INDUSTRIAL REVOLUTION

Lecture 7: Industrial Revolution

*Micro inventions
I. Steam power:
-
Galileo: atmosphere had weight
-
Toricelli: invented the barometer
1712: Newcomen: 'atmospheric' steam engine  pump water from mines  coal mining in North England
-
1765: James Watt: developed separated condenser  high-pressure steam power transferable  widely
-
applied in factories
=> macro invention: Newcomen's steam engine (1712)
=> micro invention: Watt's separate condenser (1765)
 
II. Coke and iron
-
Coke: residual of hard coal; used to decompose iron
-
1709: Darby: first blast furnace using coke
-
1750: 5% of British pig iron was produced with coke; charcoal: dominant source of fuel
-
1784: Henry Cort: puddling & rolling
o Puddling: converting pig iron  wrought iron by heat & frequent stirring in a furnace w oxidizing
substance
o Rolling: semi-molten iron run through grooved rollers  squeeze more impurities and give shapes
=> bc of these micro inventions  able mass production of iron
 
III. Cotton textiles
- Prehistoric times: spinning had been performed: repetitive precise movement of women's fingers
- Mechanical spinning:  Spinning Jenny: Hargraves (1764)
o Major macro invention
o Replicate the motion of human hand
- Successive micro inventions: spinning & weaving  cotton textiles  poster child of the IR
o Spinning frame: Arkwright (1775)
o Spinning mule: Crompton (1779)
- Steam power + higher quality iron = cotton industry  more mechanized
o Power loom: Cartwright (1784)
o Self-acting mule: Roberts (1825)
 
IV. Micro inventions
- Factor neutrals: increase productivity of all factors
- Reverse factor bias: when improvements: input saved
- Local learning
o Innovation  1 industry: investor - users of the tech that they aim at perfecting
o Any reduction in cost  improve profit  no factor bias
- Collective invention: info sharing  micro-inventions cheap  reduce need for financing + patents

V. Neutral technical change

-
If it improves the productivity of all factors proportionately
-
Macro invention:
1. Biased toward capital; save on labor and increase labor productivity
2. Not adopted in countries w cheap wage
3. 'Tipping point': micro invention: new tech cost efficient in low-wage economies
4. Low wage economies: adopt latest industrial tech  rapid catch-up productivity
=> micro invention: enhanced  destroyed the competitive advantage of 1st industrial nation
 
VI. Early followers and latecomers
 - Latecomer advantage [Gerschenkron]
o The more backward the economy  the later will industrialize BUT more dramatic gains from the latest
tech
- 1870: IR spread through Europe and North America  increase in productivity
o Western region w hard-coal deposits industrialized first (Belgium, Rhineland, Northeast France, Czech
lands, Appalachian)
o Southern & Eastern Europe began to adopt industrial technology in late 19th century w imported coal &
more eff steam engines
- 1914: IR spread to South America, Japan & Middle East
 
VII. Main industries
- Coal & iron
- Engineering
- Cotton textiles
 
VIII. Coal-based economy:
- Technological spinoffs:
o Steam engine: drain coal and was powered by coal
o Cheap iron: required coke
o Railways: late 17th century to haul coal
o Colliery railways: 18th cent: iron rails & early 19th cent: locomotives
 
IX. Engineering:
- The basis of modern economic growth: machinery production
1. General mechanization: increase productivity & wages
2. Railways integrated internal markets
3. Steam-powered iron ships  global economy + global division of labor
- 1850-1900: steam technology accounted for half of labor-productivity growth in Britain
- Second Industrial Revolution (1870)
4. High quality steal & steal based machinery
5. Electrical engineering
6. Automobiles & diesel-powered machine tools
 
X. Cottons
- <1780: Britain: minor producer of cotton cloth
- 1830: Britain: largest industry
 
TAKEAWAYS:
1. Topic of the class:
 The spread of industrialization from Britain
 Industrialization in the 19th century
 
2. Main messages:
 Micro inventions made the industrial technology more profitable
 As other countries adopted industrial technology, other western economies caught up w Britain in productivity
& industrial innovation
 Industrialization in 19th century powered by coal, steam power, mechanization of production & transport

Lecture 8: Industrial Revolution

I. The role of factor endowments
Allen: IR was the product of biased technical change responding to relative factor prices
- Why were British factor prices unique?
 1. Commercial revolution: success in global trade (Atlantic trade)  raised real wages + demand for
manufactured goods => expensive labor
2. Agricultural revolution: higher farm productivity  urbanization & proto-industrialization => capital
goods
3. Energy revolution: coal: cheapest energy in the world
 
