revolution**: coal gave Britain the **cheapest energy** in the world - Technology choice - British manufacturers invented capital and energy intensive technologies. - **High literacy** (product of high wages and the commercial revolution) enhanced the supply and spread of innovation. [Proximate vs Ultimate sources of growth] 'Proximate' sources of growth: focus on immediate factors **Factor endowments** - Increase in resources - Population growth, territorial expansion - Capital formation (physical or human) - Increase in efficiency - Better use of existing technologies - Technical change: new tools and/or know-how 'Ultimate' sources of growth **Fundamentals** - Geography (natural resources, climate, topography) - Institutions (social, political, economic) - Culture (religion, collective attitudes, etc.) [Culture and economic growth] Do beliefs and attitudes matter to economic outcomes? - [Marx]: No, "It is not the consciousness of men that determines their being, but, on the contrary, their social being that determines their consciousness" - **Beliefs don't shape outcomes**, instead a **person's social conditions** shape their **belief**s - [Keynes]: Yes, **beliefs and ideas** if powerful enough can **affect economic outcomes** - [Economic historians]: It **depends on the time and place.** According to Mokyr, in XVIII century Europe, the answer is yes - More precisely, at the end of the Enlightenment there was a change in the way humans look at the nature around them and their place within it. This had repercussions in the following period(s) [An alternative view to Allen's:] - Question: whether enlightenment directly led to their success or if they are simply linked by coicidence - Culture and institutions shaped by the European enlightenment played a significant role in the development of countries [Enlightenment(s)] - Many Enlightenments - Common denominator: **belief in human progress** - The Enlightenment Mokyr cares of is "**Industrial Enlightenment"** - Belief in **material progress**: it is possible to achieve sustained material progress - British Enlightenment different from French Enlightenment - **FRENCH**: More **political and social**. Morality, government, justice etc. - **BRITISH**: Nuts and bolts (focus on practical, hands-on-problem-solving). Pragmatism: "how do we solve problems?" [Another Malthusian trap equilibrium] Mokyr: - It is possible to imagine a **counterfactual scenario** where Europeans adopted mechanisation of textile, steam power, and coke iron, but did not develop it further (no locomotives, mechanization of other industries, iron-steam ships) - Afterall, it was not the first wave of inventions (XV century: printing press, iron casting, three masted ships) that then stopped and petered out Technical vs scientific knowledge: remember how first industrial revolution technologies were the product of technical knowledge and trial and errors? Pre XIX centuries discoveries and technologies were **[inventions that worked]**, but whose inventors did not really understand why they worked. **[Lack of epistemic base]** "engineering without mechanics, iron-making without metallurgy, farming without soil science, mining without geology, water-power without hydraulics, dye-making without organic chemistry, and medical practice without microbiology and immunology" - In short: Europe could have stopped progressing after some early inventions, and many early discoveries were made without full scientific knowledge behind them [Scientific understanding. An easy example: yeast and baking] - Traditional Yeast (Pre-scientific understanding): - Used for centuries - Long rising times - Inconsistent results - Scientific Discovery: - Yeast are living organisms (fungi) - They consume sugar, produce CO2 - Understanding of yeast cell behavior - Innovation: Instant Yeast (1970s) - Based on new scientific knowledge - Faster rising time (50% quicker) - More reliable results - Impact: - Faster bread-making, new quick-bread recipes - Improved commercial baking - Mokyr\'s Concept: - **Shows how scientific understanding (epistemic base) led to practical improvements** - Accelerated innovation in a traditional field [How? with useful knowledge] - Useful knowledge: - Scientific knowledge would be **applicable to the problems of life** in practical ways - **Baconian programme** - Understand nature in order to **control** nature - Understand nature in order to **improve** nature - How can we increase the amount of new knowledge? - Creation of i**ncentives** to produce new useful knowledge - **Access** to existing knowledge must be easier and cheaper [Useful knowledge] Useful knowledge consisted of both **propositional knowledge** **(knowledge "what**") and **prescriptive knowledge** (**knowledge "how").