ECONOMIC HISTORY

Lecture 1
History of economy studies the use of analytical tools from Economics to understand human
activity. A look at human history through the glasses of an economist: (most) individuals are
rational and respond to incentives. Of course, knowledge of economic facts throughout
history is a requisite but the focus on understanding them and how they relate is more
important. Economic history as the meeting point of theory and empirics, aiming at
understanding economic activity, but interested in all forms of human activity, without time
or space limits.
1. WHAT IS MODERN ECONOMIC GROWTH?
A country’s economic growth may be defined as a long-term (steady) rise in capacity to
supply increasingly diverse economic goods to its population. Characteristics:
➢ It is a very recent phenomenon
o Stagnation and income at subsistence not sure before 1800, but extremely slow
growth.
o Human economies experienced several radical transformations (Upper Paleolithic
explosion, the Neolithic revolution), but no steady growth
➢ There is divergence
o Differences are getting bigger, not smaller; however, the rise of China might
change this.
➢ It is persistent
o Most countries that are rich today, were already rich in 1800 or even 1500
(Western Europe).
o Japan, first, then East Asia and now China and India are the exceptions.
➢ There is conditional convergence
o MEG started in NW Europe and eventually spread to some countries which are
now rich.
o Some poor countries converge towards rich ones, provided something else
happens

2. PROXIMATE AND ULTIMATE CAUSES

Proximate causes: why does something happen? We measure Economic growth: the change
of the total output produced by an economy in a given time interval. This happens because
of:
➢ Factor accumulation (economic efficiency)
➢ Technological progress (technical efficiency)
Ultimate causes: why does MEG occur in some places?
 We measured growth: In order to compare GDPs among different time periods without
having inflation distort the results an international dollar is created. GDP per capita is used
in order to compare GDPs among different countries at the same period.
➢ Real: excluding inflation
➢ Nominal: with inflation
All regions of the world have seen a growth in their GDP over the last few years.4
But some have a bigger growth because they use more inputs or use them more efficiently
(technological progress)
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3. THE SOLOW MODEL
➢ Production (Y) is obtained by combining labour (L) and capital (K) into a production
function (F), with a given level of technical efficiency (A or “Total Factor Productivity”,
TFP).
Y= F (A, L, K)
➢ If F is “well behaved”, you get “diminishing returns to either L or K”. In terms of welfare,
production per capita is the relevant variable. Hence, it is convenient to express
everything in terms of labour units:
Y/L=F (A, K/L)
➢ Capital is accumulated by saving a portion s of income and investing it (I).
➢ Every year, population grows at rate n. Hence, new capital must be allocated to new
individuals if K/L is to remain constant
➢ Moreover, capital depreciates at rate d (machines broke after a certain period of use,
etc.). Hence, new capital must be allocated to replace the depreciated capital.
➢ Both A and K accumulation are the main proximate causes of growth. To measure A,
we try and find the production function, then we decompose it taking K and L, and lastly,
we see what is left.
■ What causes technological progress?
➢ First models: “It’s exogenous” (i.e., we don’t really know).
➢ Endogenous Growth Theories: it is another production factor (Human K, Knowledge),
with no Diminishing returns. But then, why did growth start so late in history?
 ➢ Unified Growth Theories: it incorporates demography in order to explain the delay in
HK accumulation, secular stagnation, the demographic transition and sudden
growth.
■ Why were regions rich during the 1500-1800?
➢ Nonhuman made aspects:
o Direct effect: physical geography/position, climate, natural resources.
o Indirect effect: bio-ecology has cumulative effect or has an impact on man-made
determinants.
➢ Human made aspects:
o Imperialism
o Culture
o Scientific revolutions
o Institutions



Lecture 2
The pre-modern economic growth was based in two perspectives basically (Malthusian
growth and Smithian growth)
The Malthusian model was based in the principal idea that humans produce food in order
to survive. This food is produced using land and labour, increasing the output that you gain
when you add more labour, but in a diminishing return to labor.
Vital rates (fertility and mortality) are driven by income and two forces exist that can modify
it. Firstly, preventive checks, that are the deliberate reduction of birth, as abortions,
infanticide or contra conception. When income falls, these forces increasingly reduce birth
rates. Secondly, the positive checks, forces that actively kill people, as wars, plagues or
famines. As income falls, these forces increasingly deteriorate the living standard of
population, increasing death rates.
The main implication of a Malthusian world is that in a limited resources world, population
growth will always drive income towards subsistence levels. Departures from equilibrium
are only temporary. Historically, population has fluctuated (cycles of growth and
contraction) around a very slow upwards trend until 18th century. The strong version of the
Malthusian model (with constant subsistence income and population) explains cycles but
not trends. The advance since 18th century is that population growth exploded at
unprecedent rates thereafter (modern economic growth), when Europe escaped the
Malthusian trap, growing incomes and growing population.
For explaining the increasing of population, we have two potentially forces related: the one-
time technological process, the European Marriage Pattern and the Smithian growth.
Related to the first one, it allows feeding additional population but no escape from the Trap.
In the long run, more people mean diminishing returns to labour and falling income. The
only outcome of one-time technological progress is that more people will be sustained by a
given piece of land (always with incomes at subsistence).
Related to the Smithian growth we are going to talk about it in detail.
The doctrine of Smith is useful to understand the decline of Europe after the fall of Roman
Empire and the return during Modern Era.
The first aspect is the division of labour. The technical subdivision of the production process
into separate tasks is almost without limits and has proceeded throughout history, but with
setbacks. These setbacks are associated with population decline and political disorder,
which harmed market exchange. The restoration of political order would therefore increase
the size of the economy and hence the aggregate demand: first, because safety within a
given territorial unit increased; second, because the borders of the territory within which
trade could take place increased. If market exchange could safely be extended to an entire
region and then to several regions, that would extend the scope of the economy and its
aggregate income.
The second one is labour division, that promotes technological change. Division of labour
makes it possible for producers to improve efficiency through repetition, what we have
called economies of practice. That means that each individual producer improves her skills
over time but possibly at a decreasing rate.
However, in production there is also learning by doing, which differs from economies of
practice in the following way. This new and useful knowledge represents an increase in
technological knowledge and will generate an increase in the output and improvement in
the quality of the product given the inputs in production.
Specialized tools represent fixed costs and therefore require a critical minimum level of
production to be profitably used, the higher the fixed costs the higher the critical minimum
level of production necessary. The rise and decline of the Roman Empire can be represented
by the counterclockwise circle just described.
A historical argument will illustrate this argument. the falling population and per capita
income linked to the decline of the Roman Empire caused a fall in the demand for new
housing and buildings. Consequently, a technological regress in building technology set in,
which was not reversed until the end of the Middle Ages. In particular, the hardened cement
of exceptional quality that the Romans were able to use was not in use again until the
thirteenth century.
The best example to understand the Smithian development in practice is the economic
renaissance of the ninth to fifteenth centuries. The prerequisites for growth are social order,
population growth, transport networks, markets and money.
Social order is necessary for exchange. Transaction costs are lower if infrastructures are
safe. Legal rules and courts that enforce those rules are necessary to make contracts binding
and sanctions effectives.
Second one is the population. Epidemics and diseases were endemic for generations. The
political disorder and the redrawing of political maps contributed to the diffusion of
epidemics because people on the move carried diseases. The extent of the market, as Adam
Smith called aggregate demand, declined. Land that was taxed was abandoned and sales
taxes, which were a source of revenue for local governments, fell when fewer goods were
brought to markets. From the ninth century Europe experienced an almost unbroken
increase in population until the middle of the fourteenth century, when again the cause of
negative population was exogenous, the outbreak of the Black Death. In the economic
renaissance, population almost tripled, being attained the market size necessary for
extended division of labour.
Restoration of a monetary system was a key too. The advantage of a unified system is of
course that it reduces uncertainty regarding the value of the means of payment. A
legitimate coin could easily be recognized because it was stamped in a standardized way
and its weight of metal, in this case silver, was known and could easily be checked.
Increased demand for money resulted in the debasement of coins, that is the precious metal
content of a given coin was reduced. Exchange rates between different moneys were
derived the from the relative weight and purity of the metals used. Money broking became
a specialized occupation and can in several ways be seen as the precursor of modern
banking.
Transport and trade routes explained too the renaissance. Contact between north-west
Europe and the Mediterranean seems to have been unbroken even in the darkest moments
of the immediate post-Roman period, but it relied mostly on river transport. Southern and
northern Europe were linked commercially by rivers. Northern Italian cities, which were the
important pioneering merchant and financial centers of the first half of the second
millennium, already had a prominent role in the trading network as a link between the
Mediterranean world and north-west Europe at the close of the first millennium.
The last aspect is the production and technology. We need to recognize the advancement
of technological know-how was piecemeal but nonetheless impressive in its effects. A
number of inventions were transferred from Asia and the Arab civilizations. Animals were
essential as a source of traction power in transport as well as in ploughing. Efficiency in the
use of animals improved substantially due to changes in the design of harness and the use
of the iron horseshoe. The design of the plough improved partly because of the availability
of iron: it was made to cut deeper and turn the soil, creating a deep furrow since the plough,
sometimes equipped with wheels, now had a moldboard. Nutrients deep in the soil were
therefore released.
As the pressure on available land increased again in the twelfth and thirteenth centuries
land was used more efficiently, for example the fallow periods were reduced.
The fallow land was suitable for grazing animals and animal dung helped to renew its
fertility. This was learning-by-doing knowledge, which could be carried over from one
generation to another. This example illustrates the technological basis for the pre-industrial
period was a process of gradual learning. Peasants selected superior varieties of plants from
spontaneous natural mutations and to some extent from deliberate trial-and-error
breeding of better varieties of plants and cattle. Inter-regional trade made specialization
possible so that crops and plants were selected to maximize yields in different
environments.
Paper manufacturing is of particular interest because it literally ended the Dark Ages. The
increased supply and improved quality, enhanced the documentation of price, wages and
rents. Larger-scale paper production preceded the new printing technology using movable
type by about two centuries.
Market size, as measured by aggregate demand, metered and markets needed a social
order that protected traders, ensured that contracts were honored, and provided the
means of payments. There was a technological progress, slow but persistent, and there was
institutional development in finance that facilitated trade over long distances.
Lecture 3
A suitable starting point from which to compare historical development on the different
continents is around 11000 BC. This date corresponds approximately to the beginnings of
village life in a few parts of the world, the first undisputed peopling of the Americas, the
end of the Pleistocene Era and last Ice Age, and the start of what geologists term the Recent
Era. Plant and animal domestication began in at least one part of the world within a few
thousand years of that date.
Human history, as something separated from the history of animals, began there about 7
million years ago. Around that time, a population of African apes broke up into several
populations, of which one proceeded to evolve into modern gorillas, a second into the two
modern chimps, and the third into humans.
Fossils indicate that the evolutionary line leading to us had achieved a substantially upright
posture by around 4 million years ago, then began to increase in body size and in relative
brain size around 2,5 million years ago. Those protohumans are generally known as
Australopithecus africanus, Homo habilis and Homo erectus, which apparently evolved into
each other in that sequence. Although Homo erectus, the stage reached around 1,7 million
years ago, was close to us modern in body size, its brain size was still barely half of ours.
At present, the earliest unquestioned evidence for humans in Europe stems from around
half a million years ago, but there are claims of an earlier presence. One would certainly
assume that the colonization of Asia also permitted the simultaneous colonization of
Europe, since Eurasia is a single landmass not bisected by major barriers. After half a million
years ago, the human populations of Africa and Western Eurasia proceeded or diverge from
each other and from East Asian population in skeletal details. The population of Europe and
Western Asia between 130 000 and 40 000 years ago is represented by especially many
skeletons, known as Neanderthals and sometimes classified as a separate species, Homo
Neanderthalensis. They were also the first humans to leave behind strong evidence oy
burying their dead and caring for their sick.
Human history at last took off around 50 000 years ago, at the arrival of Great Leap Forward.
The earliest definite signs of that leap come from East African sites with standardized stone
tools and the first preserved jewelry. Similar developments soon appear in the Near East
and in southeastern Europe, then in southwestern Europe, where abundant artifacts
associated with fully modern skeletons of Cro-Magnons.
The great leap forward coincides with the first proven major extension of human geographic
range since our ancestors´ colonization of Eurasia. That extension consisted of the
occupation of Australia and New Guinea, joined at that time into a single continent. Within
a short time of that initial peopling, humans had expanded over the whole continent and
adapted to its diverse habitats, from the tropical rain forests and high mountains of New
Guinea to the dry interior and wet southeastern corner of Australia.
Summing up a little bit the evolution of humans, we are going to explain the revolution that
farmer power generated in their lives.
Food production was indirectly a prerequisite for the development of guns, germs and steel.
The first connection is the most direct one: availability of more consumable calories means
more people. Most species are useless to us as food, fore different reasons (indigestible,
poisonous, tedious to prepare or difficult to gather). One acre can feed many more herders
and farmers than hunter-gatherers. That strength of brute numbers was the first of many
military advantages that food-producing tribes gained over hunter-gatherer tribes.
In human societies possessing domestic animals, livestock fed more people in four distinct
ways: by furnishing meat, milk and fertilizer and by pulling plows. First and most directly,
domestic animals became the societies major source of animal protein, replacing wild
game. In addition, some big domestic mammals served as sources of milk and milk products.
Other aspect is the interaction of largest domestic mammals with domestic plants to
increase food production by pulling plows and thereby making it possible for people to till
land that had previously been uneconomical for farming.
A more indirect way involved the consequences of the sedentary lifestyle enforced by food
production. People of many hunter-gatherer societies move frequently in search of wild
foods, but farmers must remain near their fields and orchards. A hunter-gatherer mother
who is shifting camp can carry only one child, along with her few possessions. By contrast,
sedentary people, unconstrained by problems of carrying young children on treks, can bear
and raise as many children as they can feed. The birth interval for many farm people is
around two years, half that of hunter-gatherers.
A separate consequence of a settled existence is that it permits one to store food surpluses,
since storage would be pointless if one did not remain nearby to guard the stored food. But
stored food is essential for feeding non-food-producing specialists, and certainly for
supporting whole towns of them. Hence nomadic hunter-gatherer societies have few or no
such full-time specialists, who instead appear in sedentary societies.
Two types of such specialists are kings and bureaucrats. Once food can be stockpiled, a
political elite can gain control of food produced by others and engage full-time in political
activities. Hence moderate-sized agricultural societies are often organized in chiefdoms,
kingdoms are confined to large agricultural societies. Some hunter-gatherers in specifically
rich environments also developed sedentary societies, food storage, and nascent
chiefdoms, but they did not go farther on the road to kingdoms.
A stored food surplus built up by taxation can support other full-time specialists besides
kings and bureaucrats. Stored food can also feed priests, who provide religious justification
for wars of conquest; artisans such as metalworkers, who develop swords, guns, and other
technologies; and scribes, who preserve far more information than can be remembered
accurately
Big domestic mammals further revolutionized human society by becoming our main means
of transport until the development of railroads in the 19 th century. Before animal
domestication, the sole mean of transporting goods and people by land was on the back of
humans. Large mammals changed that: for the first time in human history, it became
possible to move heavy goods in large quantities, as well as people, rapidly overland for
long distances.
The most direct contribution of plant and animal domestication to wars of conquest was
from Eurasia´s horses, whose military role made them the jeeps and Sherman tanks of
ancient warfare on that continent. Of equal importance in wars of conquest were the germs
that evolved in human societies with domestic animals. Infection diseases derived by
mutations of very similar ancestral germs that had infected animals.
The resulting food surpluses and the animal-based means of transporting those surpluses,
were a prerequisite for the development of settled, politically centralized, socially stratified,
economically complex, technologically innovative societies.

