Economic History Introduction PDF

Economic History Introduction Felix Ward Erasmus University Rotterdam 1/54 What this course is about? Questions we will explore: How has the world economy transitioned from pre-modern economic stagnation to modern economic growth? What can explain the simultaneous Great Divergence in per capita...

Economic History Introduction Felix Ward Erasmus University Rotterdam 1/54 What this course is about? Questions we will explore: How has the world economy transitioned from pre-modern economic stagnation to modern economic growth? What can explain the simultaneous Great Divergence in per capita incomes across the world? What caused the Great Depression? What were its economic and political consequences? What role did different economic policies play in ending it? Course goals: 1 Get a big picture view of the history of the world economy 2 Familiarize yourself with the major theories about the transition to modern economic growth and the Great Depression 2/54 Schedule Week 1 2 3 4 5 6 7 Session 1 2 3 4 5 6 7 8 9 Topic Introduction The pre-modern economy The transition to modern economic growth The Great Divergence Prelude to the Great Depression The Great Depression The spread of the Great Depression Recovery from the Great Depression Q&A 3/54 Course information Course materials: Lecture slides Book chapters and papers provided on Canvas Evaluation: Final exam (80%): several open and MC questions; two hours Case study (20%): in groups of four; one A4 page 4/54 Case study Case study (in groups of four): Each group is required to hand in one A4 historical case study by Friday, 5:00 PM of week 7 Group formation: self-select into groups on Canvas (People-Groups) until Friday 5:00 PM of the first week; random allocation after that You can chose your own course-related topic (time period and region), such as – – – – The Great Depression in the Netherlands The transition to modern economic growth in East Asia Pre-modern growth in the Mediterranean during antiquity ... Case study examples available on Canvas 5/54 How to access the literature University library: https://www.eur.nl/en/campus/university-library Google scholar: https://scholar.google.nl/ Journal rankings: https://www.tinbergen.nl/media/research/ti_jrn_list_ update-november-2016.pdf https://ideas.repec.org/top/top.journals.simple.html http://www.eigenfactor.org/projects/journalRank/ journalsearch.php 6/54 1 Course outline 2 Why economic history? Natural experiments Rare events and long cycles Path dependency 7/54 Why economic history? 1 Economic data typically is non-experimental, but history sometimes offers natural experiments e.g. What are the causal effects of money supply changes? → Maritime disasters in the Spanish Empire 2 Economic data can be scarce, but history offers more observations for rare events e.g. What are the economic effects of big financial crises, pandemics, wars... ? → Long-run datasets 3 Economic data can be path-dependent ⇒ To understand the present, history has to be understood e.g. Why are some countries rich and others not? → The Great Divergence 8/54 1 Course outline 2 Why economic history? Natural experiments Rare events and long cycles Path dependency 9/54 Lack of controlled experiments in economics Observation and experiment for gathering material, induction and deduction for elaborating it: these are our only good intellectual tools. Francis Bacon In many sciences controlled experiments are an important tool for gaining knowledge about causal relationships In the economist’s toolkit the experiment is often missing... ...but a look at history can often help 10/54 Example: What are the effects of money supply changes? Observation: expansionary monetary policy is correlated with low GDP growth Can we conclude that expansionary monetary policy causes low GDP growth? No! Identification problem: Monetary policy reacts to past, present, and expected future economic conditions 11/54 History provides a useful natural experiment Soon after the Columbian 1492 voyage to America the Spanish started to exploit the rich silver deposits in the New World This initiated a 300 year period during which silver coins were shipped from the New World to Spain ⇒ Spain’s money supply is subject to the vagaries of the