** Roughly, it's a distinction between people who **knew things (savants**) and people who **made things (fabricants**) Propositional (theoretical) Prescriptive (technical) [Developing useful knowledge] - **Widespread idea** that diffusion of useful knowledge opens the door to prosperity by **solving technological problems** - Organisation of societies. From Royal Society to Birmingham Brotherly Society (Mechanics' Institute) - **Specialisation and division of labour** within technological and scientific progress, many societies dedicated to several different small steps - **Based on serendipity, luck**, inspired tinkering (Very different from today R&D) [Incentives:] - Problem with knowledge: - **Non-rivalrous (**can be used by many without being used up), hard to exclude, substantial **externalities** (causing positive side effects) - Industrial Enlightenment solve the 'problem' by: - During industrial enlightenment society encouraged people to create new inventions and share knowledge by offering rewards, these included: - **Patents** (ownership of an invention), prizes (financial support), medals, pensions, membership in Societies, **higher social status** - Scientists and inventors are r**ewarded** and seen as celebrities, motivating to contribute more to progress [Access and access costs] - **Industrialists** and progressive **farmers** needed access to **best-practice science** - Innovators and scientists need to know **from whom** they can **learn** - **Recombination** and hybridisation of **existing** **techs** - Avoid **duplications** and **dead-end** research - Research generating **propositional knowledge** (theoretical) often was **directed by** recognised **technological needs** -- so, need to know which ones - Codification of knowledge, organize knowledge clearly [One example of codification]  [Science as a map for inventions' trajectory] - how science helps guide inventions If you know ***why*** something works, it is **easi*er*** debug and **improve efficiency** - In other words: if we know the reason why a **macro-invention works**, **inventing micro-inventions** is easier If you **don't**, the **direction** in which the micro-inventions should go to achieve more efficiency and adaptability are **uncharted water (slower** and more costly) - Making progress slower and more expensive - Avoid what the laws of nature tells you will not work -\> means you risk wasting time on things that go against natural laws and won't work anyway [The impact of Enlightenment] How and in what ways did the Enlightenment affect technological innovation? Four different "areas" or "ways" - Agenda - Capabilities - Selection - Diffusion [Agenda] - **Knowledge** is useful - **Science** = problem solving in the real world - Science driven by **interest for practical problems** - **Euler (**swiss mathematician and physicist**)**: designing better ships hydraulics - Science = **observation** (Bacon: best way to understand Nature is by **observing** it) - Counting, cataloguing, classifying - Knowledge becomes **recorded knowledge** (cannot be lost) [Capabilities] - **Science and technology improve through better tools** - Better instruments. **New tools** new observations new experiments - Telescope - Barometer - Improved clockwork - Scientific method - Science becomes **mathematical** - E.g. functions and calculus - **Using more mathematical methods to explain natural world** [Selection:] - Different ways knowledge is selected - Old conservative approach vs new liberal "market" approach - Old ones were more strict, new ones more open - Expert selection: peer review - Market selection - No repression (Inquisition) like in past - Conventions and norms - Scientific debate - *Ex post* selection - Recorded knowledge can be debated after published - Reputation: signalling and reputation is fundamental in science - Politics in science - Still, academia and science dealt with political dynamics and issues - Example: Netwon, tenure as Royal Society president - Robert Hooke - Calculus dispute with Leibniz [Diffusion:] - Describes how knowledge is open, reusable ad non-competitive, with access and communication - You don't have to discover the wheel each time you need a ride - No need to reinvent things every time you need them, existing knowledge can be reused - Knowledge is open-source technology, can be used by anyone - Knowledge is non-rivalrous - Anyone consuming it does not stop others consuming it - Consumption of knowledge depends on **access costs** - Horizontal movement of useful knowledge, moves between different groups through communication - Communication between *savants* and *fabricants* within the two categories - What drove down the cost of access? [The role of institutions] - Inventing is a **risky business** - **Opportunity cost**: time investment - **Unpredictable returns**: investment risk - Knowledge is **non-excludable** - Once diffused, anyone can have it for free. Free riding problem - Solution: **intellectual** property rights - Patents - Copyright - -\> to protect inventions [The patent system] - **Initial obstacles** - Patents were opposed as a form of **monopoly rents.