Lecture 4
For understanding the increasing of states power, we should define the concept of state
and analyze the historical background that legitimate its power.
The formation of states, understood as relatively cohesive organizations with the capacity
to project power beyond their intermediate geographical surrounding, generally lagged
behind the introduction of complex economic technologies and the emergence of territorial
inequalities.
Human communities only witnessed the emergence of centralized political institutions after
war technologies became sophisticated enough, at around 3000BC of five millennia after
the domestication of plants and animals. Moreover, the type of state also depended on the
military or power ratio between looters and producers. As military technologies benefited
the former, monarchies became more widespread and horizontal polities or republican
compacts less frequent. War technologies can be roughly classified into two different
categories: types of weapons employed in the battlefield and organization of the army.
Warfare influence on political institutions can be explained in the following arguments: first,
the organization of army is related to the introduction of new materials and the innovation
in specific tools. Second, changes in military organization and tactics are harder to trace and
more volatile in nature than armament. Third, the structure of army is prone to be strongly
endogenous to existing political institutions.
Materials are quite definitory to explain the born and development of states´ institution,
analyzing now, the Metal revolution and horse revolution.
Related to the metal revolution, we should make a distinction between copper and bronze
and iron era.
Related to the first one, the formation of states was characterized by a clear hierarchical
political structure and some kind of division between a military, religious and bureaucratic
elite and a mass of subordinate laborers only took place around the late fourth millennium,
that is, a few thousand years after the domestication of plants and animals. Their
emergence coincided with the metal revolution and the use of copper to build short-range
weapons. Nonetheless, copper weapons were not very effective because they weighed too
much and cracked easily. By contrast, bronze, an alloy of copper and tin, had a much bigger
impact on the conduct of war. Its relative malleability as well as its sturdiness gave a clear
competitive edge to those that employed it. This fact, combined with the scarcity and
geographical concentration of tin, led to the concentration of power in the hands of a few
armies and their rulers. A clear example is the Longshan culture, that knew how to make
bronze that experimented an incredible expansion and development despite to the
limitations on its techniques. Erlitou (the Longshan most developed city) declined was
linked to the rise of the early Shang state (Erligang culture) which states was inherited and
strengthened the political structure and territorial patterns of expansion of Erlitou.
Zhengzhou (capital) developed into a large, walled city, with an elite occupying the inner
city and a population of commoners engaged in craft production in the outer ring. Bronze
was still under the control of rulers and directed to the production of weapons and ritualistic
objects.
The second development inside metal revolution is the introduction of iron. The production
of iron weapons had a democratizing effect on politics. Whereas tin ore were scarce and
geographically concentrated, iron ones were abundant. Iron weapons and armors had any
politically equalizing impact, their effect turned out to be very transient throughout the
region. In the Middle East and Egypt large monarchical states controlled by a powerful
aristocratic elite were back in place shortly after the great invasions and migrations around
1200 BC. Their resilience was likely due two factors: on the one hand, their bureaucracies
were able to integrate the new technologies and their bearers into their professional
armies. On the other hand, the use of iron swords and spears by infantry must have been
of limited value against cavalrymen and war charioteers operating in the vast flat lands of
the region.
The effects of iron introduction can be varied as the comparison between Myceans and
Dorians show. Since Myceans before iron was divided into large monarchies governed by
kings with near absolute powers, due to the bureaucracy that controlled most land and
managed it in a highly centralized fashion. On the other hand, we have dorian invasions
around 1200 BC that broke the hegemony of that bronze-wielding putting an end to the
Mycenenan civilization. Dorian invaders seemed to have been organized along tribal lines
with constituent parties, which subdivided into clans or family groups. The possession of
land, which was inalienable, gave a right if membership into the political community of free
men, which often coincided with the group of invaders. Even when they had hereditary
kings, the government was also in the hands of a council formed by the heads of clans and
never attained the level of centralization of the Mycenaen period.
The next material before the entry of gunpowder and modern empires development is the
introduction of horse. The invention of the short bow in the second half of the second
millennium BC gave birth to the concept of cavalry and revolutionized the conduct of war.
As the cavalry consolidated its central position in war, horsemen acquired a preeminent
political and social status, as individuals and as a separate social class. The introduction of
horses intensified the probability of intertribal war for different reasons.
It multiplied by five the size of territories that could be exploited, putting neighboring bands
directly in competition with each other. Within each tribe, the horse raid offered young men
of poor parents the best way to advance economically and socially. With the introduction
of horses, social stratification intensified.
Bands abandoned the cooperative hunt as an organization of equals in which the kill was
equally divided among participating families. Instead, wealth became associated with horse
ownership, which turned out to be unequally distributed.
Beyond the social consequences of cavalry, another aspect point is the military effects that
was crucial in the state construction. The non-military ones were related with economy as
transport reduction and increased of the volume and grains from trade. In military ones,
cavalry only acquired a truly central role in the conduct of war after the introduction of large
breeds, of fourteen to fifteen hands in height starting in the 1340s. their adoption took
place jointly with the saddle and the stirrup and the spread of heavy cavalry tactics,
involving massed charges and close combats with thrusting-spear and sword and let to the
formation of several states in the West African savanna, all of them governed by horse-
owning dynasties.
A clear example is the kingdom of Mali that relied on its horseman as the striking force on
its army. The king depended on his farariya or emirs, who were the commanders of the
cavalry, cultivating their goodwill by gift of gold, horses and luxurious clothes.
Cavalry states contained stratified societies where horse ownership was reserved for a
noble class of warriors with privileged access to women, slaves and weapons. Political and
social relations were structured through loose vertical networks of patrons and clients with
the royal family at the apex. In several cases, they had an elective king, chosen and
monitored by a strong council formed by a local or extended-clan chiefs. Power was
concentrated in a ruling minority with the king as its head and there was a considerable
concentration of wealth, resulting from internal and external predation.
The most important technological evolution, aside the war chariot, is the stirrup and heavy
cavalry. The development of a mounted shock and its superiority over enemy forces
explains the success of Charlemagne´s campaigns the expansion of Carolingian empire.
Heavy cavalry had a remarkable military advantage, but the problem was its extremely cost.
The exorbitant costs of heavy cavalry as well as Europe´s limited military carrying capacity
due to its underdeveloped and thinly populated rural economy in the early medieval period
meant that the new system of combat could only be employed by a narrow segment of
society. To finance such class of warriors, and given that the Carolingian bureaucracy was
minimal, Charlemagne and his successors distributed land to their military men or vassals
in exchange for service to the monarch.
In addition, the class of horsemen was highly professionalized. With the collapse of the
Carolingian monarchy, many of these vassals asserted their sovereign or semi sovereign
status across Europe. Knights became a hereditary class living from the work of
subordinates who cultivated the land for them in exchange for protection against other
knights, a system of political and economic dependency between a landlord (feudalism).
The biggest empire, that reflects the size of state before the crisis of late antiquity is the
Roman empire. Rome evolved from a peasant republic into a large bureaucratic state based
on external expansion. Patricians received land and slaves from conquest warfare. And
Plebeians earned their life from serving the Army (paid with plunder and tribute, i.e., by war
itself) and receiving a farm from the Ager publicus (public estate agency, result of plunder)
at retirement. Alternatively, they stayed at Rome and received public grain subsidies (fruit
of plunder).
The system was socially stable as far as expansive wars were feasible. Starting ca. in 300 BC,
Rome unified for the first time the entire Mediterranean. Expansion continued until the II
century AD.
One of its main developments was the construction of a common market. A single market
without artificial trade barriers (beyond the, usually huge, trade costs). The Roman state
invested massively in transport infrastructure: roads and ports. Other characteristics were
a single legal system Law and order” (at least no piracy and banditry), Single monetary
system (gold coins for valuable transactions, silver for smaller ones).
This development broke in the crisis late antiquity. The management costs became
increasingly high, the empire became so big to control politically and economically, being
the increasing of taxes one of the causes that provoked political instability. Around III
century AD, the Empire started decomposing, being the effect of one-time shocks to
technology associated with market unification progressively died out and Malthusian forces
started to act again, favouring foreign conquests