sea More than 30 maritime disasters with substantial silver money losses occurred ⇒ Repeated natural experiment allows for measurement of the effects of money supply changes 12/54 Battle of Cape Santa Maria, 5 October 1804: 15 tonnes of silver money lost. Francis Sartorius (1807) 13/54 Around 15 tonnes of treasure salvaged in 2007 14/54 Money shocks in the Spanish Empire 15 10 5 0 1531 1550 1600 1650 Year Money loss (% of stock) 1700 1750 1810 Loss after salvage Brzezinski, Adam, Yao Chen, Nuno Palma, and Felix Ward. 2022. Vagaries of the sea: evidence on the real effects of money from maritime disasters in the Spanish Empire. Review of Economics & Statistics, forthcoming. 15/54 Effect of a -1% money inflow shock on the Spanish economy Consumer prices Real output 0.0 1.0 Percent 2.0 Percent 1.0 -1.0 0.0 -1.0 -2.0 -2.0 -3.0 0 1 2 Year 3 4 5 0 1 2 Year 3 4 5 16/54 Effects of maritime disaster losses in the Spanish Empire Prices adjusted slowly (price rigidity) Real output contracted by around 1% for every 1% reduction in money arrivals (short-run money non-neutrality) Caveat regarding historical natural experiments: do these results apply to other countries and other time periods? (external validity) 17/54 1 Course outline 2 Why economic history? Natural experiments Rare events and long cycles Path dependency 18/54 Rare events Many important phenomena occur only rarely: Pandemics Wars Financial crises ... For the empirical analysis of the economic consequences of such rare events a look at history is unavoidable 19/54 Pandemics and wars 20/54 What are the economic consequences of pandemics and wars? Jordà, Singh, and Taylor (2022) analyze the aftermath of pandemics and wars going back to medieval times Long-run dataset: 19 large pandemics, > 200 wars Economic indicators: interest rates and wages Countries: France, Germany, Italy, the Netherlands, Spain, U.K. Jordà, Òscar, Sanjay R. Sing, and Alan M. Taylor. 2022. Longer-run economic consequences of pandemics. Review of Economics & Statistics, 104(1). 21/54 Predictions of a standard neoclassical growth model Cobb-Douglas production function: Y = AKβ L1−β , β ∈ (0, 1) Decreasing marginal products (MP) & remuneration according to MP w = ∂Y/∂L > 0, ∂ 2 Y/∂L2 < 0 r = ∂Y/∂K > 0, ∂ 2 Y/∂K2 < 0 Pandemics: L ↓ and K constant Labor scarcity ⇒ wage increase, w ↑ Abundant capital/worker ⇒ low return on capital, r ↓ Wars: L ↓ and K ↓ Net effect depends on size of labor force decline vs. capital destruction, K/L ↑↓? 22/54 What are the longer-run consequences of pandemics and wars? Figure: economic effects of pandemics and wars in Europe 23/54 The economic consequences of pandemics and wars Findings consistent with standard neoclassical growth model Pandemics lead to labor scarcity and abundant capital ( KL ↑) ⇒ wages increase, return on capital decreases Wars have led to capital scarcity and a lack of capital per worker ( KL ↓) ⇒ returns to capital increase External validity for Covid-19 and Russo-Ukrainian war? 24/54 How long do post-war economic recoveries take? Lack of systematic large sample studies But: several post-WW2 recovery studies Key take-aways: Even after severe destruction of the proximate causes of economic growth (i.e. capital and labor inputs), GDP per capita returns to pre-war trend within less than two decades If war results in a deterioration of the fundamental causes of growth (e.g. technology access, institutions) long-run growth can suffer 25/54 42 WW2 destruction Table 1-11. War losses attributable to physical destruction (percent of assets) Human assets Allied powers USA UK USSR Axis powers Germany Italy Japan Physical assets national wealth industry fixed assets 1 2 3 1% 1% 18-19% 0% 5% 25% .. .. .. 9% 1% 6% .. .. 25% 17% 10% 34% ! Sources Human assets. USA, Germany: total war deaths divided by prewar Harrison, Mark. 1998. in The economics of World War II. Cambridge University Press. population from Urlanis (1971), 295. UK: chapter 2 (p. 000). USSR: table 7-13. 26/54 capita income level, the faster it catches-up Relatively fast post-WW2 economic recoveries ! Source: C.Jones, Economic Growth (2002), p64 GDP per capita returned to pre-war trends within two decades Jones, Charles I. 2002. Economic Growth. W. W. Norton. 