** - **Sanctity of private property** only codified/formalized in late 18^th^ century by - U.S. Constitution (effective from 1789) - French National Assembly (1790) - **British payment system** - In principle, left gains from invention determined by the market - Inventors allowed to profit from their investments, with market determining how much they could earn - Helped diffusion/spread of knowledge as patent holders were required to describe their inventions for the benefit of future application. - **State intervention** - **Parliamentary grants awarded** to inventors for **significant contributions** internalised the gains from positive externalities. [Modern economic growth] - Industrial Revolution: **1^st^ s**tage (1760s-1820s) - **Technological progress** limited to **few industries**; the **epistemic** base was insufficient for their broader application. - **Micro-inventions** were slow and often **unsuccessful**, leading to **modest productivity growth** in Britain before 1820. - Industrial Revolution: **2^nd^** stage (1830s-1870s) - **Full mechanisation** of textile **spinning and weaving**; improvement in iron and steel furnaces; precision engineering; gas lighting - High-pressure steam engines **revolutionised transportation**; telegraph and industrial printing did the same in **communication.** - **Scientific breakthroughs** enabled the harnessing of **electricit**y and **industrial** **chemistry** (fertilisers, chemical dye-stuffs, etc.) - **Fast and sustained productivity growth** [Industrial Revolution not British] - Industrialization in the **18^th^** century - It was a **slow evolution of technical progress**, not revolutionary - Modern factories established in **Britain first,** but by the 1780s-90s, they appeared in Belgium, France, Germany and the United States - Industrialization in the **19^th^** century - Industrialisation did **not** really get going **until the 1820s** - Factory industry and steam power only **dominant after 1830** - Mechanisation of transport negligible (insignificant) before mid 19^th^ century - **When industrial progress became revolutionary, it was a western, not just British phenomenon (spread across western world)** Mock test:  [Topic 4- Industrial economies] [Demographic Transition& Human Capital] Europe 1700: - **High Fertility** - **Modest** **educational** attainment - **Physical capital** \> human capital (education, intelligence, health-\> economic value of a worker's experience and skills) - **Low** rates of **economic growth** Europe 1870: - **Fertility** levels in **decline** - **Education** on the **rise** - **Human capital** important source of income [European Marriage Pattern] - Hungarian sociologist Hajnal (1965) described **two** different **demographic regimes.** - **Northwest Europe** 1. **Late** average age at **first marriage** for women (24--26) 2. **High fertility** within marriage 3. **Many** women, typically 10--25%, **never married** 4. **Low illegitimacy** rates, 3--4% of **births** out of wedlock - **South and East Europe** 1. **Early marriage** for most women (16-19) 2. **Very high fertility** within marriage 3. Very **few** women **never married** [The Hajnal line] - Conceptual boundary that marks demographic divide between two different patterns of marriage in europe - Hajnal (1965) proposed an East-West divergence - Eastern demographic regime prevailed in: - East and Southeast - Southern Italy - Southern Spain - Finland - Ireland - Western demographic regime was unique to northwestern Europe  [What is the mechanism? (in NW Europe)] - Restraining population growth (Alleviate Malthusian constraints) - By limiting population growth, it helped alleviate pressures on resources - Strengthening the position of women - Women gained more influence and independence - Enhancing human capital formation - Education and skill development - Both women and their offsprings - Encouraging women and girls\' access to labour and capital market [Demographic Transition] ***"Malthus published his description of the demographic system of pre-industrial Europe at exactly the time when it ceased to exist."*** (Alter and Clark) - Beginning in 1720s **mortality rates** began (slowly) to **decline**. - European **population growth** - 1700-1800: 56% - 1800-1900: more than 100% - BUT, **living standards** did **not decline** - Rising **agricultural productivity** - **Globalisation**: cheap grain **imports** from other continents - Globalisation: **mass emigration** to the New World    [Why did mortality decline?] - **Public health** - Inadequate medical knowledge: **germ theory** only became accepted in the second half of the 19^th^ century. - **Environmental theory of disease**: better sanitation and urban planning defeated the plague - **Vaccination**: smallpox practically disappears by 1800 - Better **nutrition** and **health care** in **19^th^** century - Dramatic **decline** in **infant** mortality - Better **nutrition** for **pregnant** women - Positive impact of **breastfeeding** understood These are only partial explanations, still a puzzle [Why did fertility decline?] - For a while, it **did not** - Europeans had to recognise the mortality decline and that it was something new and permanent - **Large epidemics** (cholera 1830s) and famines (mid-1840s) - **Low infant mortality** - As the chance of new-born to survive early **childhood increased**, women needed **less pregnancies**. - **Fertility control** - From the mid-19^th^ century, average age at first marriage increased again, this time across Europe. - Contraceptive methods started spreading [Economic motives] - **Rising incomes** and **consumerism** - ***Income effect***: Higher real income allowed **more children** to be **raised**. - ***Substitution effect***: But, higher