Lecture 5
Sometime around the middle of the fifteenth century, after a century of decline and
stagnation, Europe´s population began to grow once more. Aspects as population and levels
of living, discovery, price revolution, agriculture development, industrial technology and
trade were some keys to understand the European development.
According to the population and levels of living, no single obvious cause for the renewal of
population growth presents itself. Some combination of reduced death rates and higher
birth rates, Europe´s population began a sustained increase that continued throughout the
sixteenth century, even after the initial favorable conditions had changed.
One evidence is the relation between population density and productivity of agriculture
that were closely related. In some areas, tenures were divided as more and more people
sought to make a bare subsistence from land.
This overpopulation of cities also provoked overseas migrations in the sixteenth and
seventeenth centuries, being the most common, the local ones. One consequence of those
migrations was that the urban population grew more rapidly than the total. In some
instances, as increase in the urban population can be regarded as a favorable indicator of
economic development, but this was not necessarily so in the sixteenth century. The rural
migrants rarely had the skills necessary for urban occupation, forming in the city, a
Lumpenproletariat, a pool of casual, unskilled labor, frequently unemployed, who
supplemented their meager earnings by begging and petty thievery.
The plight of both the urban and rural poor was aggravated by a prolonged fall in real wages.
Because the population grew more rapidly than agricultural output, the price of foodstuffs,
bread gains in particular, rose more rapidly than money wages (price revolution).
The next aspect is the influence of exploration and discovery. Notable technological
progress in ship design, shipbuilding, and navigational instruments occurred in the latter
Middle Ages. The increase of technology allowed ships to be larger, more manageable,
more seaworthy and had greater cargo capacity, enabling them to make longer voyages.
The first century of European overseas expansion and colonial conquest (16 th century)
belonged almost exclusively to Spain and Portugal. The eminence these two nations have
achieved in history is a result mainly of their pioneering in the discovery, exploration and
exploitation of the non-European world. Before the 16th century they had been outside the
mainstream of European civilization, but in the 16, its dominions were the most extensive
and their wealth and power the greatest in the world.
Spain quickly turned to a search for gold and silver. At first, they merely plundered the
original inhabitants of their existing movable wealth; when this source was quickly
exhausted, they introduced Europe mining methods to the rich silver mines in Mexico and
the Andes. The Spanish, unlike Portuguese, undertook from the beginning to colonize and
settle areas they conquered. They brought European techniques, equipment and
institutions, which they imposed by force on the Indian population.
The rise of this increasing of wealth had economic consequences in the process that was
called Price revolution.
The flow of gold and especially silver from the Spanish colonies greatly increased Europe´s
supplies of the monetary metals, at least tripling them in the course of the sixteenth
century. The most immediate and obvious result was a spectacular and prolonged rise in
prices. If we compared historically this increase with other historical events (20th century) it
pales, but its obvious that was important. Inevitable like any inflation, is the redistribution
of income and wealth. Those whose incomes were price-elastic (merchants, manufacturers)
benefited at the expense of wage earners and those whose income was either fixed or
changed only slowly.
Another important change of this era is the agricultural revolution. Few generalizations can
be advanced with only minor reservations. First place, for Europe as a whole and for every
major geographical subdivision, agriculture was still the principal economic activity by far,
occupying 2/3 or more of the active population in the Dutch Netherlands. Second, from a
human and social point of view, manual labour was by far the most important factor of
production.
The several regional variations are key for understanding the development of history. In the
northern and western periphery of Europe, the lands were scarce populated. Primitive
slash-and-burn techniques were still applied. The principal field crops were rye, barley and
oats. Because of the relative abundance of land, tenures were fluid, with most land being
held in the name of clans of tribal chiefs or lords. The social organization was hierarchical,
but without bondage or ties of servility.
In Europe east of the Elbe and north of the Danube, personal bondage or serfdom was the
characteristic feature of social relationships at the beginning of the period and increased
more or less continuously during it. Peasants were obliged to give as many as five or six days
a week to the lord´s service, and in some instances were bought and sold separately from
the lands they toiled. Agricultural technology was relatively primitive, employing either the
two-or three-field system.
Elsewhere in western Europe, the system of open fields, an inheritance from the manorial
system of the Middle Ages, prevailed. Territorial lords had been transformed into mere
landlords; they collected rents in money or in kind, but labour services, already on the wane
in the late Middle Ages, were extinguished, although the lords retained special rights and
privileges in some areas. Transferability of land ownership became more common, and
small peasant proprietors as well as independent tenant farmers increased. The other main
type of tenure was sharecropping, where it was especially common south in Loire River. In
that system, the landlord furnished all or part of the stock and equipment, shared the risks
and decision making, and took a portion of the crop, normally half.
Another characteristic is the industrial technology and productivity. We can say that
innovation took place more or less continuously, although at a very slow pace.
None of the innovations mentioned here involved the use of mechanical power, that
represent a natural obstacle to greater industrial productivity. The textile trades remained,
collectively, the largest industrial employer, closely followed by the building trades. The
organization of the textile industries did not change appreciably from the latter Middle
Ages. The characteristics entrepreneur was the merchant-manufacturer who purchased the
raw materials, put them out to spinners, weavers, and other artisans working in their
homes. Guild organization, whether of artisan or merchants, apparently did not affect the
industry appreciable. The most advanced ones where the Dutch, that used mechanical saws
and hoists actuated by windmills, and kept stores of interchange. Because of their
efficiency, they supplied those of its rivals.
The metallurgical industries, although of relatively minor significance in terms of
employment and output, acquired major strategic significance because of the growing
importance of firearms and artillery in warfare. The process of obtaining iron by blooming,
was slow, costly in fuel and produced its output in small batches. By the beginning of the
sixteenth century the blast furnace was continuously charged at the top with charcoal to
remove impurities.
The main problem of industry development was that not naturally rich in the precious
metals, but the more utilitarian metal was relatively abundant. Timber was in great
demand, for construction and domestic heating. The shortage of timber throughout the
more developed areas of Europe was primarily responsible for integrating Norway and
Sweden into the West European economy, both directly and indirectly. Coal had been
mined in Germany and the Low Countries as well as England during the Middle Ages.
Gradually it penetrated high fuel-consumption industries, fundamental for the industries
that started to be born.
Finally, we have the overseas discoveries, that were providing new raw materials, directly
stimulated new industries as sugar refining or tobacco as the most important, but other
manufactures ranging from porcelain to snuff boxes developed to satisfy newly created
tastes.
The finally characteristic to understand this flourishing of Europe is the importance of trade.
As the most aggressive country in this aspect was Netherlands which increasing began
modestly in the fifteenth century, as Dutch fishing fleets in the North Sea began to undercut
Hanseatic dominance of the herring trade. The dried and salted fish were first distributed
around the shore of the North Sea and up the German rivers, then, in the sixteenth century,
to southern Europe and even in the Baltic. Heavily dependent on maritime commerce, the
Dutch immediately began building ships capable of the months-long voyage around Africa
to the Indian Ocean.
The other country that highlighted in commerce was England. Its commerce was triangular
in nature. A European ship carrying firearms, knives for the West African coast, where in
exchange for slaves. When the boat was full of slaves he sailed for the West Indies or the
mainland of North or South America in where slaves are exchanged by for one of sugar,
tobacco or other products of the Western Hemisphere, with which he returned to Europe.
Another characteristic was the base in monopolistic trading charters that adopted the
regulated form (public ones), but others became joint-stock companies; that is, they pooled
the capital contributions of the members and placed them under a common management

Lecture 6
The Industrial Revolution was a turning point in world history, for it inaugurated the era of
sustained economic growth. Technological change was the motor of the Industrial
Revolution. There were famous inventions as the steam engine, the machines to spin and
weave cotton and the new process to smelt and refine iron and steel using coal instead of
wood fuels.
The Industrial Revolution took place in a particular political and cultural context that was
favorable to innovation, and that may help to explain it. The English constitution had many
features that promoted economic growth, although they were not the ones stressed by
modern economist, who emphasize restrictions on taxation and the security of property.
Parliamentary supremacy actually resulted in the reverse.
In comparison with France (absolutism) the English state collected about twice as much per
person as the French state and spent a larger fraction of the national income. The navy was
directed to expand Britain´s empire and promote the country´s commerce. Growth was also
promoted by Parliament´s power to take people´s property against their wishes.
Another aspect to understand Industrial Revolution in England, is the scientific culture that
sustained it. The Scientific Revolution led to a handful of discoveries about the natural world
that were applied by inventors in the 18th. In addition, the success of natural philosophy
lent credibility to the scientific method.
Popular culture was more directly transformed by social changes than by Newton´s Principia
Mathematica. The most powerful changes were urbanization and the growth of commerce.
They encouraged the spread of literacy and numeracy by increasing their value. By the 18th
century, most sons of artisan or shop keepers, received several years of primary education,
which result was a public that read newspapers and followed politics to an unprecedent
degree.
Another hypothesis and probably the most reliable one is its model of unique structure of
wages and prices. Britain´s high-wage, cheap energy economy made it profitable for British
firms to invent and use the breakthrough technologies of the Industrial Revolution. If we
join too, the use of cheap energy we have the explanations about the English secret of
economic growth.
The first sector in industrialized was the cotton industry. International competition was the
spur that led the mechanization of cotton spinning. The finer the cotton, the more time it
took to spin. Wages were so high in England that competition with India was only in the
coarsest fabrics. There was a large market in finer fabrics, but England could only compete
if machines were invented to reduce labour.
The crux in explaining why the Industrial Revolution was invented in Britain is, therefore,
explaining why British inventors spent so much time and money doing research and
development to operationalize what were often banal ideas. The key is that the machines
they invented increased the use of capital to save labour. Consequently, they were
profitable to use where labour was expensive and capital was cheap, that is, in England.
Nowhere else where the machines profitable.
Cotton yarn was manufactured in three stages. First, the bales of raw cotton were broken
open and the dirt and debris removed. Second, the cotton was carded, that is, the strands
of cotton were aligned into a loose strand called a roving by dragging the cotton between
cards studded with pins. Third, the roving was spun into yarn. All of these stages were
mechanized, giving to England a huge competitive advantage.
The other technology clue in the Industrial Revolution was the steam engine. The purpose
of the new coming engine was to drain mines, and Britain had many more mines that any
other country due to the large coal industry. In addition, the early steam engines burned
vast quantities of coal, so they were cost-effective only where energy was cheap. Steam
engine became a technology that could be applied to many purposes and used around the
world, but only after the engine was improved.
Cotton also led the way in the application of steam power to factories. Most factories were
driven by waterpower until the 1840s. It was only then that the fuel consumption of steam
engines had dropped sufficiently to make them a cheaper source of power. After that, the
use of steam to power industry expanded continuously.
Steam power also revolutionized transportation in the 19th century. One solution was to
put engine on rails. Coal and ire had long been hauled in carts rolling on primitive wooden
rails laid in mines. In the 18th century, iron rails replaced wood, and the lines were
extended. The first general-purpose railway was the 35-mile Liverpool and Manchester line,
opened in 1830. By the middle of the 19th century, steam was displacing sail in ocean
transportation. Britain became the center of world shipbuilding in view of its pre-eminence
in iron and engineering. Brunel established that a ship could carry enough coal to cross the
Atlantic (1838) and the first ship to be built of iron and to use a propeller instead of paddle
wheels.
Steam power in an example of a general-purpose technology, that is a technology that can
be applied to a variety of uses. By the middle of 19th century, however, the potential of
steam was finally being realized as it was applied widely to transportation and industry. This
long-run pay-off is an important reason that economic growth continued through the
century.

Lecture 7
So far, the similarities between the globalizing world economy after World War II and before
World War I are more striking than the differences. As we shall see, the main is this: all of
the economy market integration in the Atlantic economy after the 1860s was due to the fall
in transport costs between markets, and none was due to more liberal trade policy. In
contrast, most of the commodity market integration after the 1950s was due to more liberal
policies. We can stablish that key transport innovations and trade policy changes are the
basis of the first globalization.
Related to the first theme, steamships were the most important nineteenth-century
contribution to shipping technology. A series of innovations in subsequent decades helped
make steamships more efficient: the screw propeller, the compound engine or the steel
hulls. The other major nineteenth-century development in transportation was the railroad.
In US railway was a fundamental key to build a common national market. Refrigeration was
another technological innovation with major trade implications. Refrigeration also deprived
European farmers of the natural protection that distance had always provided local meat
and dairy producers. The consequences for European farmers of this overseas competition
would be profund. The main consequence of falling transport costs was the increasing of
facilities to export that in response, tariffs increased to the competitive winds of market
integration as transports cost declined.
The other main cause to understand the first globalization is free trade. The wars that raged
between 1792 and 1815 brought an end to the strong outward orientations of much late
eighteenth-century Europa. From 1807 to 1813, the Continent was subjected to a sea
blockade by the British Royal Navy. industrial activity shifted from the Atlantic seaboard to
the interior, as import-substituting industries such as cotton textiles flourished behind the
protection from British competition afforded by war.
In Britain, protection was symbolized by the Corn Laws. In 1815, it was allowed to import
grains, but imported what could not be sold in the domestic market until the domestic price
rose to 80 shillings per quarter. The Corn Laws were finally abolished in 1846, and the rest
of the countries followed Britain but slowly.
Continental trade policy and attitudes toward globalization may have changed only very
slow, but when did change, they did so in a rush. The Cobden Chevalier treaty between
France and the United Kingdom was fundamental for European free trade. The treaty
abolished all French import prohibitions, replacing them with a tax depending on product
value not to exceed 30%. The most important clause was the most-favored-nation (MFN),
in where was stablished the principle of nondiscrimination as a cornerstone of European
commercial practice. It stablished that each country would automatically extend to the
other any trade concessions granted to third parties, fundamental for the sign of new
bilateral treaties.
The explication for this trade liberalization after autarkism has different visions. Firstly, the
fact, that Napoleon III moved to free trade by signing a commercial treaty, bypassing a
protectionist Parliament. second view is the role that Britain played to encourage in the
implement of liberalism and free trade. The last perspective is that vested interests favored
liberalization in some continental countries; for example, Prussian landowners favored free
trade as long as Prussia remained a net grain exporter or French move toward free trade
was in part due to the fact that the demand for its exports was becoming more elastic over
time, implying that the national interests required lower tariffs.
The consequence of this free trade wave is the formation of national market integration.
The American one, was influenced by the wheat. Its wheat that was flooding Europe in the
1870s and 1880s did not originate on the East Coast but rather in the Midwest. The eastern
states were themselves major grain importers during this period, and they had to adjust
structurally to the flood of grains too. The transports costs separating American grain
producers from their European consumers included rail costs within United States, as well
as transatlantic shipping costs. The percentage decline in transatlantic costs have been
greater, but in absolute terms it was the technical improvements on American railways that
did most of the work in reducing price gaps between producer and consumer. In any case,
regional price spread convergence within the United States was dramatic
Market integration increased within Germany as more and more member joined the
Zollverein and stepped behind a common tariff wall. Market integration also increased
substantially within Germany after political unification in 1871: the ratio of Bavarian to
Prussian grain prices was far more volatile before 1871 than after, and oat and rye prices
were close to parity by the mid-1870s.
The bottom line is that the evolution of a global economy had to compete with the rise of
large and integrated home markets. The facts of the late nineteenth century were that both
national and international markets were becoming better integrated, and for much the
same reasons. If internal market integration grew faster, it was because transport costs fell
more dramatically there and because there were no rising tariff barriers to offset the fall.