II. Sources of economic growth
- Factor endowments: 'proximate' sources of growth  growth dynamics
o Increase in resources: population growth, capital formation (physical or human)
o Increase in eff: better use of technologies, technical change
- Fundamentals: 'ultimate' source of growth  growth capabilities
o Geography (natural resources, climate, …)
o Culture (religion, collective attitudes, …)
o Institutions (social, political, economic)
 
III. The role of geography
- Determines:
o Allocation of natural resources
o Climate, disease environment
- Influences:
o Agricultural productivity
o Access to trade, construction costs, …
- Role is limited by migration: most ppl has lived in few regions
 
IV. Does culture matter?
- Weberian ethics: religious norms and social conventions  economic attitudes
- Enlightenment:
o Preceded the industrial revolution & established the scientific culture required to develop modern
industries
o Affected all countries in the 18th cent which had industrialized by the end of 19th cent
 
V. European Enlightenment
- Scientific Revolution
o Francis Bacon: scientific inquiry  world
o Isaac Newton: science can establish the laws of nature
- The Enlightenment
o 18th cent: scientific approach accepted in WE
o Enlightened governments established institutions to promote science: academies, societies, patent
system
- Mokyr: Enlightenment  industrialization
o New scientific culture  increase the rate of innovation
o Institutions + high literacy  lower cost of access to knowledge
o Intellectual property rights  patents
 
VI. The Industrial Enlightenment
- The IR:
o
New inventions  new investments  higher labor productivity  higher wages  labor-saving
innovation
- >< Allen:
o Macro inventions: didn't bring much benefit in the 18th cent
o Micro inventions: improved science in the 19th cent  industrial technology more eff
=> Mokyr: enlightened culture & institutions  environment supportive of micro inventions
 
VI. Science & technology
- Origins of modern econ growth
o IR: the first cluster of inventions turned into continuous technological progress
- Epistemic base:
o Pre-industrial tech: lacked epistemic base - trial & error
o Micro-inventions improve on existing tech
 
VII. The impact of Enlightenment
- Agenda
o Science = problem solving
o Science = observation
 Counting, cataloguing, classifying
 Recorded knowledge
- Capabilities
o Science & tech
o Better instruments
o Scientific method: scientific method
- Selection
o Expert selection: peer review
o Recorded knowledge can be debated after published
- Diffusion
o Knowledge = open-source tech
o Knowledge = non-rivalrous
 
VIII. The encyclopedia
- Editor: Dennis Diderot
- Compiled between 1751 and 1772
- Most important work of the Enlightenment
 
IX. The role of institutions
- Inventing:
o Risky
o Opportunity cost: time investment
o Unpredictable returns
- Knowledge is non-excludable
- Solutions: intellectual property rights: patents, copyrights
 
X. Patent system
- Patents: opposed bc of monopoly rents
- Only in late 18th cent:
o US: from 1789
o France: 1790
- British payment system
 
XI. Modern economic growth:
- Industrial revolution: 1st stage (1760s-1820s)
o Tech progress limited to few industries, epistemic base insufficient for broader app
o Micro inventions: slow & unsuccessful
=> modest productivity growth, ONLY IN BRITAIN
- Industrial revolution: 2nd stage (1830s-1870s)
 o Full mechanization of textile spinning & weaving; improvement in iron & steel furnaces; precision
engineering; gas lighting
o High-pressure steam engines revolutionized transportation: telegraph & industrial printing did the same
in communication
o Scientific breakthroughs  harnessing of electricity & industrial chemistry (fertilizers, chemical
dyestuffs, etc.)
=> fast & sustained productivity growth ACROSS WESTERN EUROPE & US
 
XII. Industrial revolution not British
-Industrialization in 18th cent:
o Slow evolution of technical progress; not revolutionary
o Modern factories were in Britain first but by 1780s-90s: appeared in Belgium, France, Germany & US
- Industrialization in 19th cent:
o Did not really get going until 1820s
 After 1830: factory industry and steam power  dominate
 Before min 19th cent: mechanization of transport negligible
=> when industrial progress = revolutionary, was western not just British
 
MAIN TAKAWAYS:
1. Topic of the class:
- Inventions of the Industrial Revolution
- The role of science and scientific culture
 