incomes earned by women and new consumer goods meant a high opportunity cost of having children (time and energy they would spend on having children could instead be used to earn more income or enjoy other economic benefits) - The **education revolution** - Expansion of **public education** → child labour phased out - **Complex industrial technologies** in late 19^th^ century increased returns to **human capital (**industries became more complex, having education more important) - *Quantity-quality trade-off* (Becker, 1960, 1965): **Once the return to education is high enough, families substitute quality for quantity of children -\> focus on quality of education** **[In short]: once education became valuable, families chose to invest more in fewer children, focusing on their education and future**  - Today (1980-2000) no correlation between income and fertility at the family level (neither positive not negative) [Personal caveat: Gregory Clark] - Gregory Clark's research, which says: [Clark 2023, Proceedings of the National Academy of Sciences (PNAS):] - Social Mobility in England is not explained by education and economic relief interventions - Social Mobility in England is well explained by genetics - Social mobility: their ability to move up or down the social hierarchy) influenced by traits from their parents rather than education Allen on *A farewell to alms* (Clark 2007): "Indeed, his biological arguments for the superiority of Anglo--American culture make the differences between the West and the Rest unbridgeable and a source of perpetual conflict. Normally, it is distressing to find that the central theses of a book are contradicted by well-known evidence, but in this case it is a relief given the pessimistic prospect that "A Farewell to Alms" holds out for the future of the world".  - "paradox": higher income leads to lower fertility rates - In late 19^th^ century: blamed on wealthy women preferring luxury and leisure over having children - 1930s: focus shifted to economic reasons: wealthy families spent on consumer goods rather than raising large families - Educational changes also encouraged more investment in fewer children - 1960: Gary Becker suggested that children are like "consumer durables", long-term investments, and families weigh the costs of having them like they would with other expensive purchases [How to explain negative correlation?] - **Changing economic value of children**: As child labor laws were introduced and education became more important, children transitioned from being economic assets to **economic liabilities** (were not able to contribute to household income, but required more financial investment in education, health ,..) - **Quality-quantity trade-off**: Becker\'s theory suggests that as incomes rose, parents invested more in the \"**quality\" of fewer children** (e.g., education, healthcare) rather than having more children. - **Opportunity cost of childrearing**: As wages rose, especially for women, the opportunity cost of staying home to raise children increased. - **Cultural shifts**: Changes in **attitudes towards family size**, childhood, and women\'s roles in society influenced fertility decisions. - **Diffusion of birth control knowledge and acceptance**: Wealthier, **more educated** individuals were often early adopters of fertility control methods. - **Rising aspirations**: Wealthier families may have had higher aspirations for their children, leading to **greater investments per child** and thus **fewer children overall**. [Female Agency and the Quantity-Quality] [Trade-Off in Human Capital Formation] 1. Female agency drives development through: 1. **Lower fertility** rates 2. Higher **human** capital **investment** in **children** 2. **Quantity-Quality Trade-Off** Hypothesis: 3. Parents choose fewer children but invest more in each child\'s human capital 4. Driven by women\'s opportunity costs in childrearing 3. Factors Influencing the Trade-Off: 5. **Women\'s education** level 6. Women\'s **decision-making power** in households 7. **Opportunity costs** of women\'s time and productivity 4. Supporting Evidence: 8. Modern demographic research confirms these links 9. Mother\'s education more significant than father\'s in determining children\'s education (mother influences child more) 5. Broader Implications: 10. **Family systems** and gender inequality (limits women's role indecision making), if less right might have more children) impact fertility and human capital formation 11. Son preference in some cultures affects the quantity-quality trade-off 6. Conclusion: Female agency is a crucial driver of the **quantity-quality trade-off**, linking family structures, gender equality, fertility decisions, and human capital development at the micro level. Topic 4- Industrial Economies [Recap:] - Transition to modern economy growth - **18^th^ century Europe**: **slow economic growth**, low educational attainment, limited human capital, high fertility - **Europe post-1870**: **dynamic economic growth** and **technological** progress, rising educational attainment and living standards, declining fertility - The origins of modern economic growth - The **Industrial Revolution** - Rising **productivity** of **labour** → higher wages - Increased demand for and returns to **education** - The **demographic transition** - **Declining fertility** reduced pressure on living standards - Families prefer '**quality' over quantity** of children - **What impact did this transition have on living standards?