Lecture 8
1. MOST SUCCESSFUL ECONOMIES OF THE 19TH CENTURY
Industrial revolution spreads to new sector and countries but unevenly, in Europe starts the
Great Divergence. Britain had the economic, financial, diplomatic and political (Pax
Britannica) leadership in Europe during the 19th century. Furthermore, the North-West of
Europe was more successful in closing the British gap8specially Scandinavia), while in the
Southern part occurs partially and later; and in the East and the Balkans were unaffected by
Modern Economic Growth. The industrialization gives to the continent a Core-Periphery
structure
■ GREAT BRITAIN
➢ Trading, industrial and financial leader
➢ It was specialized in the “core” sectors of the 1st Industrial Revolution: coal, iron
and textiles.
➢ It was a pioneer in the use of modern railways and ships and
➢ It relied on the international economy.
➢ However, it lost the lead to the US and Germany at the end of the century.
■ FRANCE
➢ It followed an alternative path to modernity
➢ It had a slower GDP growth but finally caught the UK in GDP pc
➢ No technological laggard, there was a lot of human capital invested on growth.
➢ It had poor coal and therefore it relied on hydraulic power. Because of this the
industry was scattered
■ BELGIUM, a small-scale England
➢ It had a long run industrial tradition, much like England and invested a lot of
resources on the 1st Industrial Revolution, which helped it to be fully industrialized
by 1840.
➢ It attracted foreign entrepreneurship (and K) and good access to foreign markets.
➢ It opted for institutions innovations such as investment banking and vertically
integrated firms.
➢ It was heavily dependent on international markets.
■ GERMANY
➢ It was the last of the early industrialisers but eventually the most successful.
➢ During the first half of the 19th century, it was very politically divided (38 polities),
with high transaction costs (heterogeneous legal and monetary systems) and
largely rural.
➢ During 1800-1833 started a period of modernization:
o Institutional reforms under the French rule (confederation of the Rhine) or
French threat (Prussia, 1807 edict),
o Territorial consolidation in the Congress of Vienna (1814-1815)
o Tariff unification in Prussia, 1818
o The period finished with the creation of a common market and low external
tariffs (to beat protectionist Austria).
➢ During 1833-1870, there were:
o Accelerated industrialization (especially 1840-1850)
o Market and railway integration (backward and forward linkages)
 o The technologies of the 1st industrialization were adopted (steel
production techniques).
➢ During 1871-1914:
o Germany was under the 2nd Reich
o Part of the gold standard.
o It became the industrial leader in Europe. German industrialization was
based on the emphasis on capital goods and intermediate products; the
successful adoption of new product and technologies; and becoming a key
player in the 2nd Industrial Revolution
2. THE SECOND INDUSTRIAL REVOLUTION
It had some characteristics:
➢ New sectors and production processes were heavily dependent on the integration
between science and the production process, so firms invest din R&D.
➢ There was a big need for scientifically trained personnel.
➢ Development of new products, not only production of old ones, being therefore
more efficiently (like textiles)
It developed some major areas:
➢ Chemistry: synthetic fertilizers, organic chemicals (dyestuff), pharmaceuticals.
➢ New Materials: rubber, steel...
➢ Electricity: illumination, urban transport, eventually displacing steam engines.
➢ Petroleum and its derivatives (natural gas, industrial oils as lubricants, eventually
gasoline)
➢ Automobile industry: internal combustion engine.

■ GERMANY
➢ Their growing and urbanizing economy, unburdened with previous fixed
investments, proved a fertile ground for developing these new technologies.
➢ It had a large firm size, banking and cartelization (some were dumping).
➢ The German education system (technical schools, emphasis in scientific training)
was based on the French model (but available to more people) and helped to gain
from these innovations.

3. THE RISE OF THE USA

➢ It had a very rapid absolute and relative growth as its frontiers expanded. The
population grew from 4M inhabitants in 1790 to 40M in 1870 and reaching 100M
in 1915.
➢ It had a frontier economy:
o Huge endowment of land and labor scarcity.
o Huge dimensions allowed agricultural specialization.
o There were high wages economy which attracted migrants and settlers
 o Agriculture predominated for most of the century: there was predominantly
rural population until WWI; exports were dominated by agricultural products;
and the largest share of income and employment came from agriculture.
o Industrial output expanded but not merely extensively
➢ It had high incomes throughout 19th century because of the frontier,
➢ Incomes rose at the end of the century
➢ Expanding frontier (demand) and high levels of human capital (supply) made it
particularly beneficial to the US
➢ It became the world mineral leadership partly due to greater endowments which
allowed higher extraction rates.
Therefore, the US was in a unique position to benefit from 2nd Industrial Revolution. The
reasons for its success were:
➢ Geography: Large “empty” zones with arable land and many natural resources.
➢ Enormous investment levels in the construction of cities, canals, railways,
telegraph network, etc. which produced linkages.
➢ The domestic market was very big (and growing), increasingly integrated,
homogeneous and with relatively “rich” consumers.
➢ Relative factor endowments like UK on a large-scale M, new materials and large-
scale standardized production more interesting (from the S and the D side).
➢ Economies of scale and innovations in production, marketing, advertisement,
distribution, consumer credits, etc. – transformation of production and
consumption. Standardized mass production with interchangeable parts
➢ There was an institutionalization of the process of research and development
(new products, new techniques)
➢ It took advantage of the two World Wars
The results were mass production and the modern capitalist firm
Mass production requires three-pronged investment:
➢ In the optimum-size plants to assure economies of scale (high fixed costs)
➢ In networks to assure continuous raw material supply and new forms of marketing
(branding, advertisement) and distribution (franchise, own sales agents)
➢ In a hierarchy of specialized salaried managers who organized production, supply,
distribution, marketing (managerial capitalism)
Modern capitalist firms and oligopolies have different characteristics:
➢ Economies of scale (concentrating production in a few large firms) were more
efficient when there are high fixed costs, which then integrate vertically backward
(with suppliers) or forward (with distributors) to reduce transaction costs
➢ As the expansion to other sectors was possible, it causes diversification, and the
economies of scope are developed
➢ The results are the conglomerates of large firms (trusts), instead of horizontal
integration (price) stabilizing mergers and cartels.
Thus, the USA becomes the manufacturing leadership because of:
➢ Early dominance in mass production industries
➢ Leadership based on large domestic market and abundant natural resources
➢ High technology industries due to the massive private and public investments in
research and development and scientific and technical education,
➢ It was an exporter of natural resources and technology
➢ Some say tariffs also played a role

Lecture 9
To understand the costs of the IWW we should obviously talk about the economies of war
that were fundamental in the twentieth century. In pre-1914 peacetime economies, the
role of the state was extremely limited. Governments provided for defense, foreign policy,
domestic security and free universal elementary education in some cases; they subsided
railways and built national roads.
The short-war theorem was based on very shaky foundations. It disregarded both the
flexibility of a modern economy and the adaptability of mankind to almost any situation.
The revolutionary aspect of the war economy consisted mainly in the rapid shift of
resources from consumption to arms production and the attendant reorganization of the
entire economic life of the belligerent nations.
A colossal amount of labor had to be swiftly diverted from peacetime production to military
and to rapidly expanding armament factories. Female labor was widely used in the
countryside. The capital needs for this colossal resource reallocation were met chiefly by
borrowing or simply by printing large quantities of bank notes.
the reduction of trade and of domestic production of consumer goods during the war meant
that the farmers had little to buy if they sold their output. The result was that the farmers
felt hard-pressed and reluctant to sell food. Lack of food is a classic source of civil unrest,
and the inevitable result was a revolution.
In the international economy, the war brought about two major developments. First, the
displacement of the agricultural sector in the belligerent countries led to the lifting of
import duties in order to gain access to the cheapest overseas supplies. Second, financial
cooperation was undertaken by the Entente powers in the form of inter-allied loans. At first,
Britain lent to its financially weaker allies, France, Italy and Belgium. Later on, the United
States provided war loans to all the European countries fighting against the central empires.
The consequences of the war are some, so let’s explain them.
Firstly, we have two exogenous shocks. The major disruption caused in the real economy,
both on the demand side and on the supply side. The other one occurred when much of its
capacity became superfluous once the war was over. It proved exceptionally difficult to
adjust to the required patterns of peacetime production as swiftly as required by sudden
changes in demand created by unfulfilled wartime needs. The war also stimulated domestic
production in non-European countries in order to substitute for imports from Europe.
Second, a more rigid economic environment. In the postwar labour market, wage flexibility
was diminished as many more decisions were centrally negotiated in a greatly extended
process of collective bargaining. Behind this change lay the growth of working-class
militancy and the dramatic rise in the membership and strength of the trade union
movement.
Thirdly, a weaker financial structure. The financial sector was also greatly affected by the
war and the extensive interference in the peacetime patterns of domestic and international
markets that it stimulated. In all countries, note issues and bank credits were expanded by
immense amounts, with little or no attempt either to raise taxes or to borrow from the
public on the scale needed to offset the additional demand on resources generated by the
enormous military expenditures.
After the war, finance ministers faced the need to service these swollen internal public
debts. There were also external demands for payment of war debts and reparations, while
at the same time, international financial cooperation had entirely vanished. The reduction
of budget deficits was made more difficult by the need to provide for reconstruction and by
new demands for higher expenditure on social security and unemployment benefits
advanced by active trade unions.
Fourth, the fragile international monetary system. Within a few months of the declaration
of war, gold standard payments were suspended. The powers of the Entente developed
their own payment system backed by the inter-Allied loans, as noted above.
Once the war was over, cooperation ceased almost overnight. Inter-Allied financial
assistance was suspended. At the same time, the victorious powers insisted on extracting
an unrealistic number of reparations from those they had defeated.
The last point to understand the influence war economies, are its consequences.
First, the shock of economic restructuring and social unrest. Return to peacetime economic
organization and production entailed a huge process of resource reallocation that, contrary
to what is assumed in economics textbooks, not only required a long period of time but also
met with the resistance of the vested interests that had been created.
Businessmen and industrials were divided between those who favored an immediate return
to laissez faire economy and those who argued in favor of a slow return to normality with
strong help in the process. Industrial restructuring implied the closing of a number of plants
and capital was scarce. The result was unemployment and increasing of social conflict, in a
period in where working class started to organize itself.
The social unrest was enforced by two aspects. First the powerful growth of the
organization, strength and solidarity of the working class. The war provided a tremendous
boost to these organizations. Second, the Russian revolution exercised considerable
influence on working-class movements, even though this influence was ambiguous. A
model for a militant minority, but at the same time a highly divisive factor for those who
did not share this ideology.
Second, the economic consequences of the peace treaties. Various aspects of these treaties
were to be a cause if severe disturbances to postwar trade and production. First, the way
in which political map of central and eastern Europe was redrawn disrupted long-standing
economic relations and created new barriers to trade. Second, the attempt to hold
Germany responsible for the war by imposing huge demands for reparations for the losses
suffered by the victorious powers became a major cause of political antagonism and
economic discord. Bolshevik revolution effectively severed most of the country´s prewar
links with the rest of the world. Trade was reduced to a fraction of its pre-1914 level, and
western European capital was scared off by the repudiation of the tsarist’s regime´s foreign
debt. The splitting of Russia and the latter´s autarkic evolution all represented a major shock
to the international economy.
Third, the end of financial solidarity among the allies. The war had been tremendously
demanding of Europe´s resources, both human and economic. Finance was needed all over
Europe to carry on the reallocation of resources from war-related production to peacetime
production. In these circumstances, the European countries, most notably Britain and
France, argued in favor of soft landing. This would have meant a continuation of financial
assistance from the United States and a slow relaxation of wartime controls on exchange
rates on the international economy.
At the same time, France demanded the imposition of very harsh conditions to Germany,
for fund France’s reconstruction and war pensions, but also its foreign debt. Indeed, the
French insisted that the reimbursement of their debts to the United States and Great Britain
must be linked to the actual receipt of reparations from Germany.
The political weight of the U.S. was considerable, because it had to be reckoned that U.S.
intervention in the war had been decisive in tipping the scale in favor of the Entente; and
most important, America was now the world´s dominant financial power. However, the US
did not respond adequately to its newly acquired responsibility as world leader. The end of
US wartime financial support of Europe and of the attendant pegging of Entente currencies
to the dollar, exchange rates were left to their own fate.
Fourth, reparations. They were the most controversial issue in the peace treaty with
Germany and are widely regarded as one of the critical elements underlying the political
and economic failures of the interwar period. Keynes was the first to condemn reparations
as economically irrational and politically unwise. Difficulties in transferring real resources
across borders, given the uncertainty about how the postwar international capital market
would work. The London Schedule of Payments for the first time formally established
Germany´s reparation obligations. Germany, however, dragged its feet, so the allies again
entered its territory in 1923, this time occupying the mining district of the Ruhr.
The only mechanism that was created to disperse in time the payments was the Dawes
Loan. It made possible for reparations to be smoothly transferred to France, the British
Empire and the other minor allies.