27/54 Recovery of destroyed cities 1282 THE AMERICAN ECONOMIC REVIEW DECEMBER 2002 ! FIGURE 2. POPULATION GROWTH Long-run city growth remarkably resilient to destruction wartime should asymptotically ap-Bones,gasaki. those cities, thethe number of deaths was Davis,growth Donald R., and David E. Weinstein. 2002. bombs,Inand break points: geography of proacheconomic unity asactivity. the endAmerican period Economic increases.Review In the92(5). such that if these cities recovered their populalast column of Table 3 we repeat the regression, tions, it could not be because residents who 28/54 Fundamental vs. proximate causes of growth (Lecture 4) 140000 120000 100000 80000 60000 40000 20000 0 1900 1910 1925 1938 East-Germany 1950 1960 1970 1980 1990 West-Germany GDP per capita (in thousands of 1990 international USD) Regions subject to more fundamental institutional and political changes can experience long-run effects Data source: Rosés, Joan R. and Nikolaus Wolf. 2021. Regional growth and inequality in the long-run: Europe, 1900-2015. Oxford Review of Economic Policy, 37(1) 29/54 Financial crises 30/54 What are the economic costs of systemic financial crises? Schularick and Taylor (2012) compile a dataset of systemic financial crises for 17 advanced economies from 1870 until today Systemic financial crisis definition: “banking sector experiences bank runs, sharp increases in default rates accompanied by large losses of capital that result in public intervention, bankruptcy, or forced merger of financial institutions” What are the economic costs of systemic financial crises? Schularick, Moritz and Alan M. Taylor. 2012. Credit booms gone bust: monetary policy, leverage cycles, and financial crises, 1870-2008. American Economic Review, 102(2). 31/54 Relatively few financial crisis observations post-WW2 Ward, Felix. 2017. Spotting the danger zone: forecasting financial crises with classification tree ensembles and many predictors. Journal of Applied Econometrics, 32(2). Online Appendix. 32/54 Percent Income losses in financial crises versus normal recessions Years Jordà, Òscar, Moritz Schularick, Alan M. Taylor. 2013. When credit bites back. Journal of Money, Credit and Banking, 45(2). 33/54 The economic consequences of financial crises Normal recession: 1-2% fall in real GDP per capita Temporary: 1-2 years Financial crisis recession: ≥5% decline in real GDP per capita Very persistent 34/54 Long cycles 35/54 Long cycles Many important economic variables exhibit long cycles Salient long-cycles: International capital and goods market integration Inequality Debt-to-GDP ratios ⇒ Distant past can be more relevant for the present than recent past History does not repeat itself, but it rhymes Mark Twain 36/54 Global capital market integration Reinhart, Carmen M. and Kenneth S. Rogoff. 2008. This time is different: a panoramic view of eight centuries of financial crises. NBER Working Paper 13882. 37/54 Global goods market integration (Exports+Imports)/GDP .6 .4 .2 0 1870 1900 1950 Year 2000 2020 Figure: Average trade ratio based on 17 developed economies Data source: Macrohistory Database, http://www.macrohistory.net/data/ 38/54 Debt-to-GDP ratio Schularick, Moritz and Alan M. Taylor. 2012. Credit booms gone bust: monetary policy, leverage cycles, and financial crises, 1870–2008. American Economic Review, 102(2). 39/54 Income inequality IGURE 9.7. T he top decile income share in Europe and the United States, 1900–2010 n the 1950s–1970s, the top decile income share was about 30–35 percent of total income in Europe as in the United States Sources and series: see piketty.pse.ens.fr/capital21c. Thomas. 2014. in the University Press. What Piketty, we find is that onCapital the eve of Twenty-First World WarCentury. I, theHarvard top decile’s share was 45–50 percent of national income in all the European countries, compared with a little more than 40 percent in th United States. By the end of World War II, the United States had become slightly more inegalitarian 40/54 Example: Great Recession–Great Depression parallels Kumhof et al. (2015) highlight three parallels between the Great Recession and the Great Depression (Lectures 5-8) 1 Preceded by rising top income shares 2 Preceded by rising debt-to-GDP ratios 3 Accompanied by financial crises They propose a model that links all three phenomena: Rich households have lower marginal propensity to consume Higher top income share ⇒ more savings ⇒ lower interest rate More borrowing ⇒ higher debt-to-GDP ratios ⇒ more crisis risk Kumhof, Michael, Romain Rancière, and Pablo Winant. 