** [European prosperity, 1700-1913] 1. **Economic growth** - Gradual acceleration - **Divergence** between **East** and **West** 2. **Real wages** - Real wages important because they provide insight into how economic growth translated into living standards of population 3. **Human development** - **Population** growth - **Standard** of living 4. I**nequalit**y - Impact of industrialization - Impact of globalization [Economic growth] 1. 1700-1820 - **Modest growth in Britain**: 0.3% (0.26%) per annum, 45% (36.6%) in total - **Stagnation** in the **rest** of **Europe** 2. 1820-1870 - Growth **acceleration** in **Britain** and **Western Europe**: 1-1.5% per annum - **Eastern/Southern** Europe: **modest** growth → falling behind 3. 1870-1913 - **Spread of industrialization** → strong convergence (starting to catch up) in Western Europe - Growth acceleration in the periphery but no convergence - Gap between **East and West** in 1913 larger than in 1820  [Conditions of the working class (?) ] - The tough conditions faced by the working class during the industrial revolution - Friedrich Engels - Lived in Manchester in 1840s - Read *Oliver Twist* by Dickens - Observed the poor conditions of workers - Proletarianization of labour - Expropriated working class, lost control over their work - Dependency on capitalist class - Urban poverty - High crime, poor sanitation - Insufficient, limited education - Rising female and child labour "*the invention of the steam-engine and of machinery for working cotton was to blame*" - **Steam engine and machinery reason for worsening conditions** - **Engels believed industrialization worsened life for the working class** [Urban (early) growth paradox] - Even though cities were growing and productivity was increasing, workers did not immediately benefit from higher wages - Productivity growth did not immediately increase wages - Concentration of income, concentration of the wealth for the rich - Decline of handcrafts - Increased use of cheap unskilled (incl. child) labour - 'Urban penalty' - Spatial concentration of poor, poor people crowded into unhealthy, dirty areas - Poor housing and sanitation - hurt their health - Factory system - Discipline: 'dark satanic mills' - Exploitative work conditions [Real wages in Britain] - Optimistic view (Lindert & Williamson) - **Real wages doubled** between **1780 and 1850** - **Pessimistic view** (Feinstein, Allen) - **Real wages fell** behind the growth of GDP per capita - **Labour** became relatively **cheaper**  [The role of demography] - How population growth and industrialization affected wages in Britain and Europe ***Post-Malthusian economy***: **wages stable** despite **population growth** - **Britain** - **Population growth** made labour more available, which **reduced wages.** - **Industrialization** helped keep wages stable by creating more jobs - **Before 1850, industrialization was labour-intensive** - **Continental Europe** - Before 1850, **industrialization** only affected **urban wages** in **Britain** - European wages stable despite population growth because: - **Population** grew **slower** than in Britain - Farm output grew faster than population **→** **cheaper food** - In Eastern Europe**, high mortality** **→ no population pressure** on wages [Quality of life] - Biological standards of living - Average heights - Life expectancy - Nutritional status - Educational attainment - Public schooling - Adult literacy - Human Development Index - Input (cost of labor) and Output (the goods and services produced) [Biological standards or living] - How human biology affects living standards - Economics of human biology - Average adult heights depend upon **early-life conditions**: - **Nutrition**, particularly protein - **Disease** environment, general **healthcare**, etc. - [Stunting]: limited capacity to recover stunted childhood growth (stunting= child's growth is slowed down due to not getting enough nutrition, making them shorter than normal for their age) - **Anthropometrics**: (measuring size and shape of human body to understand health and living standards) - **Human-body measurements** approximate living standards - Height data: easy to find, accounts for distribution - Archaeology: skeletal data - Conscription records - Prison records (poor) [Average heights] - How average heights were impacted by living conditions during industrialization - **Secular decline** until **1860s** - English conscripts became 2cm shorter - Decline continued even after real wages increased - **Adverse effects** of **industrialization** - Substitution of carbs for protein - Urban penalty in health - **Intensification of labour** → physically demanding work, inadequate rest - **Rising inequality** → the **poor** became **poorer** - Urban disamenities - Libertarian policies (focus on individual freedom and limited government) **neglected social welfare**, ignored need of poor people - Epidemics remained frequent in large