Lecture 10
The stability of the prewar gold standard was instead the result of two very different factors:
credibility and cooperation. Credibility is the confidence invested by the public in the
government´s commitment to a policy. The credibility of the gold standard derived from the
priority attached by governments to the maintenance of balance-of-payments equilibrium.
If one of the core countries central banks lost gold reserves and its exchange rate weakened,
funds would flow in from abroad in anticipation of the capital gains investors in domestic
assets would reap once the authorities adopted measures to stem reserve losses and
strengthen the exchange rate.
By the first decade of twentieth century, unemployment had become a prominent social
issue. Those who might have objected that restrictive monetary policy created
unemployment where in no position to influence it. Domestic political pressures did not
undermine the credibility of the commitment to gold.
A constellation of political power, reinforced by prevailing political institutions, and a view
of the operation of the economy provided the foundation for the classical gold standard
system. This combination of factors was the basis for system´s credibility. Ultimately,
however the credibility of the prewar gold standard rested on international cooperation.
When stabilizing speculation and domestic intervention proved incapable of
accommodating a disturbance, the system was stabilized through cooperation among
governments and central banks. Consequently, the resources any one country could draw
on when its gold parity was under attack far exceeded its own reserves: they included the
resources of the other gold standard countries, providing countries additional ammunition
for defending their gold parities.
Where the independence of monetary policymakers was most seriously compromised,
explosive inflations ensued. Unable to balance governments budgets, politicians enlisted
the central bank´s monetary printing presses to finance their deficits. The instability of the
interwar gold standard is explicable in terms of political as well as economic changes.
Politics enters at two levels: first, domestic political pressures influence governments choice
of international economic policies. Second, domestic political pressures influence the
credibility of governments commitment to policies and hence their economic effects.
After the war and credibility erosion, international cooperation became even more
important, but three obstacles blocked the way domestic political constraints, international
political disputes and incompatible conceptual frameworks.
After analyzing the development of gold standard, now we are explaining causes of great
depression, well linked to gold standard.
First, the war, as obvious. It greatly strengthened the balance-of-payments position of US
and weakened that of other nations. In the mid-1920s, the external accounts of other
countries remained tenuously balanced courtesy of long-term capital outflows from the US.
but if US lending was interrupted, the underlying weakness of other countries external
position suddenly would be revealed.
Second, US position. As it was explained before, lots of countries were dependent of US
lends. The debtor nations, heavily reliant on capital imports, felt the effects starting in the
summer of 1928. As their payments positions weakened, they were forced to adopt
increasingly stringent monetary and fiscal policies to defend their gold parities and maintain
service on their external debts. Sometimes even the most draconian measures did not
suffice. The debtors were forced off the gold standard, one after another, starting in 1929.
Policies in other countries were linked to policy in the US by the international gold standard,
so given the pattern of international settlements, a modest shift in US policy could have a
dramatic impact on the payments positions of other countries.
The third one, and maybe the less economic one is the lack of cooperation. The question of
war debts, still unresolved, continued to diagnose the crisis in different ways. Containing
bank runs required policymakers to inject liquidity into the banking system, but this could
be inconsistent with the gold standard rules. Defending the gold parity might require the
authorities to sit idly by as the banking system crumbled.
The last point to understand the Great depression is the end of the gold standard.
The advantage of currency depreciation was that it freed up monetary and fiscal policies.
No longer was it necessary to cut public spending in countries where expenditure was
already in a tailspin. A financial crisis might force a country to abandon gold convertibility,
but it did not cause it to abandon financial orthodoxy. Only when the principles of orthodox
finance were also rejected did recovery follow.
The magnitude of the beggar-thy-neighbor effects depended on the nature of the policies
that accompanied devaluation. The more the depreciating country expanded domestic
credit, the greater the level of domestic spending on imports as well as other goods. In part,
different decisions across countries reflected differences in the balance of political power,
between creditors who benefited from deflation and debtors who suffered, or between
producers of domestic goods who were likely to be hurt.
A suggestive correlation exists between countries that suffered inflationary crisis in the
1920s and those with proportional representation. The architects of the postwar political
order therefore created several separate nations out of what had previously been the
Austro-Hungarian Empire and encouraged the adoption of proportional representation to
give voice to minorities. Weimar Germany adopted a proportional system. France reformed
her electoral system to incorporate a strong element of proportionality. Belgium eliminated
the right of electors to cast multiple votes, thereby enhancing the proportionality of her
electoral system.

Lecture 11
The Great Depression was not caused by the Wall Street crash in 1929 (only a part of the
whole mechanism)
➢ It was a macroeconomic event international in its nature and gestation, not simply
the sum of synchronic crises
➢ It was characterized by worldwide falling output, trade and prices (deflation)
➢ Financial and currency crises followed the decline in real activity
➢ Economic policies adopted to respond to the latter
➢ Gold-exchange standard
While trying to keep the Gold Standard some currencies undervalued while others
overvalued. There was deflationary bias of the system and asymmetry of the
adjustment.
➢ Effects of the WWI on world economic structure:
The US strengthened its position against Europe because of trade surplus
War debts and reparations increased deficits
➢ Therefore, making US K exports to Europe the base on which the system relied on.
2. FIRST PROBLEMS AT THE PERIPHERY
➢ The problems started with the difficulties for agrarian producers in the 1920s,
following Europe’s recovery.
o Prices of agricultural foodstuffs fell, and it decreased primary producers’ terms
of trade
o Manufacturing imports were cut which downward pressure on world demand
and prices
➢ As the crisis’s advances, these are the first countries to depreciate and leave the gold
standard
The political weight of the U.S. was considerable, because it had to be reckoned that U.S.
intervention in the war had been decisive in tipping the scale in favor of the Entente; and
most important, America was now the world´s dominant financial power. However, the US
did not respond adequately to its newly acquired responsibility as world leader. The end of
US wartime financial support of Europe and of the attendant pegging of Entente currencies
to the dollar, exchange rates were left to their own fate

All this drives to a massive contraction of US foreign lending, which translate into massive
shock to Europe’s balance of payments. The new imbalance couldn’t be settled by massive
gold outflows without threatening the Gold Standard.
At this point, 2 options became clear on how to deal with the crisis:
o Abolish reparations and war debts.
o Reduction in prices and costs (selling European goods).

■ YOUNG PLAN
➢ To try and solve the situation, the Young Plan (1929) was adopted which consist in
reducing and rescheduling reparations payments, but transfer protection clause
lifted.
➢ However, this dried foreign borrowing in Germany and made it harder to fund public
deficit, initially with higher resorting on short term borrowing. These increased
doubts about the future commitment of Germany to the Gold Standard.
➢ There were different responses to capital flight:
o Expansive policies, but they were incompatible with the Gold Standard
o Rising prices would have increased demand for imports
o Falling interest rates would have encouraged capital outflows
o Both would have increase reserve losses rising fears of currency depreciation
and further capital flight.
FIRST PROBLEMS AT THE PERIPHERY
➢ The problems started with the difficulties for agrarian producers in the 1920s,
following Europe’s recovery.
o Prices of agricultural foodstuffs fell, and it decreased primary producers’ terms
of trade
o Manufacturing imports were cut which downward pressure on world demand
and prices
➢ As the crisis’s advances, these are the first countries to depreciate and leave the gold
standard
Agricultural periphery: excess capacity, contrac*on and domes*c protec*on
4. THE GREAT DEPRESSION IN THE US
➢ The depression had a big impact on the US.
➢ Further repatriation of capital from Europe, generated further credit crunch and
recession
➢ Falling foreign demand for US goods and financial crises
➢ The US government responded with conventional ‘gold standard policies’: balanced
budgets and monetary contraction with increasing protectionism. This stetted in
motion a wave of retaliatory tariffs worldwide, which had large effects on the real
economy and debt-deflation mechanism.
Falling prices follows a debt-deflation mechanism
➢ The real burden of debt, which increases the share of income devoted to service that
debt, rises... This directly reduces consumption and aggregate demand.
➢ The real interests’ rates rise. This means that investments lower and so does
aggregate demand.
➢ If this mechanism is strong enough, it will cause further fall in prices and an increase
in nonperforming loans which will end up in banking crisis and credit crunch.
➢ This delayed expenditure on consumer durables an as a consequence, aggregate
demand and unemployment decreased, reinforcing the original shock.
• US: large interna*onal (Germany and Austria) and domes*c exposure (Florida, real
estate etc), monetary policy is disastrous, contrac*ng credit in the midst of a banking crisis,
very large number of banking failures (greatest expert on 1930s banking failures in the
US is ....)
4. THE GREAT DEPRESSION IN EUROPE
➢ Credit contraction had amplified the recession in Germany already in 1928.
➢ Capital flight added to net debtor position of Europe while in Germany reparations
continued.
➢ To combat this, Germany went fallen with austerity policies to keep the Gold
Standard and try to reduce reparation payments which eventually succeed (Young
Plan), and reparations were reduced to 26B and prolonged. And after the collapse,
reparations were cancelled (Lausanne, 1932)
• Germany and Austria: credit boom gone wrong [à la Greece, Spain, Ireland (combina*on
public-private) ] coupled with concomitant huge banking crisis
■ TRANSMISSION OF THE GREAT DEPRESSION
➢ The Gold Standard amplifies the contractions made because it avoided currency
reflation from national countries. Fixed exchange rates meant that a foreign
contraction (either capital flight or falling demand) had to be transmitted to the
domestic economy. Therefore, the world fell in a contractive spiral.
➢ Self-infliction of recession is not compatible with democracy in the long run
(Germany)
➢ The credit crunch caused a bigger:
o Fall of employment and aggregate demand.
o Fall of prices.
o Rise in real burden of debt.
➢ This resulted in defaults and banking crises.
➢ More adherence to gold standard also meant that the Central Bank cannot act as a
lender of last resort which led to banking panics and further credit crunch.
5. SOLUTION.
The solution could be reflation.
➢ Monetary expansion with fixed exchange rates in order change expectations (from
deflationary to inflationary) and stimulate investment. This failed as it required
international cooperation.
➢ Stimulate demand with tariffs: which was made, but largely failed since everybody
did the same.
➢ Insulation from the world economy and pursuit of independent expansionary fiscal
and monetary policies, which implied abandoning the Gold Standard (devaluing or
with capital controls).
However, there is a problem, the Trilemma of the open economy:
➢ You can only have two of the three solutions.
➢ The gold standard chooses not to have monetary autonomy, countries had always
to adjust the amount of money in circulation to the conditions dictated by the
balance of payments (from trade or capital flows).
■
■
■
■
■
■
■
■
■
■ DESINTEGRATION OF THE GOLD STANDARD, 1931
➢ In 1931 there was a Banking crisis in Austria and payments were suspended by
Credit Anstalt. This brought a default chain to central Europe, rising doubts about
banks’ solvency were raised.
➢ In that same year, there were doubts on the continuation of German fulfilment
policy
In summer 1931 Germany suffers the twin crisis, a banking and currency crises. They
occur because of the Central Bank’s fundamental trade-off between acting as
lender of last resort and currency convertibility in a system of fixed exchange rates.
As the central bank runs it funds withdrawn from commercial banks, which
threatened their solvency, capital flights collapse the financial system which rise
doubts about currency convertibility.
The Reichsbank could provide liquidity but that would increase banknotes in
circulation increasing pressure on reserves. Fearing depreciation, foreign investors
accelerated the bank run and capital flight.
After international cooperation (i.e. foreign loan) failed, foreign exchange controls
were established in July 1931.
The market formally retained fixed foreign exchange rates but limited currency
convertibility. Yet Brüning continued with further orthodox 
 deflationary fiscal
policies (further slump):
o Why not devaluing?!Foreign debt in $.
o Why not inflating?!Trade surplus required to pay back debt required
international competitiveness and fear of inflation.
At the end reparations were cancelled at Lausanne, but democracy was destroyed.
➢ At the same time, in 1931 fall, the Sterling crisis started. The British suffered
massive gold losses, and the Labour government suspends gold convertibility in
September.
On the free market, the Pound loses 30% of its value until December 1931, as there
was devaluation instead of deflation.
Without need to defend sterling’s parity, Expansive monetary policies were now
possible.
The panic crosses the Atlantic as the British experience raises doubts on the dollar,
which brings bank runs and currency flight in the US.
The Federal Reserve response was the highest increase in interest rates in history
(October 1931). Dollar convertibility was saved but what started as a Depression
became even worse.
➢ The US eventually abandoned gold in 1933, with Roosevelt’s bank holiday (the
dollar depreciation and the regime change cause inflationary expectation)
➢ After France abandoned gold in 1936, the world economy disintegrates into
“currency and trade blocks” often held together by bilateral agreements. This left
countries free to pursue their own expansive fiscal and monetary policies.

6. THE NAZI ECONOMY

During the Nazi regime there were capital controls, bilateral clearing agreements, and
administrative controls in order to distribute the (scarce) imports and access to foreign
exchange.
This had an impact on the whole economy as prices were controlled and quotas imposed.
As there was no need to play Allies against each other and the risk of default caused
rearmament and deficit spending.
7. THE DISINTEGRATED WORLD ECONOMY
➢ Some countries belonged to the “sterling block” around the UK (but evading
appreciation, dirty floating) devaluating their economy and believing in a purely
monetary recovery.
➢ The “Nazi block” believed in autarky, price controls and state allocation, capital controls
and public works and rearmament program.
➢ The “gold block” (around France) used conventional politics until the Gold Standard was
abandoned.
➢ The US isolates itself and develops a recovery policy under President Roosevelt: The
New Deal (public works, industry coordination, social security).
➢ Leaving the Gold Standard was necessary to make fiscal policy (government spending to
induce economic activity) and expansive monetary policy possible.
8. SUMMARY OF THE GREAT DEPRESSION
“Real” economy
➢ Industrial production falls 1929–1932
➢ Employment falls 1929–1932
➢ World Trade falls 1929–1932
“Monetary” economy
➢ Deflation 1925/29-1932, especially in agricultural and other primary products
already since 1925
➢ October 1929ff. Stock market crash (first in New York)
o Banking and financial crisis 1930–1933
o Many countries are unable to meet their public debt (default), 1931/33
Institutional level
➢ Gold standard is abandoned in UK 1931, US 1933, France 1936
 ➢ Protectionism: Increases in tariff rates, bilateral exchange agreements (to balance
the balance of payments not according to market outcomes, but after political
negotiations)