2. Main messages:
- Enlightened values & institutions supported inventions  investment & productivity growth
- The Enlightenment  incentives for science + lowered the cost of access to new knowledge
- Micro inventions > macro inventions
 
3. Examples:
Q1. According to Allen, industrialization began to spread from Britain when:
A. British technology became cost-effective in countries with relatively lower wages compared to Britain
B. British firms began to invest in other countries
C. British inventions became known to other nations
D. All of the above
E. None of the above
 
Q2. The chart on the right indicates that:
A. Living standards grew in England more than in other countries in the early modern period
B. There was a price revolution in Western Europe
C. Nominal wages grew in northwestern Europe in the 17th century
D. All of the above
E. None of the above
 
INDUSTRIAL ECONOMIES

 Lecture 9: Demography
I. Modern economic growth
- Transition to modern economy growth
o 18th cent: slow economic growth, low education attainment, limited human capital, high fertility
o Post 1870: dynamic economic growth & technological progress, rising educational attainment & living
standards, declining fertility
- The origins of modern economic growth
o Industrial Revolution
 Rising productivity of labor  higher wages
 Increased demand for educations
o The demographic transition
 Declining fertility  decreased pressure on living standards
 Families: 'quality' > quantity of children
 
II. Pre-modern stagnation
- Pre-industrial development: not dynamic
o High fertility >< high mortality  modest pop growth
o Slow technological progress  modest growth: income & productivity
- The Malthusian Trap:
o B4 IR: pop growth in Europe was held in check by a self-equilibrating mechanism
1. Birth rate was constant, only increased if real wages increased. At any lvl of income, depended
on social conventions
2. The death rate declined w rising average real incomes
3. Average real income declined if population increased
=> growth of both pop and living standards was unsustainable
 
III. Historical evidence:
Is the Malthusian model a good characterization of European society in the pre-modern era?
- Data on English wages & pop growth are supportive
- Real income  pop growth
o Fall in real wages until mid-1600s  decreased pop
o Rising real wages after 1650  faster pop growth
- More nuanced research is less conclusive
o Real wages may reflect exogenous shocks  farm productivity
o Fertility trend weren't the same across Europe
 
IV. Premodern demographic regimes
 - 18th century England: no longer a Malthusian economy
o Fast pop growth didn't cause real wages to decrease
o Farm productivity increased bc of better climate & tech
- NW Europe escaped the Malthusian trap before the IR
o Wages & productivity in Holland & England remained well above subsistence lvl throughout the early
modern period
o Low birth rate kept pop growth in check
- Rest of the world: high fertility & stagnating or declining living standards
 
V. European marriage pattern
- Hajnal (1965): Hungarian sociologist, described:
o NW Europe:
 Late average age at 1st marriage for women (24-26)
 High fertility within marriage
 Many women, typically 10-25% never married
 Low illegitimacy rates 3-4% of births out of wedlock
o South & East Europe
 Early marriage (16-19)
 Very high fertility
 Very few never married
=> the Hajnal line:

- East-West divergence
- Eastern demographic regime:
o East and southeast
o Southern Italy
o Southern Spain
o Finland
o Ireland
 
VI. Western marriage pattern
- Late average age of marriage
o Nuclear fam: ppl couldn't marry b4 earning enough to maintain a household
- High share of women never married
o Girl power: independent jobs in growing urban econ for women
o Had the power to delay marriage & support themselves
o Only unmarried women allowed to work in domestic service
 - Little fertility control once in marriage
 
VII. The demographic transition
- Beginning in 1720s mortality rates began to decline
- European population growth
o 1700-1800: 56%
o 1800-1900: > 100%
- Living standard didn't decline
o Rising agricultural productivity
o Globalization: cheap grain importation from other countries
o Globalization: mass emigration to the New World (US)
 
VIII. Why did mortality decline?
- Public health
o Inadequate medical knowledge
o Environmental theory of disease: better sanitation and urban planning
o Vaccination: smallpox practically disappears by 1800
- 19th cent: better nutrition + health care
- Dramatic decline in infant mortality
o Better nutrition for pregnant women
o Positive impact on breastfeeding
o Only partial explanation, still a puzzle
 