cities [Life expectancy] - Regional patterns - Rapid **improvement** in continental **western** Europe - **Stagnation** in **Britain** and in **southern** Europe - **Infant mortality** - Dramatic **decline** in Scandinavia - **Increase** in Britain and northwestern Europe until 1850s - Real breakthrough from **1860s** **→** **demographic transition** (lower birth and death rates)  [Education and literacy] - **Regional divergence** - Growing **gap** between **northwest** Europe and **east and southern** Europe - **Growth** lead by **Germany, Holland and Scandinavia** (school reform) - Liberal policy - British governments did not support public schooling before the reform acts of Parliament extended the franchise to working men. - Supported individual freedom, so did not support public schools - elimination of guilds (organizations that controlled certain jobs and training) broke up social ties (weakened strong social connection people had through these groups) and rolled back apprenticeships [Public school reforms: state, not market] - **Prussia** - **1763**: First country in the world to introduce **tax-funded**, general compulsory **primary education** from age 5 to 13 (*Volksschule)* - **1788**: Preparatory school with national curriculum (*Gymnasium*) - **1812**: National high-school examination for university entry (*Abitur)* - **Austria** - **1774**: 'Theresia School Reform' introduced **public state school** with compulsory attendance from age 6 to 12 - **1869**: establishment of **public school boards** and a **national curriculum** - **Sweden** - **1842**: Introduction of 4-year primary school (*folkskola*) - **1882**: Comprehensive schooling extended until grade 6-8 - **1905:** Introduction of voluntary secondary school (*realskola*) [Human development index ]  [Human development ] - **Using a Composite index, which combines** - Longevity: life expectancy at birth - Knowledge: weighted average of adult literacy and enrolment rates - Income: GDP per capita PPP adjusted - **Historical development** - Strong convergence in western Europe (catching up with each other) - **East and South lagging behind** [Inequality] - Inequality during industrialization using Kuznets curve - Kuznets-curve - **Early phase of industrialization**: **wages in small** urban sector held back by stagnant incomes in larger rural sector **→** **inequality grows** - **Mature phase of industrialization**: urban growth increases urban wages and eventually pulls up rural wages too **→ inequality declines** - **Was Kuznets right**? - Yes, but for a different reason - **First stage**: growing employment **cheap unskilled (often child) labour** - **Second stage**: new public **schools** **increased human capital** and thus wages for everyone - Preconditions - **Inequality already very high** in western Europe **before 1800** - **High inequality could not be the consequence of industrialization** [Growth and inequality] - Inequality in **pre-industrial western Europe** - **Wealth** concentrated in **landowners** and merchants (trading people) - Fiscal-military state **→** **regressive (unfair) taxation** and income distribution - **First Industrial Revolution** - Further **concentration of capital** - Decline of artisanal production(traditional jobs) **→** **shrinking middle class** - **Mechanisation** **→** redistribution of income from labour to **capital (**machines replaced jobs) - **Second Industrial Revolution** - Increased supply and use of **skilled labour** - Government increased **social spending** to satisfy working-class voters [What have we learned?] - Topic of the class - **Living standards during the Industrial Revolution** - **Growth and inequality** - Main messages to take away - In the **early stage of industrialization**, **wages lagged behind** productivity because of **rapid population growth** - **Living standards increased rapidly from 1870** (but not much before) due to faster growth of productivity, **declining fertility**, and **higher educational** attainment. - **High inequality in pre-industrial Europe** increased further after the Industrial Revolution and **remained high until the 20^th^ century.** [Reading of the Book] [The British Industrial Revolution in Global Perspective] - Industrial Revolution began in Britain in 18th century, primarily due to its unique economic structure, with high wages and cheap energy - Key drivers of industrial growth urbanization and capital accumulation were the steam engine, cotton spinning machinery, and iron production with coal - steam engine, invented by James Watt, increased productivity and allowed expansion\ of factories and industries, especially in textiles - these innovations set stage for further technological development, marking start of the **First Industrial Revolution** - During this period, wealth increasingly concentrated in hands of industrialists, landowners, and merchants, - traditional forms of production declined - Artisans replaced by mechanized production-\> shrinking middle class - rise of large factories: shifted income from labor to capital-\>increasing inequality - Mechanization: key in redistributing income from workers to the capital owners who controlled production - Before