Lecture 12
The Bretton Woods System departed from the gold-exchange standard in three
fundamental ways. Pegged exchange rates became adjustable, subject to specific
conditions, being an instrument for eliminating balance-of-payments deficits. Control was
permitted to limit international capital flows, designed to avert the threat posed by volatile
capital flows of the short that were disruptive in both interwar decades. And a new
institution, the IMF, was created to monitor national economic policies and extend balance-
of-payments financing to countries at risk, with the capacity of sanction governments
responsible for policies that destabilized the international system and compensate
countries that were adversely affected.
Planning for the postwar international monetary order had been under way since 1940 in
the UK and 1941 in the US. their rival plans passed through a series of draft. The Keynes
plan would have allowed countries to change their exchange rates and apply exchange and
trade restrictions as required to reconcile full employment with payments balance. The
White Plan, in contrast, foresaw a world free of controls and of pegged currencies
superintended by an international institution with veto power over parity changes.
The final plan was based on liberalism and free trade. Trade would fuel recovery and provide
Europe with the hard currency earning needed to import raw materials and capital goods.
Once an open, multilateral trading system was restored, Europe could export its way out of
the dollar shortage and out of its problems of postwar reconstruction, allowing the system
of convertible currencies to be maintained. The administration´s free trade orientation was
supported by American industry, which saw export markets as vital to postwar prosperity
and Britain´s system of imperial preference as hindering its market access. The restoration
of open, multilateral trade was to be the tonic that would invigorate the Bretton Woods
System. For instead of removing them, Western European countries maintained, and in
some cases added to, their wartime restrictions. In Eastern Europe exchange controls were
used to close loopholes that would have undermined state trading. Latin American
countries used multiple exchange rates to promote import-substituting industrialization.
Overall, there was a movement un a liberalizing direction, but the five-year transitional
period stretched out to more than twice that length. There are several explanations for this
failure to liberalize at the anticipated pace. Sustaining a more liberal trading system would
have required European countries to boost their exports. Governments resisted trade
liberalization on the grounds that it would have worsened the terms of trade and lowered
living standards. Import restrictions acted like tariffs; they turned the terms of trade in
Europe´s favor at the expense of the US. the last failure is the lack of collaboration as GATT
showed. The GATT´s ambiguous statues limited the scope for coordination with the IMF,
complicating efforts to trade tariff concessions for the elimination of exchange controls.
The first crisis of Bretton Woods was the sterling crisis and the realignment of European
currencies. Britain´s attempt to restore convertibility was further complicated by its delicate
situation. Private and official holdings of gold and dollars had fallen by 50%. Foreign assets
had been requisitioned, and controls of foreign investment had prevented British residents
from replacing them. Under the circumstances, the decision to restore convertibility in 1947
was the height of recklessness. It was an American decision, not a British one. The six weeks
of convertibility were a disaster. Reserve losses were massive. The government, seeing its
reserves approaching exhaustion, suspended convertibility on August 20 with American
consent. A loan that had been designed to last through the end of decade was exhausted in
a matter of weeks.
Acknowledging the severity of Europe´s problem, the US acceded to modest discrimination
against American exports. And it followed up with the Marshall Plan. Significant quantities
were finally transferred in the second half of 1948. Until then, Britain´s position remained
tenuous. Making the dollar more expensive was designed to encourage exports to the US
and discourage imports in order to replenish France´s dollar reserves. But the policy created
inefficiencies and disadvantaged other countries; it provided and incentive to shunt British
exports to the US through third countries. These were precisely the kind of discriminatory
multiple exchange rates frowned on by the farmers of the Bretton Woods Agreement.
The situation became even worse with the 1948-49 recession in the US, that caused a dollar
gap to widen. While the recession was temporary, its impact on Europe reserves was not.
What the US gave with one hand, it took away with the other. Britain reserves for example,
losses halted immediately, and the country’s reserves tripled within two years.
The next aspect is the European Payments Union. They adopted a Code of Liberalization,
which mandated the removal of restrictions on currency conversion for purpose of current-
account transactions. Countries running deficits against the EPU have access to credits,
although they would have to settle with their partners in gold and dollars once their quotas
were exhausted. EPU departed from the Bretton Woods model and challenged the
institutions established there. The clearest examples are the crisis of 1947 and 1949. The
USSR had been presented at Bretton Woods but refused to assume obligations of an IMF
member. This left the US more willing to countenance discrimination in trade if doing so
facilitated recovery and economic growth in Western Europe.
The authority of the Bretton Woods institutions was weakened according to their
detachment from postwar payment problems, not being enough the lends to Europe
community.
Another problem was the convertibility issue. The situation was complicated by the fact
that the Bretton Woods System, like the gold standard before it, generated its own liquidity.
As they had under the gold standard, governments and central banks supplemented their
gold reserves with foreign exchange. The US could run payments deficits in the number of
foreign governments and central banks desired acquisition of dollars. A further problem
was the Triffin dilemma. Accumulating dollar reserves was attractive only as long as there
was no question about their convertibility into golds. But once foreign dollar balances
loomed large relative to US gold reserves, the credibility of this commitment might be cast
into doubt.
The logical response was to substitute other forms of international liquidity, born the
special drawing rights with the aim of diminishing the dollar´s key-currency role, generating
a conflict between developed and underdeveloped countries, according to their reserves of
gold.
The two last crisis that showed the fragility of Bretton Woods system were the sterling and
dollar ones.
Related to the first one, British governments, seeking to defend the exchange of 2,80$.
Despite to its positions fiscal policies should be implemented to maintain in Bretton Woods
(adjustment policies). Harold Wilson Cabinet rejected devaluation. It feared the inflationary
consequences in an economy already approaching full employment and worried that
Labour would come to be seen as the party that habitually devaluated. The governments
only remaining alternative was to impose deflationary fiscal measures, which it hesitated to
do.
The closing of the Suez Canal during the Six-Day War in 1967 and the declarations of the
French Foreign Minister, disappointed by the British government´s failure to adopt
adequate adjustment measures, voiced doubts about sterling´s stability. Against this
background, capital took flight and was no alternative to devaluation, being reduced in a
175 On November 18,1967.
The last crisis is the dollar´s one, as the end of Bretton Woods system.
American´s ultimate threat was to play bull in the china shop: to disrupt the trade and
monetary systems if foreign central banks failed to support the dollar and foreign
governments failed to stimulate merchandise imports from the US. Foreign governments
supported the dollar because it was the linchpin of the Bretton Woods and because there
was no consensus on how that system might be reformed or replaced. As income rose, so
did the relative price of services, the output of the sector in which the scope for productivity
growth is least. Since few products of the service sector are traded internationally, the
relatively rapid rise in sectoral prices showed up in the GNP deflator but did not damage
competitiveness. Hence, Europe and Japan, which were growing faster than the US, could
run higher inflation rates.
By absorbing dollars rather than forcing the US to devalue, foreign central banks allowed
their inflation rates to rise still further. In a world of liquid markets, even a small divergence
from sustainable policies could provoke a crisis. The spring of 1971 saw massive flows from
the dollar to the deutsche mark. It provoked an inflationary effect that was incremented by
the Nixon decision of closing the gold window, suspending the commitment to provide gold
to official holders of dollar at $35 an ounce or any other price.
The US import surcharge was abolished. But the US was not compelled to reopen the gold
window; if exchange rate pegs were maintained, this would now occur purely through
intervention on the part of the relevant government and central banks. Adjustment would
depend on the effects of the revaluations of European currencies that had occurred in the
summer of 1971.

Lecture 13
Globalization is a concept that is currently in our daily life. We cannot understand flying to
elsewhere in less than 15 hours without understanding the technological situation that
derived this process.
Working methods and product designs shifted to make production more modular and thus
easier to coordinate at distance. The telecom and Internet revolutions triggered a suite of
information management innovations that made it easier, cheaper, faster, and safer to
coordinate separate complex activities spatially.
The ICT revolution took years. However, was not the only big change in this time frame. The
development of air cargo both stimulated and was stimulated by the development of
international production networks. Air cargo allowed manufacturers to know that
intermediate goods could flow among distant factories almost as surely as they flow among
factories within a nation.
The attraction of sending things by air is speed. Is also associated with certainty and these
matters. Air cargo allows the offshoring firms to fix it in days, or maybe even hours, rather
than the weeks it would have taken when things were shipped by land or sea.
Evidence of a globalized world can be seen in many features, but firstly we are going to
analyze the different phases of globalization. In phase one, globalization consisted of the
gradual humanization of the planet. Globalization in phase two meant something quite
different. The Agricultural Revolution allowed humans to settle down in villages, cities and
eventually civilizations, so globalization in this phase meant localizing the world economy.
Phase third radically changed globalization yet again when the steam revolution launched
a century-long sequence of developments that made humans the masters of
intercontinental distances. Falling cost boosted trade, but moving goods hardly made the
world flat, quite the contrary. By the late twentieth century, 2/3 of economic activity was
clustered in just seven nations.
Phase four, has seen the economic foundation of this micro clustering crumble as the ICT
revolution lowered the cost of coordinating complex process across great distances. They
started moving labor-intensive stages of production from high-wage nations to low-rage
nations. Globalization was transformed by this North-South offshoring since advanced
know-how accompanied the offshoring stages of production. They are what allowed a small
number of developing nations to industrialize with a rapidity entirely out of line with
historical experience.
An impact on manufacturing was clear. The Old Globalization produced an industrialization
of the North and a deindustrialization of the South. The New Globalization has turned this
situation on its head. The North has seen a rapid fall in the number of jobs and value-added
shares in the manufacturing sector. At the same time, manufacturing output has soared in
six developing nations (China, Korea, India, Indonesia, Thailand and Poland).
US manufacturing output enjoyed positive growth for the first decade of Phase Four,
perhaps because it gained international competition from outsourcing to Mexico and
Canada. China´s manufacturing sector, which was completely uncompetitive in 1970, was
the second largest manufacturer in the world in 2010.
The shocking share shift showed how the group of seven share of global GDP declined from
2/3 in 1990 to under on-half today. Only eleven nations saw their global shares rise by more
than three-tenths of one percentage point between 1990 and 2010.
The share shift was unevenly distributed. China alone accounted for about seven
percentage points. Chinese export growth came about 90% from the manufacturing sector,
based in the value of goods as they leave the country. Rather 90% reflects the composition
of what is called value-added exports (iPhone example). The top five of R11 (China, Korea,
Poland, Turkey and Mexico) can be classified as dynamic manufacturing sectors.
The second category includes nations that made it via primary exports. Australia is the only
one that is clearly in this category, as over 60% of the value-added in its export growth came
from the primary goods sector.
The final category is India. India´s value-added export growth has been remarkably biased
toward services, although the manufacturing sector accounts for about 40% of its growth.
This reflects the country´s well-known prowess in information technology services, call
centers, and the like.
Brazil and Indonesia defy simple classification. Their booming value-added exports were
generated about 40% from the primary sector and 40 or 50% from the manufacturing
sector.
The next impact is on trade. Trade among rich nations has long involved a great deal of
back-and-forth trade, namely lots of exports and imports of the same type of goods. The
phenomenon it as indicative of factories that are spread across international borders. For
example, Airbus planes are assembled in France, but the parts are made all over Europe.
Some parts, for example, are made in France, exported to Germany for further processing,
and then re-exported to France for assembly into the final goods.
Another impact of ICT revolution can be seen in nation policies. Between the mid-1980s and
the mid-1990s, governments in developing nations around the world reversed decades of
opposition to freer trade and investment. They suddenly started to remove barriers to cross
border flows of goods, services and investment that they had kept in place for decades. In
short, protectionism seems to have become destructionism in the eyes of developing
nations.
The process that other G7 countries applied to catch the United Kingdom was the standard
set of four policies: unifying the domestic marketing with internal tariff, erecting external
tariff barriers to blunt the competitiveness of British manufactured goods, chartering banks
to finance industrial investments and stabilize the currency and establishing mass education
to ease the farm-to-factory transition.
As history would have it, most developing nations implemented this standard four-pack
once the yoke of colonialism was lifted in Phase Three. All this changed in Phase Four,
protectionism became destructionism. When the global value chain revolution started
picking up steam, many developing nations realized that trade barriers were harming their
chances of getting their share of the offshored jobs. The most obvious sign of this was the
full-throated unilateral tariff cutting that began around 1990. When a developing nation
joins an international production network, it typically imports a part a re-export it after
some processing. Any tariffs paid on the imported part add costs that directly harm the
competitiveness of the importing nation.
The most practical example of this globalization in terms of trade is the figure of Bilateral
investment treaty (BITs). These are concessions to rich nation firms seeking to invest in the
developing nation that signs the BIT. The concessions come in the form of disciplines that
govern interaction between private foreign investors and host governments. For the most
part, the provisions in these agreements constrain the developing nation´s sovereignty.
For example, BITs limit the developing nation´s ability to impose controls on capital flows
so investing firms can get money in or out the nation freely. Developing nations, however,
came to see them as win-win. The investment-receiving nations-mostly developing nations-
wanted to attract the jobs and factories that were being offshored as part of globalization´s
second unbundling. BITs do more to encourage North-to-South investment than South-to-
North or South-to-South investment.
The last aspect of this tech revolution is the impact on poverty. Globalization cannot be
blamed for all or even most of the rise. Population climbed rapidly in nations that were
already poor, and many of these poor nations had governments that pursued poverty-
inducing or poverty-sustaining policies. Since the Old Globalization turned into New
Globalization, the nations that the World Bank classifies as upper-middle-income countries
witnessed a miraculous drop in poverty. The upper-middle-income category includes most
of the R11 nations and most important, it includes China. The other standout member of
the R11 is India. It falls under the lower-middle-income classification and its growth is
largely responsible for the slowdown in the rise of poverty in these nations since 1993. The
situation in the low-income countries, which have generally been untouched by the rise of
offshoring and global value chains, continues to deteriorate.
LITTLE DIVERGENCE
The "Little Divergence" is the process by which the North Sea area of Europe (the United
Kingdom and the Netherlands) became the most prosperous and dynamic part of the
continent between 1300 and 1800. Studies such as Allen's classic study of real wages or Van
Zanden's or Broadberry's study of GDP per capita showed that the Netherlands and England
experienced almost continuous growth between the 14th and 18th century, while in other
parts of the continent real incomes declined in the long run (Italy), or stagnated at best
(Portugal, Spain, Germany, Sweden and Poland).
Several hypotheses of what caused this difference have been suggested: institutional
change (two versions: socio-political institutions such as parliaments, demographic
institutions such as the European marriage pattern), the impact of the growth of overseas
trade (Acemoglu), and the effect of human capital formation (Baten and Van Zanden).
The most comprehensive test of these various hypotheses was published by ROBERT C.
ALLEN. He set out to explain the Little Divergence in terms of real wages (of skilled workers),
comparing the results for a set of nine countries (Spain, England and Wales, Italy, Germany,
Belgium, the Netherlands, France, Austria-Hungary, and Poland) over the period 1300-1800.
Real wages, agricultural productivity, urbanization, proto-industrialization, and population
growth are explained by each other and by six exogenous variables: land-labor ratio,
enclosure movements, trade levels, representative governments, literacy rates, and
manufacturing productivity. The regression results show a positive effect of the land-labor
ratio (according to Malthusian expectations), and generally positive coefficients for
urbanization and agricultural productivity. But neither increasing literacy nor the expansion
of international trade seem to contribute directly to real wage growth. However, booming
international trade and agricultural productivity help explain trends in the rate of
urbanization and, through this link, also affect real wages. Allen finds a large effect of
international trade on the development of northwest Europe, while representative
governments and literacy rates are not able to explain economic success.
Other authors such as Pamuk focus on the influence of the Black Death on the differential
growth process in Europe. Only in the North Sea region (Flanders, Holland and England) did
this demographic shock have the "expected" Malthusian consequences, leading to a large
jump in GDP per capita. Moreover, the sharp rise in real income during the 1340s was not
followed by a decline in the subsequent period. In Spain and France, the Black Death had a
very different impact on GDP per capita, confirming that the Little Divergence may have
originated in responses to the sudden shock of the Black Death. The Black Death era
witnessed a series of important long-term changes in demographic behavior, agriculture,
manufacturing, trade and technology. They also suggest that the Netherlands and England
were able to resist to a greater extent the general downward trend during the second stage
of the demographic cycle that began with the Black Death. Even a cursory look at the real
wage series makes it clear that modern economic growth and the Black Death are the two
events that caused the most significant changes in wages and incomes during the last
millennium (Pamuk 2005).
Taking into account the different indicators, we can identify two types of causes of this little
divergence: intermediate causes and ultimate causes.
INTERMEDIATE CAUSES
On the one hand, among the intermediate causes we find international trade, often
identified as the main engine of growth in northwest Europe. Allen's conclusion was based
on estimates of the value of imports and exports of the countries active in the Atlantic trade.
Although the Italian fleet dominated the Mediterranean area in the 15th century, the Dutch
fleet was then ten times larger, and maintained this leading position until the 20th century.
The increase in European shipping was even more rapid after 1750, as the Scandinavian and
English fleet managed to catch up with the Dutch.
Another cause has to do with agriculture. Population growth, and above all the increase in
urban demand, raised the demand for food, which required higher levels of agricultural
production. Increased production was made possible by the expansion of land use.
Therefore, it was necessary to increase agricultural. Agricultural productivity stagnated in
southern Europe, while the countries bordering the North Sea were characterized by the
highest yield ratios in Europe.
Agriculture productivity
Agriculture was the most important input in the process of economic development, as it
produced by far the largest part of GDP. Population growth, and especially the increase in
urban demand, raised the demand for food, which required higher levels of agricultural
production. Increases in production were possible by expanding (arable) land use, but the
amount of land that can be used was limited in the long run. Rising agricultural productivity
was therefore necessary to feed a growing population. It worked in the opposite direction
as well: productivity growth in agriculture contributed to development, because it supplied
the manufacturing industry with raw materials and labour (Overton).
the yield ratio, of which Slicher van Bath has collected a large dataset, which was updated
with more recent evidence by Van Zanden. The yield ratio is the ratio between the gross
yield of a certain crop (in this case, wheat, or rye, the two dominant crops of European
agriculture) divided by the amount of seen used. It varies from about three in agricultural
systems with low levels of productivity, to (in our dataset) ten for highly efficient agricultural
systems. Slicher van Bath collected a large dataset of yield ratios from the available
literature and demonstrated that it is a good proxy of the efficiency of farming. Levels of
productivity in Western and Southern Europe were more or less similar. The yield ratios of
Central and Eastern Europe were much lower and almost constant over time, which
indicates little advances in productivity levels. Agricultural productivity stagnated in
Southern, whilst efficiency significantly increased in Western Europe. The countries
bordering the North Sea were characterized by having the highest yield ratios of Europe. By
contrast, productivity levels in Eastern and Central Europe were as high as those in Western
Europe during the Middle Ages.