IX. Why did fertility decline?
- For a while it didn't
o Mortality decline: new & permanent
o Large epidemics:
 Cholera: 1830s
 Famines: mid 1840s
o Low infant mortality: as babies has more chance of survival, women needed less pregnancies
o Fertility control
 Min 19th cent: average age at 1st marriage increased across Europe
 Contraceptive methods spreading
 
X. Economic motives
-
Rising incomes & consumerism
o Income effect: higher real income  can raise more children
o Substitution effect: higher incomes earned by women & new consumer goods  high opp cost of having
children
- The education revolution
o Expansion public edu  high labor phased out
o Late 19th cent: complex industrial tech increased  human capital
o Becker (1960, 1965): quantity-quality trade-off
=> fam substitute: quality > quantity children
 
MAIN TAKEAWAYS:
1. Topic of the class
- Premodern demographic regimes
- Demographic transition
 
2. Main messages
- Before the IR, pop growth and living standards were held in check by Malthusian trap
 - NW Europe developed a unique demographic regime: restrict fertility & allowed modest growth of income
- Industrialization bought a demographic transition: decline of mortality  fertility

Lecture 10: Living standards

I. European prosperity: 1700-1913:
1. Economic growth:
- Gradual growth
- Divergence between East and West
2. Real wages
3. Human development
- Pop growth
- Standard of living
4. Inequality
- Impact on industrialization
- Impact of globalization
 
II. Economic growth
1. 1700-1820:
- Modest growth in Britain
- Stagnation in the rest of Europe
2. 1820-1870:
- Fast growth in Britain & Western Europe
- Eastern/Southern: modest growth  falling behind
3. 1870-1913:
- Spread of industrialization  strong convergence in Western Europe
- Fast growth in the periphery, no convergence
=> gap between East and West: @1913 > @1820
 
III. Conditions of the working class by Friedrich Engels
- Proletarianization (ppl move from being either an employer, unemployed or self-employed -> being employed as
wage labor by an employer) of labor:
o Take over working class
o Dependency on capitalist class
- Urban poverty
o High crime, poor sanitation
o Insuff edu
o Rising female + child labor
 
IV. Urban (early) growth paradox
- Productivity growth  concentration of income, decline of handcrafts, increased use of cheap unskilled labor
(child labor)  increase wage [didn't immediately increase wages]
- 'Urban penalty':
o Poor housing and sanitation -> detrimental to health
- Factory system:
o Discipline: 'dark satanic mills'
o Exploitative work conds
 
V. Real wages in Britain
- Optimistic view (Lindert & Williamson): real wages doubled between 1780 and 1850
- Pessimistic view (Feinstein, Allen): real wages fell behind growth of GDP per capita  labor=cheap
 
VI. The role of demography
Post-Malthusian economy: wages stable despite pop growth
- Britain:
o Pop growth  labor less scarce  reduced wages
o Industrialization offset the downward pressure on wages
=> b4 1850, industrialization = labor intensive
- Continental Europe
o B4 1850: industrialization only affected urban wages in Britain
 Pop growth < Britain's pop growth
 Farm output growth > pop growth  cheaper food
 Easter Europe: high mortality  no pop pressure on wages
 
V. Quality of life
- Biological standards of living
o Average heights: depend on early life conditions: nutrition, disease environment, healthcare, etc.
 Secular decline until 1860s; decline continued even after real wages increased
 Stunting [prevent from growing or developing properly]: limited capacity to recover stunted
childhood growth
o Life expectancy: regional patterns: rapid improvement in continental western Europe but stagnation in
Britain and southern Europe
 Infant mortality: dramatic decline in Scandinavia but increased in Britain and NW Europe until
1850s; real breakthrough from 1860s  demographic transition
- Nutritional status
- Education attainment
o Regional divergence: growing gap between NW Europe and East and Southern Europe; growing:
Germany  Holland  Scandi countries
o Public school
 Britain gov didn't favor public school b4 the reform acts of Parliament
 Public school reforms:
 Prussia [Germany]:
 1763: 1st country in the world to introduced tax-funded compulsory primary
education from age 5-13
 1788: preparatory school w national curriculum
 1812: national high school exam for uni entry
 Austria:
 1774: Theresia School Reform -> public state school w compulsory attendance
from 6-12
 1869: establishment of public-school boards and national curriculum
 Sweden:
 1842: intro of 4-yr primary school
 1882: comprehensive schooling extended until grade 6-8
 1905: intro of voluntary secondary school
o Adult literacy
- Human development index
o Composite index:
 Longevity: life expectancy at birth
 Knowledge: weighted average of adult literacy & enrolment rates
o Historical development
 Strong convergence in Western Europe
 East and South behind
 