2015. Inequality, Leverage, and Crises. The American Economic Review, 105(3). 41/54 U.S. income inequality and household debt 42/54 U.S. economy was crisis prone in 1929 and 2008 43/54 1 Course outline 2 Why economic history? Natural experiments Rare events and long cycles Path dependency 44/54 Path dependency In path-dependent systems past events and initial conditions can have persistent effects – QWERTY-keyboard – Railway track gauge Example: Why did the Industrial Revolution start in C18th England? 45/54 Why did the Industrial Revolution start in C18th England? According to the induced innovation thesis the British Industrial Revolution (Lecture 3) was a path dependent process that originated in mid C18th England’s unique factor price combination: Initial condition: unique combination of factor prices 1 Wages were relatively high 2 Energy (coal) was cheap 3 Capital was cheap / interest rates were low ⇒ Entrepreneurs have incentive to develop and continuously improve energy-intensive and labor-substituting machines (e.g. steam engine, Spinning Jenny) Persistent effect: Onset of modern economic growth 46/54 Wages in England were comparatively high 360 R. C. ALLEN 20 18 15 Grams of silver per day 14 London 12 Amsterdam Vienna 10 Florence Delhi 8 Beijing 6 4 2 18 25 17 75 17 25 16 75 15 75 16 25 15 25 14 75 14 25 13 75 0 Figure 1. Labourers’ wages around the world Source: See text. ! 6 5 47/54 Energy in England was comparatively cheap 365 INDUSTRIAL REVOLUTION Figure 5. Source: See text. Be iji ng N ew ca stl e ra sb ou rg St Pa ris Lo nd on A m ste rd am 10 9 8 7 6 5 4 3 2 1 0 Price of energy, early 1700s ! share of the workforce in agriculture dropped from about 75 per cent to 35 per cent. Only the Low Countries, whose economies were also oriented to internaAllen, Robert C. 2011.experienced Why the Industrial Revolution was British:structural Commerce, induced invention, and In the tional trade, similarly sweeping transformations. the scientific revolution. Economic History Review, 64(2). eighteenth century, the Dutch and the English had much more trade per capita than other countries in Europe. Econometric analysis shows that the greater volume of trade explains why their wages were maintained (or increased) even as their populations grew.15 48/54 Capital in England was comparatively cheap Allen, Robert C. 2010. The British Industrial Revolution in Global Perspective. Proceedings of the British Academy, 167, 199-224. 49/54 Factor prices and technology choice in textile manufacturing Spinning Jennies: by 1790 in England around 20,000; in France only 900. Why the difference? Spinning Jennies not cost-effective in France: Given lower French wages, cost-minimization in France implied employing more workers with old-fashioned spinning wheels rather than investing in novel Spinning Jennies 50/54 Factor prices and technology choice in textile manufacturing Spinningwheel: Spinning Jenny: 51/54 What explains the initial condition? (Lecture 2) Why was coal cheap? Geographical luck Why were wages high? C14th Plague Commercial Revolution and Atlantic trade Why didn’t the Plague lead to an equal wage increase everywhere? Why didn’t Atlantic trade equally benefit Portugal and Spain? ... Path-dependent system: no steady state from where to start and to which to return 52/54 Path dependency and historical events In a path-dependent world disruptive events can push the world economy onto a new path Technological changes: e.g. Improvements in ship design & discovery of sea route around Africa (1497) Geopolitics: e.g. WW1 and the Russian Revolution Climate change: e.g. Late Antique Little Ice Age Epidemics: e.g. 14th century Plague 53/54 Summary Many reasons to study economic history: 1 Find natural experiments to identify causal effects 2 Better understand rare event characteristics 3 Understanding of historical path-dependency complements economic equilibrium analysis ... Example is the school of mankind, and they will learn at no other Edmund Burke 54/54