Lecture 1: The One Big Question & Five Big
Approaches of Economic History
ECON 451
Fall 2012
Professor David Jacks
1
Already identified the big question for this course:
how did we get here?
But there are probably too many answers and
certainly not enough time for this.
What we need to do is get a little more specific in
this lecture.
In particular, we want to identify the various
approaches used to explain the economic history
of the world in the past 12,000 years.
The theme of this course
2
First, an overview of 12,000 years of global
economic history…
Population in 10000 BC = 50 million
Population in 5000 BC = 100 million
Population in 0 AD = 300 million
Population in 1800 AD = 800 million
Note the accelerating trend; this suggests
tremendous “success” in replicating ourselves.
The Economic History of the World
3
But a very different picture emerges if we
consider income per capita over these years
(indexing to its value in 10000 BC)…
Income/Person in 10000 BC = 1
Income/Person in 5000 BC = 1
Income/Person in 0 AD = 1
Income/Person in 1800 AD = 1
Note the lack of trend; this suggests tremendous
“failure” in bettering ourselves.
The Economic History of the World
4
Of course, this might be a little too extreme of a
statement…
Certainly, there were deviations around 1 at
some times and places, e.g. Rome in 200 AD,
Song Dynasty China in 1100 AD, Newfoundland
in 1350 AD, Tahiti in 1700 AD…
But these deviations were extremely small (range
of of 0 to 2) and were swamped by the standards
of living of populations living elsewhere.
The Economic History of the World
5
In the pre-modern era (that is, everything before
1800 AD), the only growth was extensive
growth—an increase in the sheer numbers of
humanity.
But there were no permanent improvements in
income per capita for over 11,000 years.
Understanding the sources of this lack of growth
is one of the key goals of this course…knowing
what was holding us back might help us forward.
Pre-modern Economic Growth
6
1000
World Population (millions) & Living Standards (1800=1)
from 10000 BC to 1800 AD
5
800
4
600
3
400
2
200
1
0
10000
0
9000
8000
7000
6000
5000
4000
3000
2000
1000
Pre-Modern Economic Growth in Pictures
0
1000
7
Imagine forecasting the world of 2000 AD in
1800 AD…probably, more of the same, but you
would be oh-so-wrong.
Global Population in 2000 AD = +6 billion
Income per person in 2000 AD = 15 for OECD
(Europe, NA, Australasia, Korea, and Japan)
Huge deviations across countries as well:
GDP/cap in top 20 countries = 28,000 USD
GDP/cap in bottom 20 countries = 220 USD
Moving forward in time
8
In the modern era (that is, after 1800 AD),
growth was now both:
1.) extensive in that population grew (well,
actually exploded) and
2.) intensive as there was an increase in the
amount of output per person.
Thus, 1800 AD marks a clear breakpoint in
human history which we still struggle to
understand.
Modern Economic Growth
9
6000
World Population (millions) & Living Standards (1800=1)
from 10000 BC to 2000 AD
15
14
13
5000
12
11
4000
10
9
8
3000
7
6
2000
5
4
3
1000
2
1
0
10000
0
9000
8000
7000
6000
5000
4000
3000
The Economic History of the World
2000
1000
0
1000
2000
10
An even more astounding statistic to consider is
the growth in global output (that is, population
times output per capita):
Y in 10000 BC = 1
Y in 5000 BC = 2
Y in 0 AD = 6
Y in 1800 AD = 16
Y in 2000 AD ≥ 1000!
Thus, we live in a world of whole lot more
stuff…
Another View of Modern Economic Growth
11
Essentially, we have three different aspects of
long-run economic growth to explain:
1.) Why was there so little growth before 1800?
Week 2: The Malthusian World (or Trap)
2.) Why was there a turning point around 1800?
Weeks 3-9: The Agricultural/Commerical/
Industrial Revolutions
3.) Why was the take-off after 1800 limited?
Weeks 10-11: The Great Divergence
Eras in European Economic History
12
Most of our time will be focused on the second
topic, and there is a reason for that.
If we can explain the second, the other two
questions will be in large part answered.
What we will concentrate on in the rest of this
lecture are some of the main explanatory
variables employed by economists and historians
to address these three questions.
Eras in European Economic History
13
In general, there are five big themes used by
economic historians to explain this transition:
1.) Technology
2.) Markets
3.) Values
4.) Geography
5.) Institutions
But notice none of these explanations are
mutually exclusive…in fact, they might all be
vitally related to one another.
Five Big Explanations
14
Obvious importance of technology in
determining the transition from the so-called
Malthusian trap to the present day.
Less obvious importance of “the rise of modern
science” as it can explain little of the growth
witnessed before 1870.
And it has little to say about the emergence (and
persistence) of divergent economic outcomes
across countries into the present day.
Technological Fundamentalism
15
Pros for the technology approach:
It explains everything about economic growth.