VI. Inequality:
- Kuznets-curve:
 o
Early phase of industrialization: wages in small urban sector held back by stagnant incomes in larger
rural sector  inequality grows
 Growing employment of unskilled workers (children)
o Mature phase of industrialization: urban growth increases urban wages  increase rural wages 
inequality declines
 New public schools  increased human capital  increased wages
- Preconditions:
o Inequality: already very high in Western Europe b4 1800
=> high inequality is not the consequence of industrialization
 
VII. Growth and inequality
- Inequality in pre-industrial western Europe
o High concentration of land and commercial wealth
o Fiscal-military state  regression taxation & income distribution
- 1st Industrial Revolution
o Further concentration of capital
o Decline of artisanal [handmade] production  middle class decrease
o Mechanization  redistribution of income from labor to capital
- 2nd Industrial Revolution
o Increased supply & the use of skilled labor
o Gov increased social spending  appease working-class voters
 
MAIN TAKEAWAYS:
1. Topic of the class
- Living standards during the Industrial Revolution
- Growth and inequality
 
2. Main messages to take away:
- In the early stage of industrialization, wages lagged productivity bc rapid pop growth
- Living standards increased fast from 1870 bc faster growth of productivity, declining fertility, and higher
educational attainment
- High inequality in pre-industrial Europe increased after IR and remained high until 20th cent

 THE FIRST AGE OF GLOBALIZATION

Lecture 11: Globalization
I. What is globalization?
- As process and outcome
o Process: strengthen interactions  interconnected + integrated world => soft globalization
o Outcome: market integration across world regions => hard globalization
- Hard (economic) globalization: integration of national economies  trade + international flows of capital, labor,
and tech
o Evidence for market integration: commodity + factor prices converge across countries
o Price convergence driven by: transport cost (tech) and legal barriers to trade (tariff policy)

II. The first age of globalization

- Between 1870 & 1914 economies  globally integrated
1. Increased trade: within Europe & between Europe and the periphery
2. Capital flows
3. Increased labor mobility  mass migration
4. International transfer of tech & knowledge

III. Global markets:

- Volume of trade:
o European international trade boomed after 1830
o Increased trade intensity in Europe but w substantial cross-country differences
- Market integration
o Price gaps in long-distance trade (1870  1914)
 Liverpool/Chicago in wheat down from 1.58 to 1.16

IV. Why did trade increase?

- Declining cargo costs
o Cost of sea transport reduced bc steamships and faster sailing ships
o Inland transport easier bc railway expansion
 Vital for large markets
- Trade promotion
o Colonial empires: extending markets, removing trade barriers, secured property rights
o Gold standard: global currency regime based on fixed-exchange rates

V. Global infrastructure:
- The Suez Canal: 1869 after 10 years construction
o Main incentive: trade between UK & India
o Most strategic sites in the world
o Raised strategic importance of other locations: Gibraltar, Malta, Cyprus, Aden

VI. The classical Gold Standard

- Mechanics: Central Banks asked to exchange currency into gold at fixed parity
o In principle: global money supply is limited bc supply of gold
o Deficits in international trade should be settled in gold
- Why does it work?
o Gold-exchange standard: Sterling was ‘just as good as old’
o Gold supply increased rapidly (esp in British Empire)
o Major CB cooperated not to run out of reserves
- Regional monetary unions

VII. Capital flows

- Core vs. Periphery
o Core: high savings & low returns on capital
o Periphery: foreign capital  high returns
 Nature resources: grain, cash-crops, minerals
 Expansion of transportation (frontier: railways, ports, canals, urban construction)
- Areas of recent (western) settlement benefited the most
o Development of new resources
o High land/labor ratio  high relative wages  pref for capital intensive tech
o Western institutions built by European settlers
*Human capital may have attracted capital

VIII. The role of imperialism

- Theory of imperialism (Marx):
o Advanced stage of capitalism:
 High income inequality  excessive savings
 Falling profit rate (decreasing returns)
 Need for investment outlets in the global periphery (suburb)
- Lenin: imperialism = highest form of capitalism
- Modern interpretation:
o Colonialism was not so extractive
o European economies invested little in colonial resources bc they imported few resources from their
colonies