International trade
has often been identified as the main driver of the growth of northwestern Europe
(Acemoglu). Reliable data on the growth of international trade are however not available.
Allen’s conclusion was based on estimates of the value of imports and exports of the
countries active in the Atlantic trade that were however highly “tentative”. Thanks to the
research by Unger and others, we have relatively good estimates of the size of the merchant
fleet of various regions and Europe as a whole, which can be used as a proxy of the growth
of overseas trade. The size of merchant fleets captures more general trade flows, and it is
for that reason a better measure of international trade. Moreover, it is available for more
countries and a longer period. Although the Italian fleet dominated the Mediterranean area,
its per capita size was equal to that of Spain, England, and Germany. The Dutch fleet was
ten times as large by then, and it kept this leading position. Whilst the Dutch managed to
quadruple per capita tonnage between. Rapid expansion in English and French shipping
started, although the French fleet was rather small compared to England and Holland.
Increases in European shipping were even faster, since the Scandinavian and English fleet
managed to catch-up with the Dutch. In Europe’s merchant fleet not only surpassed
anything seen before, but also the rise of north-western Europe in shipping was obvious
too: the Dutch, English, and Scandinavian fleets were by far the leading ones.
ULTIMATE CAUSES
On the other hand, the ultimate causes include the following. An influential body of
literature argues that it is the specific political economy of Western Europe and the balance
of power between sovereigns and the social interests represented in parliaments, which
created the right institutional conditions for the specific growth pattern of Europe. The
general idea is that the sovereign had to be limited to protect the property rights of citizens.
In republican systems with a strong Parliament, property rights were more secure than in
states ruled by absolutist kings.
An equally influential literature suggests that the fundamental causes of "modern economic
growth" are to be found in an interaction of demographic and economic changes, affecting
the "quality-quantity" trade-off (Becker , Galor), i.e. in the evolution of human capital
formation. A third "ultimate" cause of growth is possibly religion. Since the writings of Max
Webers, the relationship between religious change and economic development has been
much debated. Becker and Woessmann have concluded that Protestantism may have had
a strong positive effect on human capital formation.
Religion
A third “ultimate” cause of growth is possibly religion. Since Max Webers writings on “The
Protestant ethic and the spirit of capitalism” the link between religious change and
economic development has been much debated. Recently this debate has received new
attention as a result of econometric research trying to confirm such a relationship. Becker
and Woessmann have tested this relationship and concluded that Protestantism may have
had a strong positive effect on human capital formation.
Following Becker and Woessmann and hypothesize that Protestantism had a strong and
positive effect on human capital formation, and van Zanden,, who have shown that
Protestantism had no direct effect on economic development.
The Second-Stage results show that book consumption per capita significantly contributed
to per capita GDP. The coefficient on book consumption in the regression explaining
urbanization has the correct sign but is only significant at the low level. On the other hand,
however, the results indicate a positive relationship between political institutions and
urbanization.
In sum these findings therefore highlight the importance of human capital formation for
early modern growth. Via this channel, Protestantism has an indirect effect on growth, and
land scarcity appears to have a negative effect on GDP, but this is only a weak link. It also
highlights the close association of institutional changes and economic development.
To test for causality, we instrument the log of per capita book consumption with our
Protestantism variable. The first stage results show a positive association between
Protestantism and book consumption, which adds support to the empirical findings of
Becker and Woessmann that are indicative of a similar link between these variables. The
estimation results of the second stage indicate that book consumption contributed to per
capita GD
Protestantism was strongly correlated with human capital formation and was via this
channel indirectly affecting economic growth. This conclusion moreover supports growth
theories that stress the importance of human capital formation for the onset of modern
growth (Nelson and Phelps, Schultz, Galor).

Specific political economy of Western Europe and in particular the balance of power
between sovereigns and societal interests
An influential body of literature argues that it is the specific political economy of Western
Europe and in particular the balance of power between sovereigns and societal interests
represented in Parliaments that created the right institutional conditions for Europe’s
specific growth pattern. Two versions of this hypothesis can be distinguished. The first one
stresses the Glorious Revolution as the watershed between “absolutism” and some form of
“parliamentary” government and sees this event as the main cause of the Industrial
revolution (North and Weingast, Acemoglu and Robinson). The other one argues that these
institutions that resurfaced has a much longer history and that forms of power sharing
between the Prince and his (organized) subjects go back to the Middle Ages and are rooted
in the feudal power structures of that period (Van Zanden). The general idea shared by this
literature is that the sovereign had to be constrained to protect the property rights of
citizens. In republican systems with strong Parliament property rights were more secure
than in states ruled by absolutist kings. This translated itself into, for example, lower interest
rates at the capital market (Hoffman and Norberg). Previous research (e.g., Allen) used a
dummy variable derived from De Long and Shleifer to distinguish states governed by
“Princes” and those without (absolute) monarchs, the “Republics”. Poland is however
classified as a “Republic” which may help to explain why this variable turned out to be
insignificant in the regressions (Allen). We use the activity index of the various Parliaments
(defined as the number of years they were in session during a century) as the proxy for the
quality of political institutions. The averages of the south, central, and north-western parts
of Europe show a clear “institutional divergence” within the continent: parliamentary
activity grew strongly in the north-west but declined due to the rise of absolutism in the
south, but also in the central parts of Europe (except for Switzerland).
An additional institutional variable can be derived from information of the self-government
of cities. The communal movement that started in the Middle Ages has been seen as an
essential precondition for the rise of parliaments in the late Middle Ages, and important, as
it created stable systems of property rights in the cities concerned (Stasavage). In another
study the number of self-governing cities and the share of cities with communal status have
been quantified (Bosker). Cities can gain “independent” status, which they do on a large
scale, but can also lose it again, because of conquest by another city (as happened on a
certain scale in Italy), or by the abolishment of city right by absolutist rulers. We use this
information in two ways: the share of cities with self-government is used as an index of the
“republican” nature of the polity, like the activity index of the parliaments, because strong
self-government clearly constrains the sovereign.
Demographic and economic changes
An equally influential body of literature suggests that the root causes of “modern economic
growth” should be found in an interplay of demographic and economic changes, affecting
the “quality-quantity” trade-off (Becker and Galor), and resulting in on the one hand,
limitations on fertility and population growth, and on the other hand in increased human
capital formation. The emergence of the European Marriage Pattern in the North Sea area
in the Late Middle Ages has been hypothesized as the crucial demographic change, which
also resulted in increased investment in education of the (less) children (Hajnal, De Moor
and Van Zanden). An important part of the mechanism was the increase in the average age
of marriage of women (and men), which both limited fertility and increased opportunities
for human capital formation. Ideally, we would like to have a dataset of the spread of the
European Marriage pattern to test this hypothesis, but data limitations are particularly
severe here. Instead, we focus on the results of the switch from quantity to quality, that is
on developments in human capital formation. Allen used highly tentative estimates of
literacy as measures of the increase in human capital that occurred.
Instead, we use much more robust estimates of book consumption per capita as our
measure of human capital formation. This measure has already proven itself as a reliable
guide to changes in human capital (Baten and Van Zanden), and the underlying data (of
actual book production) are, especially for the earlier period, much better than the proxies
for literacy. Moreover, book consumption also measures more advanced reading and
writing skills than literacy rates do. Human capital formation is obviously not an entirely
“exogenous” factor. The literature on the European Marriage Pattern argues that it is
rooted in social and cultural institutions which help to explain the divergent development
of different parts of Europe, but endogenous processes—the growing demand for skills in
the more successful economies, for example—imply that human capital can to some extent
also be seen as an intermediate factor. To take this into account, we will instrument it with
a “truly” ultimate factor, the rise of Protestantism.
During the Middle Ages, Flanders and Italy, the two core areas of Western Europe, had
relatively high levels of book consumption. The Netherlands, Germany, France, and
Switzerland approximated or even surpassed Belgian and Italian levels of consumption,
whereas England, Ireland, Spain, Poland, and Sweden lagged behind. Levels of book
consumption were highest in Holland, followed by England and Sweden, whilst Belgium and
Italy fell behind. The large increases of book consumption per capita are the results of two
changes, the growth of human capital (resulting in a shift of the demand curve) and the
decline of book prices, following, amongst others, the invention of movable type printing
(resulting in a move along the demand curve).

Recently, the idea of a "Little Divergence" within Europe has been suggested as part of the
explanation of why the Industrial Revolution, the most important break in world economic
history, occurred in this part of the world.

