Lecture 2 - The pre-modern economy.pdf

Economic History The pre-modern economy Felix Ward Erasmus University Rotterdam 1/48 1 The Malthusian model 2 Pre-modern efflorescences 3 The Little Divergence 2/48 World economic history in one graph Clark, Gregory. 2007. A Farewell to Alms: A Brief Economic History of the World. Prince...

Economic History The pre-modern economy Felix Ward Erasmus University Rotterdam 1/48 1 The Malthusian model 2 Pre-modern efflorescences 3 The Little Divergence 2/48 World economic history in one graph Clark, Gregory. 2007. A Farewell to Alms: A Brief Economic History of the World. Princeton University Press. 3/48 The Malthusian model Malthus, Thomas R. 1798 [1904]. An Essay on the Principle of Population. London: J. Johnson. 4/48 Malthusian theory Malthus’ theory links demographic and economic variables Birth rates are increasing in p.c. incomes Good harvest ⇒ more children are born/survive Bad harvest ⇒ fewer children are born/survive Death rates are decreasing in p.c. incomes Good harvest ⇒ fewer people starve Bad harvest ⇒ more people starve 5/48 Graphically Birth rate Death rate Income per capita Population decline Population growth 6/48 Malthusian theory Consider the following pre-modern production function Y = AΛα L1−α Y: Output (Food) A: Total factor productivity (TFP) Λ: Land input L: Labor input 0 < α < 1: constant scale returns; decreasing marginal returns Land Λ is in fixed supply; normalize: Λ = 1 Divide by L to obtain per capita income y ≡ Y/L y = AL−α ⇒ As population L rises, per capita income y falls 7/48 Graphically Income per capita 8/48 Long-run equilibrium: Malthusian trap Birth rate Death rate #∗ #$ !∗ !$ Income per capita ⇒ Population growth pushes p.c. incomes to equilibrium level y∗ 9/48 Malthusian theory According to Malthus, only two mechanisms determine the equilibrium income level Positive checks increase the death rate e.g. famines, wars, epidemics Preventive checks decrease the birth rate e.g. birth control, cultural norms on marriage age and extra-marital child births 10/48 Change in birth rate Birth rate% Birth rate" Death rate !∗% !∗" $%∗ $"∗ Income per capita ⇒ Pre-industrial societies could increase p.c. incomes by limiting births 11/48 Change in death rate Birth rate Death rate' Death rate( +∗( +∗' )(∗ )'∗ Income per capita ⇒ In pre-industrial societies anything deadly could increase p.c. incomes 12/48 Change in technology Birth rate Death rate #∗% #∗$ !∗ Income per capita ⇒ Technological progress did not result in higher p.c. incomes 13/48 The Malthusian model The Malthusian model presents a simple account of how pre-industrial economies operated Recent research across many countries in the pre-modern period has become broadly supportive of the Malthusian theory1,2,3 1 Madsen, Jakob B., Peter E. Robertson, Longfeng Ye. 2019. Malthus was right: Explaining a millennium of stagnation. European Economic Review, 118. 2 Kelly, Morgan and Cormac Ó Gráda. 2012. The preventive check in medieval and preindustrial England. The Journal of Economic History, 72(40). 3 Ashraf, Quamrul and Oded Galor. 2011. Dynamics and stagnation in the Malthusian epoch American Economic Review, 101(5). 14/48 1 The Malthusian model 2 Pre-modern efflorescences 3 The Little Divergence 15/48 Pre-modern efflorescences History is dotted with Golden Ages during which per capita incomes rose above subsistence levels for prolonged periods of time Mediterranean Antiquity (C4th BC – C2nd CE) Islamic Golden Age, and Tang/Song China (C8th–C13th) Mughal India (C17th) Dutch Golden Age (C16th-C17th) How can we understand such economic efflorescences in the pre-modern world? 16/48 Economic growth in pre-modern economies Adam Smith highlights division of labor as source of growth1 Larger population allows for more specialization More specialization in turn provokes technological progress through learning-by-doing Relatedly, David Ricardo emphasizes international trade2 Only produce the good in which you have a comparative advantage Buy all other goods on the international market ⇒ international trade = international division of labor 1 2 Smith, Adam. 1776. The Wealth of Nations. London: W. Strahan and T. Cadell. Ricardo, David. 1817. The Principles of Political Economy and Taxation. John Murray. 17/48 Smithian growth: Specialization and trade ' &"#$ % &"#$ ( ' !"#$ % !"#$ Food ⇒ Division of labor allows for output growth absent technological progress 18/48 Smithian growth: Learning-by-doing !' !% !& !" * A → B: division of labor ) B → C: learning-by-doing (Golden Age) + C → D: decline in market size ( D → A: forgetting (Dark Age) ⇒ Output fluctuations in pre-modern economies #",% #&,' Division of labor 19/48 Smith and Malthus ⇒ Pre-modern income fluctutions above the subsistence level Persson, Karl Gunnar and Paul Sharp. 