Cons for the technology approach:
It explains nothing about economic growth as
economic growth and technological
improvement are virtually synonymous.
That is, it just pushes our question from “what
explains long-run economic growth” to “what
explains long-run technological improvement”.
Technological Fundamentalism
16
This is actually one of the first economic theories
of growth ever formulated.
The source was Adam Smith and his book, The
Wealth of Nations: over time the size of markets
would expand.
When markets expanded, the degree of
specialization could increase as well and with
specialization comes productivity gains.
Markets
17
That is, more output could be produced from the
same amount of inputs; Smith’s famous example
of a pin factory in Scotland.
18 separate processes to make just one of these...
Markets
18
This mechanism primarily works in two
dimensions:
1.) Deepening the market: greater incomes
stimulate more diversified demand.
2.) Widening the market: bring in new
geographical areas or new types of consumers.
In either case, progress on these two fronts
occurred in pre-modern era, but at a slow pace.
Markets
19
Pros for the market approach:
1.) Economists certainly like it as markets are
something we can actually talk about.
There is also nice set of theory to draw insights
from (in particular, micro and international).
2.) It fits some time periods well, e.g., regional
trade in early modern Europe (1500-1800).
Markets
20
Cons for the market approach:
1.) The gains from trade that Smith (but also
other classical economists) describe are static.
That is, they are an insufficient explanation for
the dynamics of long-run economic growth.
2.) “The division of labour is limited by the
extent of the market”: in times of high trade
costs (the majority of human history), the extent
of the market is very limited indeed.
Markets
21
Cons for the market approach:
3.) It assumes—but does not explain—the
existence and evolution of markets over time, but
this is problematic because
a.) markets are highly dependent upon
outside influences (in other words,
susceptible to exogenous shocks).
b.) markets face serious issues with respect
to coordination & cooperation.
Markets
22
Probably the oldest type of explanation—see
Aristotle, for instance, on this one.
Most of the time, this approach answers the
question of “why are we so rich and they so
poor” in two ways: we are good and they are
bad, or vice versa.
That is, wealth associated with personality traits
of individuals, nations, ethnicities, races, etc.
Generally amounts to observing economic
outcomes and working backwards.
Values
23
Most famous thesis relating values and growth is
Weber’s idea of a protestant work ethic which
runs like this:
1.) Protestant theology stressed the role of God’s
grace in salvation, but this created uncertainty.
2.) So believers became single-minded in their
devotion and had no room for diversion.
That is, they developed “an ascetic character”,
denying themselves all pleasures of this world.
The Protestant Work Ethic as an Example
24
3.) Protestantism also stressed the necessity of
hard work and the goodness of labour (in
particular, finding a calling).
Hard work + clean living = capital accumulation.
All together, this justified the pursuit of profit as
an appropriate activity for protestant Christians
and instilled workers with a capitalist ethic.
Thus, the goals of personal salvation and
personal enrichment became wrapped up with
one another.
The Protestant Work Ethic as an Example
25
By pursuing riches (as well as salvation),
Protestant countries pulled away from the rest—
Christian or not.
Modern economic growth began first in the
Netherlands and then definitely in the United
Kingdom.
These were also the most heavily protestant
nations of Europe…
At the same time, it is clear that Weber had the
benefit of observing them after their transition.
The Protestant Work Ethic as an Example
26
Pros for the values approach:
1.) It is undeniable that the values an individual
possesses are going to have some effect on
things like their attitude to money and work.
And these will likely be correlated with
economic outcomes; so why not larger units?
2.) It might explain some real world examples,
c.f. Europe and the United States.
Values
27
Cons for the values approach:
1.) Economists dislike it because it leaves the
explanation of economic growth in the realm of
anthropology, history, and sociology.
2.) It is hard to describe an individual’s values
beyond superficialities, much less a nation.
Thus, drawing reliable conclusions about effects
on economic growth is highly problematic.
Values
28
Cons for the values approach:
3.) Supposed “values” like laziness are an effect
of the economy itself; consider the examples of
Germany, Japan, and Korea…
4.) It is easily reconciled with stereotypes
motivated by religion, racism, nationalism, etc.
Moreover, it can lend support to some pretty
dubious causes.
Values
29
Another obvious candidate as geography plays
into such factors as:
1.) agricultural productivity,
2.) disease vectors,
3.) natural disasters,
4.) defense from enemies…
An area of increasing public interest and policy
research lately (Jeffrey Sachs, Bono, the UN).
Geography
30
But at the same time, how far does this get in
explaining differences in income per capita?
Geography is—for all intents and purposes—
fixed, permanent, invariant...
Consequently, geography is likely to have a level
rather than a growth effect.
And we would like to explain differential growth
over the long-run.
Geography
31
The only way for geography to influence growth
outcomes is in its interaction with other
variables/determinants.