IX. What drove capital flows?

- Colonies not so important
o Major colonial powers  invested: independent periphery
- Did the GS matter?
o Hypothesis: countries cling to fixed exchange rates  pursue sound fiscal policy  raised investor
confidence
o Mixed evidence: true for Scandi countries, but some big capital importers-maintained bimetallism
[allow unrestricted currency of 2 metals like gold and silver at a fixed ratio to each other] for a long time
 E.g: Baring crisis 1890: acute recession
- Most likely explanation: capital  trade
o Core invested in periphery  important raw materials
o Investment dominated by railway construction & urban development

X. International migration
- 1870-1914: greatest migration wave in history
- 40 mil ppl crossed Atlantic from Europe: mainly from British Isles, Germany, and Scandi  Eastern and Southern
Europe
- Other sources of mass migration
o Chinese in US West Coast
o Indians in South and East Africa

XI. What fueled emigration?

- High land/labor ratio in areas of new settlement
o High New World wages attracted unskilled labor
o Esp at the time of resource booms (e.g: Gold Rush in Sacramento Valley, California at 1848)
- Declining transport cost
- Liberal immigration policy
- Cultural ties
o Areas that have recent settlers strongly connected to Europe bc of language and family ties
 British Isles to US and Dominions
 Spain/Portugal to Latin America
- High pop growth in Europe  pressure on wages

XII. Migration within Europe

- Within country mass migration:
o UK: from Ireland  Britain
o Germany: East Prussia  Rhineland
o Italy: South  Lombardy, Piedmont, and Rome
- Cross country migration
o Much smaller than emigration to the New World
o Most important place: France
 Slow pop growth  no pressure
 Countries of origin of the immigrants: Italy, Spain, Poland (Russian part)

XIII. Technology and knowledge flows

- Embodied technology
 o Tech transfer across countries bc of machine exports
o New infrastructure built by foreign firms
- Declining costs of knowledge transfer
o Knowledge travelled w migrants (even tho most were unskilled)
o New techs: telegraph, telephone
o New institutions: world exhibition, international scientific org, Universal Postal Union (1874)
- Limitations:
o Intellectual property rights dif to monitor bc ppl are in dif countries
o Large engineering firms  subsidiaries (multinationals smaller company)

XIV. Globalization: the consequences:

- Price convergence
o In prices of traded commodities
o In factor prices
- Welfare gains from capital flows: capital imports, investment abroad
- Political impact: the Globalization backlash

MAIN TAKEAWAY:
1. Topic of the class:
- Globalization: 1870-1914
- The drivers of globalization

2. Main messages:
- Long distance trade expanded bc of the reduction in trade costs and trade-promoting institutions
- European capital exports  trade and expansion of the frontier
- High wages across the Atlantic + pop pressure in Europe  mass migration to the Americas

Lecture 12: Globalization

I. Global trade patterns
- Dominance of core-periphery trade
o Western core countries exported manufacturers
o Periphery (including Europe): exported food + raw materials
o Trade between manufacturers of industrial nations  limited
- Core-periphery trade driven  scarcities
o Core specialized in: production of capital & labor intensive goods
o Periphery exported land intensive goods

II. Why countries trade? (theory)

- David Ricardo (1772-1823)
o Comparative advantage
 ‘Opportunity cost’
 Countries: export goods that they produce efficiently and import inefficiently produced goods
 Trade  beneficial even for countries that efficiently produced all goods - absolute advantage

III. Ricardian fable

- England & Portugal produce 2 commodities: wine & woolen cloth
- Portugal: absolute advantage in both
o England can produce them, but Portugal has favorable conditions to product grapes and raise sheep
- England: relatively more costly to produce wine
- England: comparative advantage in cloth and should export it to Portugal
 Both countries gain from trade

IV. Comparative advantage revisited:

- Heckscher-Ohlin Theorem
o Comparative advantages  factor endowments not on productivity differentials
 countries that have comparative advantage in goods produced w factors which they have a lot
- Explains core-periphery trade model in 19 th cent:
o Core: labor- & capital-intensive goods  manufacturers
o Periphery: land-intensive goods  grain, cotton, minerals