2015. An Economic History of Europe: Knowledge, Institutions and Growth, 600 to the Present. Cambridge University Press. 20/48 Example: Antique efflorescence in the Mediterranean Antiquity: Mediterranean experiences Smithian growth until C2nd Population level and economic activity increase Long-distance trade blossoms (Silk Roads) ⇒ Around 100 CE p.c. incomes on Italian peninsula may have been up to 5x subsistence (similar to Dutch Golden Age)1 Late Antiquity: Decline from C2nd onwards Climate change, epidemics, Barbarian Invasions ⇒ Declining population, market size, and division of labor Roman population: ∼60 million (C2nd) → ∼30 million (C6th) Early medieval period: Dark Ages between C6th to C9th Europe de-urbanizes, road network deteriorates, incomes decline 1 Temin, Peter. 2012. The Roman Market Economy. Princeton University Press. 21/48 Smithian growth: specialized engineering Roman aqueduct, in Segovia (Spain), still standing today Neal, Larry and Rondo Cameron. 2015. A concise economic history of the world: from Paleolithic times to the present. Oxford University Press. 22/48 Trade: Mediterranean shipwrecks ⇒ Increasing activity until C2nd Wilson, Andrew. 2011. Developments in Mediterranean shipping and maritime trade from the Hellenistic period to AD 1000. in: Maritime Archaeology and Ancient Trade in the Mediterranean. Edited by Damian Robinson and Andrew Wilson. 23/48 Pre-modern growth, conquests, and empires Golden Ages often associated with episodes of imperial expansion (Roman conquests, Muslim conquests, Song conquest of Ten Kingdoms,...) Why? Malthusian mechanism: more land & conflict deaths Smithian mechanism: lower transaction costs & market integration (secure transport, common currency, common measures,...) Ormrod, D. 2003. The rise of commercial empires: England and the Netherlands in the age of mercantilism 1650–1770. Cambridge University Press. p.341 24/48 Economic efflorescences in the pre-modern world Even in pre-modern times, when and where one was born could make a difference for one’s income and quality of life Increasing specialization and learning-by-doing could raise per capita incomes significantly, leading to so-called Golden Ages But the per capita income gains that were achieved during Golden Ages eventually disappeared under the pressure of various disrupting events and Malthusian forces 25/48 Example: End of the Islamic Golden Age Pamuk, Sevket, and Maya Shatzmiller. 2014. Plagues, wages, and economic change in the Islamic Middle East, 700–1500. The Journal of Economic History, 74(1). 26/48 1 The Malthusian model 2 Pre-modern efflorescences 3 The Little Divergence 27/48 The Black Death and the Little Divergence How can incomes diverge in a Malthusian world? Pamuk, Şevket. 2007. The Black Death and the origins of the ‘Great Divergence’ across Europe, 1300–1600. European Review of Economic History. 11, 289–317. 28/48 Did high European death rates cause the Little Divergence? Three horsemen of riches:1 1 Plague: Black Death killed 1/3 to 1/2 of European population ● labor supply ↓ ⇒ wages ↑ 2 ⇒ (Engel’s law) urban manufactures demand food demand ↑ ⇒ urbanization Urbanization: urban mortality > rural mortality ⇒ overall mortality ↑ ● cities specialize ⇒ trade ↑ ⇒ disease spread ↑ ⇒ mortality ↑ ● trade ↑ ⇒ tariff revenues ↑ ⇒ military expenditure ↑ 3 War: disease spread & battle deaths ⇒ mortality ↑ 1 Voigtländer, Nico and Hans-Joachim Voth. 2013. The three horsemen of riches: plague, war, and urbanization in early modern Europe. Review of Economic Studies. 80(2). 29/48 The link between plague, urbanization, and war 30/48 The link between urbanization and tax revenues ⇒ Urbanization promotes tax revenues, which are mainly spent on wars 31/48 Why only Europe and not other parts of Eurasia and Africa? 1 Urban disease environment: ● Europe: urban infrastructure deficiencies urbanization ⇒ mortality ↑ ● Asia: cities cleaner (e.g. separated lavatory areas) 2 Political fragmentation: ● Europe: politically fragmented wars in 9 out of 10 years between 1500 and 1800 ⇒ mortality ↑ ● Eastern Empires: politically more integrated fewer wars within & fewer threats from outside ⇒ In the context of Europe’s urban infrastructure and political fragmentation the Black Death develops a persistent death rate effect 32/48 Did low European birth rates contribute to the Little Divergence? European marriage pattern (EMP):1 After the Black Death, men and women in Northwest Europe married relatively late (>24 years) and often not at all (>10-15%) ⇒ 25% to 40% fewer births than biologically possible Why? High post-Black Death wages boosted labor market participation2 Many men and women worked from around 15 to 25 as servants (apprentices, maids) before marrying 1 Hajnal, John. 1965. European marriage patterns in perspective. in: Population in History: Essays in Historical Demography. edited by: David V. Glass and David E. C. Eversley, 101–43. London: Arnold. 