industrialization, inequality already present in pre-industrial Western Europe, (wealth concentrated in land and trade) - regressive taxation system further widened gap between the rich and poor - First Industrial Revolution: worsened inequality (wages urban sectors low and rural incomes stagnant -\>growing inequality) - Industrial Revolution matured: urbanization increased and wages for urban workers rose and for rural wages -\> decline in inequality - **Kuznets curve** supports this, showing that inequality first rises during industrialization but falls as economic development progresses and benefits more parts of the population - Second Industrial Revolution (late 19th century), more skilled labor - Industries required workers with specialized knowledge: increased supply of skilled labor and better wages for those workers - Governments: increasing social spending, aiming to improve living conditions of lower-income population - This period: marked a significant increase in government involvement in social welfare, including the introduction of public education and healthcare systems - Historically, Britain\'s success in industrialization: traced back to its preconditions - end of serfdom (peasants forced to live and work on landowner's land), which allowed for greater mobility of labor (move around and find better jobs), and the establishment of a stable legal environment that encouraged capitalist enterprise (businesses could grow) were crucial factors - Britain\'s vast coal reserves and favorable wage structure played central role - Coal provided cheap energy source, making it profitable for businesses to invest in machines that substituted labor with capital and energy - Britain\'s global economic success during 16th and 17th centuries laid groundwork for Industrial Revolution - expansion of international trade, especially through its colonies, boosted Britain\'s wealth - This increase in trade led to growth of cities, which in turn promoted spread of literacy, education, and productivity - Urbanization, coupled with technological advancements, played significant role in\ the country\'s rise as the first industrial power **In summary, the Industrial Revolution was driven by a combination of technological innovation, economic structure, and historical circumstances.\ It led to both positive and negative outcomes, including urbanization, economic growth, rising inequality, and eventually social reforms**. The transformation of Western economies continued into the Second Industrial Revolution, where governments began to address social issues, inequality, and the demands of a growing, urbanized working class. [High-wage Economy of Pre-Industrial Revolution] [1. High-Wage Economy in Pre-Industrial Britain:\ ]- British economy in the 18th century had notably high wages compared to other countries in Europe and Asia\ - British workers, though poor by today\'s standards, were more prosperous (successful and wealthy) than their counterparts in most of continental Europe and Asia.\ - Classical economists debated \'subsistence\' (wages needed to survive) wages, but British wages were higher than what was needed [2. Wages and Demographics]:\ -British wages were high relative to consumer goods, capital, and energy, making mechanization profitable. -Classical economists like Adam Smith noted that wages in Britain, especially southern England, were higher than in Scotland or France. \- In Asia, wages were much lower due to cultural factors such as early marriages and high fertility rates. [3. Comparisons with Other Regions:\ ]- In the Low Countries (modern Netherlands and Belgium), wages and standards of living also relatively high\ - In contrast, workers in France and Italy faced poor nutrition, relying on cheaper grains and lacking access to meat or dairy products.\ - In Asia, diets mainly vegetarian with low consumption of meat and other animal products, contributing to lower living standards [4. Subsistence vs. Respectability Standards:\ ]- British workers could afford a \'respectability basket\' of goods, which included meat, bread, cheese, and beer, far surpassing the \'subsistence basket\' common in France, Italy, or Asia.\ - While British workers enjoyed diet rich in protein, workers in France, Italy, and India struggled with diets barely meeting nutritional needs. [5. Industrial Revolution and Wage Growth:\ ]- The Industrial Revolution in Britain partly driven by high wages, which incentivized invention of labor-saving technologies like coal-powered machinery\ - London saw highest wages in the 18th century, with skilled laborers enjoying substantial purchasing power [6. Impact on Living Standards:\ ]- Workers in Britain, particularly in London and northern cities, could afford a higher standard of living compared to much of Europe and Asia.\ - Height, as a measure of health and nutrition, was higher in Britain than in France or Italy, reflecting better diets and living conditions.\ - The Industrial Revolution led to geographic wage convergence in Britain, with northern cities catching up to London\'s high wages by the early 19th century [Agricultural Revolution:] [1. Agricultural Revolution Overview:\ ]- The **Agricultural Revolution** in England and the Netherlands