OTHER FACTORS OF LITTLE DIVERGENCE

The little divergence: per capita GDP
The starting point is that we try to explain patterns of GDP growth in Western Europe
between 1300 and 1800. Recently, much new research charting the long-term evolution of
GDP per capita in various parts of Europe has been carried out, which now makes it possible
to systematically analyse patterns of real income growth. Moreover, we think that GDP is a
better proxy of economic performance. Real wages, an alternative proxy, are affected by
systematic changes in income distribution, and are strongly influenced by the “Black Death
bonus”, the sudden increase in real wages, due to increased labour scarcity. As a result, in
most countries the trend in real wages is downward, whereas GDP per capita is stagnant or
growing. A similar situation of labour scarcity is affecting real wages in Eastern Europe as a
result of which, for example, the highest real wages in the Allen dataset are found in Vienna,
not the region that comes to mind first as being highly successful. We prefer to use the GDP
estimates made within the framework developed by Maddison , which links all series of
GDP per capita to the benchmark (all estimates are therefore presented in GK dollars).
Thanks to studies carried out by Broadberry, Van Zanden and Van Leeuwen (Holland), Buyst
(Belgium), Schön and Krantz (Sweden), Pfister (Germany), Malanima (Italy), Alvarez-Nogal
and Prados de la Escosura (Spain and France), Pamuk and Shatzmiller (Ottoman Empire) we
now have a set of estimates of GDP per capita for those countries.
The timing of the Little Divergence is dependent on the country. The Netherlands already
has a much higher level of GDP than the rest of the continent. England only distances itself
from the other European countries, but it is also the country that grows consistently during
the whole period. To explain these trends, we test a number of alternative (or to some
extent supplementary) theories and ideas about why certain parts of Western Europe
experienced relatively rapid pre-industrial economic growth. The hypotheses we test are
derived from institutional economics (stressing the importance of political institutions
constraining the executive), and new/unified growth theory (focusing on human capital
formation). Moreover, we link GDP growth to international trade (the Smithian dimension),
to agricultural productivity, and finally we try to establish if Protestantism had a significant
effect on growth (indirectly via its effect on human capital formation). We will now review
these various explanations and discuss the various improved datasets we have collected to
test them.

Explanations of the Little Divergence

Intermediate causes
International trade
has often been identified as the main driver of the growth of northwestern Europe
(Acemoglu). Reliable data on the growth of international trade are however not available.
Allen’s conclusion was based on estimates of the value of imports and exports of the
countries active in the Atlantic trade that were however highly “tentative”. Thanks to the
research by Unger and others, we have relatively good estimates of the size of the merchant
fleet of various regions and Europe as a whole, which can be used as a proxy of the growth
of overseas trade. The size of merchant fleets captures more general trade flows, and it is
for that reason a better measure of international trade. Moreover, it is available for more
countries and a longer period. Although the Italian fleet dominated the Mediterranean area,
its per capita size was equal to that of Spain, England, and Germany. The Dutch fleet was
ten times as large by then, and it kept this leading position. Whilst the Dutch managed to
quadruple per capita tonnage between. Rapid expansion in English and French shipping
started, although the French fleet was rather small compared to England and Holland.
Increases in European shipping were even faster, since the Scandinavian and English fleet
managed to catch-up with the Dutch. In Europe’s merchant fleet not only surpassed
anything seen before, but also the rise of north-western Europe in shipping was obvious
too: the Dutch, English, and Scandinavian fleets were by far the leading ones.
Agriculture productivity
Agriculture was the most important input in the process of economic development, as it
produced by far the largest share of GDP. Population growth, and especially the increase in
urban demand, raised the demand for food, which required higher levels of agricultural
production. Increases in production were possible by expanding (arable) land use, but the
amount of land that can be used was limited in the long run. Rising agricultural productivity
was therefore necessary to feed a growing population. It worked in the opposite direction
as well: productivity growth in agriculture contributed to development, because it supplied
the manufacturing industry with raw materials and labour (Overton).
To find out how important increases in agricultural productivity were for explaining the
Little Divergence Allen uses an index of agricultural productivity to compute gains in
efficiency (Allen). This measure of technological progress however depends on the process
of urbanization, real wages, and the land-labour ratio, which means that it is already
correlated with these variables. We therefore prefer another indicator, the yield ratio, of
which Slicher van Bath has collected a large dataset, which was updated with more recent
evidence by Van Zanden. The yield ratio is the ratio between the gross yield of a certain
crop (in this case, wheat, or rye, the two dominant crops of European agriculture) divided
by the amount of seen used. It varies from about three in agricultural systems with low
levels of productivity, to (in our dataset) ten for highly efficient agricultural systems. Slicher
van Bath collected a large dataset of yield ratios from the available literature and
demonstrated that it is a good proxy of the efficiency of farming. Levels of productivity in
Western and Southern Europe were more or less similar. The yield ratios of Central and
Eastern Europe were much lower and almost constant over time, which indicates little
advances in productivity levels. Agricultural productivity stagnated in Southern, whilst
efficiency significantly increased in Western Europe. The countries bordering the North Sea
were characterized by having the highest yield ratios of Europe. By contrast, productivity
levels in Eastern and Central Europe were as high as those in Western Europe during the
Middle Ages. The variables considered so far, the size of the merchant fleet and agricultural
productivity, can be considered as “intermediate” causes of the Little Divergence. We now
turn to several “ultimate” causes, such as the quality of political institutions, demographic
changes (resulting into more human capital formation) and religion, which in the literature
play an important role as root causes of economic growth.

Ultimate causes
Specific political economy of Western Europe and in particular the balance of power
between sovereigns and societal interests
An influential body of literature argues that it is the specific political economy of Western
Europe and in particular the balance of power between sovereigns and societal interests
represented in Parliaments that created the right institutional conditions for Europe’s
specific growth pattern. Two versions of this hypothesis can be distinguished. The first one
stresses the Glorious Revolution as the watershed between “absolutism” and some form of
“parliamentary” government and sees this event as the main cause of the Industrial
revolution (North and Weingast, Acemoglu and Robinson). The other one argues that these
institutions that resurfaced has a much longer history and that forms of power sharing
between the Prince and his (organized) subjects go back to the Middle Ages and are rooted
in the feudal power structures of that period (Van Zanden). The general idea shared by this
literature is that the sovereign had to be constrained to protect the property rights of
citizens. In republican systems with strong Parliament property rights were more secure
than in states ruled by absolutist kings. This translated itself into, for example, lower interest
rates at the capital market (Hoffman and Norberg). Previous research (e.g., Allen) used a
dummy variable derived from De Long and Shleifer to distinguish states governed by
“Princes” and those without (absolute) monarchs, the “Republics”. Poland is however
classified as a “Republic” which may help to explain why this variable turned out to be
insignificant in the regressions (Allen). We use the activity index of the various Parliaments
(defined as the number of years they were in session during a century) as the proxy for the
quality of political institutions. The averages of the south, central, and north-western parts
of Europe show a clear “institutional divergence” within the continent: parliamentary
activity grew strongly in the north-west but declined due to the rise of absolutism in the
south, but also in the central parts of Europe (except for Switzerland).
An additional institutional variable can be derived from information of the self-government
of cities. The communal movement that started in the Middle Ages has been seen as an
essential precondition for the rise of parliaments in the late Middle Ages, and important, as
it created stable systems of property rights in the cities concerned (Stasavage). In another
study the number of self-governing cities and the share of cities with communal status have
been quantified (Bosker). Cities can gain “independent” status, which they do on a large
scale, but can also lose it again, because of conquest by another city (as happened on a
certain scale in Italy), or by the abolishment of city right by absolutist rulers. We use this
information in two ways: the share of cities with self-government is used as an index of the
“republican” nature of the polity, like the activity index of the parliaments, because strong
self-government clearly constrains the sovereign.
Demographic and economic changes
An equally influential body of literature suggests that the root causes of “modern economic
growth” should be found in an interplay of demographic and economic changes, affecting
the “quality-quantity” trade-off (Becker and Galor), and resulting in on the one hand,
limitations on fertility and population growth, and on the other hand in increased human
capital formation. The emergence of the European Marriage Pattern in the North Sea area
in the Late Middle Ages has been hypothesized as the crucial demographic change, which
also resulted in increased investment in education of the (less) children (Hajnal, De Moor
and Van Zanden). An important part of the mechanism was the increase in the average age
of marriage of women (and men), which both limited fertility and increased opportunities
for human capital formation. Ideally, we would like to have a dataset of the spread of the
European Marriage pattern to test this hypothesis, but data limitations are particularly
severe here. Instead, we focus on the results of the switch from quantity to quality, that is
on developments in human capital formation. Allen used highly tentative estimates of
literacy as measures of the increase in human capital that occurred.
Instead, we use much more robust estimates of book consumption per capita as our
measure of human capital formation. This measure has already proven itself as a reliable
guide to changes in human capital (Baten and Van Zanden), and the underlying data (of
actual book production) are, especially for the earlier period, much better than the proxies
for literacy. Moreover, book consumption also measures more advanced reading and
writing skills than literacy rates do. Human capital formation is obviously not an entirely
“exogenous” factor. The literature on the European Marriage Pattern argues that it is
rooted in social and cultural institutions which help to explain the divergent development
of different parts of Europe, but endogenous processes—the growing demand for skills in
the more successful economies, for example—imply that human capital can to some extent
also be seen as an intermediate factor. To take this into account, we will instrument it with
a “truly” ultimate factor, the rise of Protestantism. During the Middle Ages, Flanders and
Italy, the two core areas of Western Europe, had relatively high levels of book consumption.
The Netherlands, Germany, France, and Switzerland approximated or even surpassed
Belgian and Italian levels of consumption, whereas England, Ireland, Spain, Poland, and
Sweden lagged behind. Levels of book consumption were highest in Holland, followed by
England and Sweden, whilst Belgium and Italy fell behind. The large increases of book
consumption per capita are the results of two changes, the growth of human capital
(resulting in a shift of the demand curve) and the decline of book prices, following, amongst
others, the invention of movable type printing (resulting in a move along the demand
curve).
Religion
A third “ultimate” cause of growth is possibly religion. Since Max Webers writings on “The
Protestant ethic and the spirit of capitalism” the link between religious change and
economic development has been much debated. Recently this debate has received new
attention as a result of econometric research trying to confirm such a relationship. Becker
and Woessmann have tested this relationship and concluded that Protestantism may have
had a strong positive effect on human capital formation. In our approach such an effect
would be included in the book production estimates (which are indeed strongly correlated
with Protestantism). We will test for this indirect effect, by including, starting in dummies
for Protestantism.
Following Becker and Woessmann and hypothesize that Protestantism had a strong and
positive effect on human capital formation, and van Zanden,, who have shown that
Protestantism had no direct effect on economic development.
The Second-Stage results show that book consumption per capita significantly contributed
to per capita GDP. The coefficient on book consumption in the regression explaining
urbanization has the correct sign but is only significant at the low level. On the other hand,
however, the results indicate a positive relationship between political institutions and
urbanization. In sum these findings therefore highlight the importance of human capital
formation for early modern growth. Via this channel, Protestantism has an indirect effect
on growth, and land scarcity appears to have a negative effect on GDP, but this is only a
weak link. It also highlights the close association of institutional changes and economic
development.
To test for causality, we instrument the log of per capita book consumption with our
Protestantism variable. The first stage results show a positive association between
Protestantism and book consumption, which adds support to the empirical findings of
Becker and Woessmann that are indicative of a similar link between these variables. The
estimation results of the second stage indicate that book consumption contributed to per
capita GD
Protestantism was strongly correlated with human capital formation and was via this
channel indirectly affecting economic growth. This conclusion moreover supports growth
theories that stress the importance of human capital formation for the onset of modern
growth (Nelson and Phelps, Schultz, Galor).
SHORT QUESTIONS (max one quarter of a page). Pick TWO. There will be 10 questions
from this pool.
1. What are the main brakes to demographic expansion in a pre-industrial economy?
2. Were living standards above a minimum respectable level after the Black Death?
Motivate your answer.
3. Why do you think Marx and Engels misinterpreted the consequences of the Industrial
Revolution in England?
4. Why was aggregate economic growth in England so slow during the Industrial Revolution?
5. To what extent was the first globalization a consequence of the English Industrial
Revolution?
6. Why was there a globalization backlash in the last quarter of the 19th century?
7. What were the sources of the industrial success of the US economy? Explain your answer.
8. Why was the Versailles Treaty an obstacle to the return of normal economic conditions
after WWI?
9. What was the impact of WWI on the British balance of payments?
10. Which European economies performed worse in the 1920s and why?
11. Which European economies performed worse in the 1930s and why?
12. To what extent did the US economy sustain the stabilization of Western European
economies in the 1920s? Discuss this specially in relation to Germany.
13. Why do you think the Great Depression was NOT caused by the Stock market crash in
the US in October 1929?
14. What were the three main autonomous centres of the Great Depression? Why?
15. Why the international economy fragment during the Great Depression?
16. Which were the main trading zones after the collapse of the Gold Standard? Did the
creation of these zones have a negative impact on international trade?
17. Why did Germany and other central and Eastern European economies use bilateral
agreements to trade after 1931?
18. Despite the destruction and deaths, why did Western Europe recover quickly from
WWII?
19. Which were the main factors explaining the decades of super growth in Western Europe
after WWII?
20. What is the trilemma and what version of the trilemma did Bretton Woods represent?
Motivate your answer.
21. Why was fast economic growth a global economic phenomenon in the 1950s and 1960s?
22. Why was Europe unable to adopt mass production before 1950?
23. Why was the oil shock of 1973 NOT the cause of the end of the Golden Age?
24. Why was the rise of the welfare state so complementary to the Golden Age of growth
in Western Europe?
25. What is de-industrialization and what are the main factors explaining it?

Mass production requires three-pronged investment:

➢ In the optimum-size plants to assure economies of scale (high fixed costs)
➢ In networks to assure continuous raw material supply and new forms of marketing
(branding, advertisement) and distribution (franchise, own sales agents)
➢ In a hierarchy of specialized salaried managers who organized production, supply,
distribution, marketing (managerial capitalism)