2 Voigtländer, Nico and Hans-Joachim Voth. 2013. How the West “ invented” fertility restriction. American Economic Review. 103(6). 33/48 Why Northwest European birth rates fell more than elsewhere 1 Consensuality: 2 Labor market access: 3 Inheritance: Northwestern Europe: Marriages not arranged by parents Relatively free labor market Upon parents’ death, not upon marriage China/India: Eastern Europe: Southern Europe: Arranged marriages at young age; women don’t exploit labor market opportunities Landlords strengthen serfdom to fight labor shortage Women inherit upon marriage as dowry; dowry rises with age of woman; incentive to marry early ⇒ In European institutional and cultural context the Black Death develops a more persistent birth rate effect de Moor, T. and J. L. van Zanden. 2010. Girl power: the European marriage pattern... The Economic History Review, 63(1); for recent critiques see: Dennison, T. and Ogilvie, S. 2014. Does the European Marriage Pattern... The Journal of Economic History, 74(3); Palma et al. 2021. Historical gender discrimination does not explain... , CEPR DP15922. 34/48 Summary: Black Death and the Little Divergence In Northwest Europe, institutions and cultural norms, as well as urban infrastructure and political fragmentation allow the Black Death to develop a particularly persistent effect 1 Horsemen effect: urbanization ⇒ mortality ↑ 2 EMP effect: labor market opportunities ⇒ fertility ↓ ⇒ Higher incomes in Northwest Europe after the Black Death 35/48 A final pre-modern efflorescence adds to the Little Divergence 1 Black Death 2 What happens here? ⇒ Dutch and English incomes rise again in the 16th and 17th centuries Broadberry, Stephen. 2021. Accounting for the Great Divergence: Recent findings from historical national accounting. VoxEU column. 36/48 Commercial Revolution and the final pre-modern efflorescence In the early modern period, intra-European trade intensified Proliferation of institutional innovations Financial institutions (stock exchanges, insurance) Financial instruments (bill of exchange) Business law (joint stock companies) ⇒ Decreasing transaction costs allowing for European market integration (despite political fragmentation) ⇒ Smithian growth North, D. C., and R. P. Thomas. 1970. An economic theory of the growth of the Western world. The Economic History Review, 23(1). 37/48 Commercial Revolution and European market integration Trade bill connections ≈1400: Trade bill connections ≈1600: Denzel, M. A. and O. Schwarzer. 1995. Währungen der Welt IX: Europäische Wechselkurse von 1383 bis 1620. Franz Steiner Verlag Stuttgart. 38/48 Atlantic economy and the final pre-modern efflorescence Colombian voyage to America (1492) and circumnavigation of Africa (1497) increased the Atlantic’s relevance as an economic waterway Age of European naval empires begins New trade pattern emerges: Manufactures from Europe: e.g. textiles, weapons Slave labor from Africa Primary products from America: e.g. silver, sugar, cotton Luxury goods from Asia: spices, tea, textiles, silk, porcelain A case of imperial expansion causing Smithian growth and Malthusian growth? 39/48 Was Europe’s early modern growth grounded in imperialism? 1970s: Yes 1970s: Not much 1980s: No Dependency theory1 : Mediterranean view2 : Cliometricians3 : Powerful West expropriated resources and labor from rest until C18th England primarily exported to Mediterranean Atlantic trade too small to matter (<4% of European GDP) ⇒ Intra-European trade boom O’Brien (1982): investment that was financed out of Atlantic trade profits below 1% of GDP Williams (1944): slave trade profits eventually financed Industrial Revolution Atlantic trade boom only in C18th 1 e.g. Frank, Andre Gunder. 1979. Dependent accumulation and underdevelopment. Macmillan Williams, Eric. 1944. Capitalism and slavery. Chapel Hill: University of North Carolina 2 e.g. Rapp, R. T. 1975. The unmaking of the Mediterranean... . Journal of Economic History, 35(3). 3 e.g. O’Brien, Patrick. 1982. European economic development:... . Economic History Review, 35. 40/48 Was Europe’s early modern growth grounded in imperialism? 2000s: Cumulatively 2000s: Indirectly 2020s: Indirectly Mercantilist view1 : Institutionalist view2 : Money view3 : Export-led growth: Europe cumulated learning-by-doing in manufacturing Effects of Atlantic trade profits were amplified by ensuing institutional changes American precious metals stimulated intra-European trade and investment Allen (2003): 50% of urbanization due to trade (but mostly intra-European) Rich Atlantic merchants became politically influential ⇒ commerce-friendly institutions Contributed to European Commercial Revolution ⇒ commerce-friendly institutions 1 e.g. O’Brien P.. 2000. Mercantilism and imperialism... . De Economist, 148(4). Allen, R. C. 2003. Progress and poverty... . Economic History Review, 55(3). e.g. Acemoglu et al. 2005. The rise of Europe:... . The American Economic Review, 95(3). 