V. Factor-price convergence
- Factor prices & trade specialization
o Comparative advantage: an economy’s ability to produce a particular good or service at a lower
opportunity cost than its trading partners
 Abundant & cheapest factor  used more intensively  price increases
 Scarce factors: used less intensively  price fall
- Core vs. periphery
o Core: more intensive use of labor in manufacturing  increased wages & land rents fell
 Major world powers and the countries that had much wealth
o Periphery: land rents increased US & Latin America  wages
 Countries that aren’t reaping the benefits of global wealth and globalization
 Impacted by the globalization without being a big part of it
 Core-periphery convergence in rents and real wages

VI. Wage growth in Europe

- Dynamics of western wages
o Average West European catching up the New World (America) wages – except for US and Canada
o Strong wage increases in Western Europe
- Diverging peripheries:
o Scandinavia: real wages grew x3 as fast as European average
o Eastern Europe: real wages lag > income/capita or productivity
o Southern Europe: strong growth in Northern Italy, Southern Italy, Spain, and Portugal were stagnated

VII. The role of factor mobility

- What happens if labor and capital are mobile?
 o Ppl migrate to places where they earn the highest returns
- Core vs. periphery
o Capital exports + emigration from Europe to New World
 New World: capital and labor intensive
 Limited investment & population growth in Europe
- Welfare gains  migrant and those stayed behind
o Emigration  limited pop  pressure Europe  wages increased
o Cheaper food imports into Europe  increased real wages
 E.g: reduction of food price explained 43% growth in British real wages 1870-1913

VIII. Capital flows and welfare

- Welfare gains from capital imports
o Strong evidence: wage gains in Scandinavia
o Weak evidence: Eastern and Southern periphery
- Role of institutions (political structures: Central Bank; public companies that offer services to the ppl and own by
the gov):
o Gains from capital in Eastern and Southern Europe = unequally distributed  minimal impact on wages
o Scandinavia, US, and British colonies  more inclusive instructions
- Why did European periphery (Greece, Italy, Portugal, Spain) import so little capital?
o Low lvls of farm productivity
o Non-adherence to Gold Standard
o New World more attractive  abundant resources

IX. Imperialism and welfare

- The net welfare gain was minimal
o Colonies: modest share in European capital exports
o Most colonies weren’t vital markets
- Cost of imperialism
o Maintaining the colonies was cheap  they were self-finance
o Little public invest in colonies b4 WW1
- Distributive effects may have been larger
o Profits in Britain went to investors and global service providers
 Center of UK economy shifted back to London

X. Politics: globalization backlash

- Globalization produced large net gains
o Grain invasion: cheap wheat imports from US and Ukraine  bad for farmers in Europe
o European emigration  pressure  US
o Manufacturing imports  hindered industrialization in periphery
- Policy response
o Continental Western Europe: agricultural tariffs
 US: tariffs on manufactures (infant-industry)
 European periphery: broad tariff regimes
- Exception: Britain and its close trade partners  free trade

XI. Immigration policy:

- Globalization backlash in the New World
o Large frontier economics  built by immigrants
o Once immigrated, immigrants don’t like new immigrants
- US: gradual change in immigration policy
o Restriction on Chinese immigration from 1880s
o Until WW1 no limit on migrant from Europe
 o Argentina, Brazil, and Canada: restriction later
- Why?
o Downward pressure on wages
o Cultural and racial preferences

XII. Protectionist rhetoric

XIII. Theory: protectionism

- Stolper-Samuelson Theorem
o If relative price of 1 good increases  the most used material in production of that good will increase 
other factors decline
 Despite net gain from trade, there will be loses
- Political economy of tariffs
o Turn to protectionism: landowners in France or Germany needed protection against decreasing grain
price due to imports
o Britain: 1870, share of agriculture too small  losses to farmers and landowners > gains to industry and
consumers
- Objective reason for tariffs?
o Protection of infant industries = new industries

XIV. Infant-industry protection

- Assumptions
1. Technological progress is augmented by learning-by-doing
2. There’re dynamic economies of scale
- Implications
o Infant industries: steep learning curves + more eff as they reach optimum scale
o Need protection until finish learning and reached competitive scale
- New industries of 2nd Industrial Revolution
o Large ideal scale
o Highly skill intensive  long learning curve
o Highly capital intensive  long investment

MAIN TAKEAWAYS:
1. Topic of the class:
- Trade and factor price convergence
- The economics and politics of tariffs
2. Main messages
- Trade based on comparative advantages is mutually beneficial to both partners
- Core-periphery trade: comparative advantages depend on relative factor endowments
- Trade affects relative factor prices  has both winners and losers, even if net gain is positive