These interactions could come through the pace
of technological change, the extent of markets,
or the type of institutions established.
The party line for some is that geography matters
in the very long run (Diamond), the long run
(Jones), and/or the medium run (Sachs).
Geography
32
In the very long run, geography determines the
basic agricultural technology available to a
society.
Rice—the most productive crop in the world—
can only be grown in a fairly limited area which
by and large excludes Europe.
Likewise, horses—a powerful aid to agricultural
production—died out in North America circa
10000 BC.
Geography
33
For Jared Diamond, the lack of domesticated
animals and plants explains the disparity
between the Eastern and Western hemispheres at
the point of contact circa 1500 AD.
No rice, wheat, barley, rye, horses, cows… =
limited population levels and density.
Lower population levels resulted in a lower level
of technology; lower population densities
resulted in a higher susceptibility to disease.
Geography
34
But what about dogs, corn, & Mexico City?
Geography
35
In the long run, geography might determine the
general technology available to a society.
For Eric Jones, this explains the disparity
between Europe and Asia from 1500.
A lack of geographical barriers in much of Asia
gave rise to political consolidation in the face of
recurrent invasions from the Eurasian steppe.
Thus, the Chinese, Ottoman, and Mughal
empires.
Geography
36
But Europe was “blessed” with many natural
barriers—the Carpathian Mountains, the Alps,
the Pyrenees, the Danube, the Rhine…
This provided natural borders and aided the
growth of multiple European states.
Their struggle for dominance led to an openness
to innovation, especially in the military sphere
but also political and technical.
Geography
37
And those who “put the blinders down” suffered,
witness the Ottomans.
This lack of openness hindered East and South
Asian nations in the “race” to follow.
Even if the claim that Asia lacked natural
barriers is plausible, a political and therefore
economically integrated area would provide for
greater incentives to innovation if the size of the
market matters.
Geography
38
In the medium run, geography determines the
trade opportunities available to a society.
For Jeffrey Sachs, this explains much of the
disparity in economic performance across
nations after 1950.
The lack of access to waterways, remoteness
from trade partners, and the physical size of a
country all lead to lower levels of trade, both
domestically and internationally.
Geography
39
Empirically, lower levels of trade are associated
with lower levels of:
1.) competition;
2.) scale in production;
3.) “embodied” technological change; and
4.) lower levels of foreign direct investment.
All of which can have detrimental effects on
economic growth.
Geography
40
Pros for the geography approach:
1.) It obviously has big level effects across
countries, and with interaction effects, can have
big growth effects as well.
2.) It is a particularly value-free approach to
economic history and development—witness the
success of Diamond’s book (“if geography is the
key, no one should feel superior/inferior to
another person/nation/culture/continent”)
Geography
41
Cons for the geography approach:
1.) It is not obvious whether geography is purely
exogenous; that is, a case of reverse causality.
The examples of natural resources and the
United States in 1900 or the prevalence of
malaria today.
2.) It can easily fit the data too well, e.g.,
Diamond’s thesis has no way of being falsified.
Geography
42
First, we need to define an institution, and we
will go to the source on this one, Doug North.
Institutions “are the humanly devised constraints
that structure political, economic, and social
interaction.”
They “consist of both informal constraints
(sanctions, taboos, customs, traditions, and codes
of conduct), and formal rules (constitutions,
laws, property rights).”
Institutions
43
“Together with the standard constraints of
economics they define the choice set and
therefore determine transaction and production
costs and hence the profitability and feasibility
of engaging in economic activity.”
Specifically, they “provide the incentive
structure of an economy; as that structure
evolves, it shapes the direction of economic
change towards growth, stagnation, or decline.”
Institutions
44
Now, let us consider an example of an
institution, its possible effects, and its evolution.
Usury laws set the maximum amount of interest
which can be charged on certain types of loan.
Usury laws emerged in Europe and were dictated
by the Catholic church which ruled that it was
sinful to gain from the misfortune of another
(i.e., someone in need of a loan), so it was sinful
to charge interest on a loan.
Institutions
45
But without interest, there is no market in
loanable funds.
But credit such as this could be employed in
profitable enterprises and maybe spur growth.
Eventually, the wealth of the church and the selfinterest of merchants lead to usury laws to be
increasingly ignored, and money flowed into
profitable enterprises.
Institutions
46
Pros for the institutions approach:
1.) We can potentially explain economic growth
in terms of economic variables, plus they allow
us to bring in the insights of anthropology,
history, and sociology (but on our own terms).
2.) The institutional approach
makes obvious sense—one only
need think of the two Koreas.
Institutions
47
Cons for the institutions approach:
1.) Sometimes bad institutions change over time
and sometimes they persist; the role of culture
and politics—but what determines these?
2.) Susceptible to post hoc, ergo propter hoc
reasoning (“after this, because of this”).
For example, the correlation between democracy
and economic growth.
Institutions
48