3 e.g. North, D. C., and R. P. Thomas. 1970. An economic... . The Economic History Review, 23(1). p.14. Chen et al. 2022. Goldilocks:... . TI Discussion Paper 2022-063/VI. 2 41/48 Colonization and Europe’s early modern efflorescence Colonization = more land (esp. America) ⇒ Malthusian growth? Malthusian effect in Europe insignificant Amount of commodities supplied by America small until C18th1 European emigration to America only significant in C19th ⇒ Colonization didn’t significantly increase Europe’s land/capita America thinly populated (after native populations had succumbed to Old World pathogens) High incomes in New World (for free labor) Demand for slave labor and plantation system 1 Pomeranz, K. (2000). The Great Divergence. Princeton University Press. 42/48 Did slavery contribute to early modern Europe’s efflorescence? Descriptive data: Causal estimate: What share of GDP was slavery related? How much lower would GNI have been without slavery? Narrow view: Broader view: Direct slave trade profits negligible: Slave holding profits (incl. plantation profits) non-negligible: ≈0.5% of U.K. GDP1 ≈0.005% of Dutch GDP2 ≈5% of U.K. GDP3 ≈5.2% of Dutch GDP4 U.K. national income 3.5% higher in 1830s due to slave holding5 Larger estimates for regional income in slave holding hubs (London, Bristol, Liverpool) 1 Engerman, S. L. (1972). The slave trade... The Business History Review, 430–443. Eltis, D. et al. (2016). More than profits?... Slavery & Abolition, 37(4). 3 Solow, B. L. (1993). Slavery and the rise of the Atlantic system, vol. 1, Cambridge University Press. 4 Brandon, P., & Bosma, U. (2021). Slavery and the Dutch economy... . Slavery & Abolition, 42(1). 5 Voth et al. (2022). Slavery and the British Industrial Revolution. NBER Working Paper 30451. 2 43/48 Precious metals and Europe’s early modern efflorescence Gold and silver most valuable import from America until C18th: > 80% of value of American imports of Spain until late C18th ≈ 1% of West European GDP for three centuries Sustained monetary injections facilitate Europe’s market integration and Commercial Revolution in the context of financial frictions and nominal rigidities1,2,3 Chen et al. (2022): caused a 41% GDP increase in Europe Stimulated new trade connections and investment 1 Keynes, J. M. 1936. The general theory, ch. 23: Notes on mercantilism. Harcourt, Brace & Co. North, D. C., and R. P. Thomas. 1970. An economic... . The Economic History Review, 23(1). p.14. 3 Chen et al. 2022. Goldilocks... . TI Discussion Paper 2022-063/VI. 2 44/48 Money and incomes in early modern England ⇒ Money and income per capita begin to rise together Palma, Nuno. 2018. Money and modernization in early modern England. Financial History Review, 25(3). 45/48 American precious metals and the Little Divergence Why did second-stage receivers (Netherlands and England) outperform first-stage receivers (Portugal and Spain)? Dutch disease: inflation caused real exchange rate appreciation ⇒ Iberian tradables sector became uncompetitive1 Institutional resource curse: Spanish and Portuguese governments could rely on American precious metals for their revenues ⇒ Iberian governments became unresponsive to demands from local taxpayers; missing out on Commercial Revolution2 1 Drelichman, Mauricio. 2005b. The curse of Moctezuma: American silver and the Dutch disease. Explorations in Economic History, 42(3) 2 Henriques, Antonio, and Nuno Palma. 2020. Comparative European institutions and the little divergence, 1385-1800. CEPR Discussion Paper No. DP14124 (v.3). 46/48 Institutional resource curse Figure: Years with parliamentary meetings, 1385–1800 Institutional gap between Northwest Europe and South Europe Henriques, Antonio, and Nuno Palma. 2020. Comparative European institutions and the little divergence, 1385-1800. CEPR Discussion Paper No. DP14124 (v.3). 47/48 Summary 99.9% of humanity’s economic history adheres to Malthusian model Only temporary efflorescences due to Smithian growth or Malthusian growth After the Black Death, a confluence of factors gives rise to the Little Divergence during which Northwest European incomes begin to rise The three horsemen and the EMP Commercial Revolution and Smithian growth Atlantic economy: American precious metals and slavery High wages in Northwest Europe set the stage for the subsequent Industrial Revolution by inducing labor-saving innovations 48/48