November 7th

 Neapolitan’s continental system: cutting England off of the EU?

o Objective was to cut off the EU exports to England with the idea of starving
England into submission.
o England was a food producer but most of its good land was already in food
production
 With the Napoleonic wars, England had to increase domestic production of food but the
quality of land they had to bring into production wasn’t very good.
o To turn it into decent land and replace the food that was cut off from Europe, you
had to spend a fair bit on clearing the land.
o Think about what this does to the cost of food and the production function and
MC of food
 Think in terms of intro micro so you were moving into higher cost of
marginal cost.
 Marginal cost of domestic agricultural production increased dramatically
(fig 1).
 Price had to be high enough to cover the marginal unit
 Marginal cost of production will increase
 Price must cover the cost of growing on the bad land
 Good land is going to be exceedingly profitable because the price has to
be the same for the poor land
 Price of food has to go up at the same rate as marginal cost of production
 In England during this time (19th century), you had a lot of small banks that were in
competition with each other. They were not branches of the same bank
o Little to invest but they tended to invest locally
o More and more of bank investments took the form of loans to people who were
bringing land into production
o Food was going up which means that owning good land was increasingly more
profitable as average cost was more than marginal cost
 You have to spend more money on the poor land to maintain it – it was an
ongoing high cost of maintaining the poor land
 Degree of rational exuberance
 People began to think that the price of agricultural land always went up as
they got used to the idea that land prices were rising or staying high
 Similar to the US 2009 situation as banks lent to land developers
 Apart from the nature of the crop, you had the same thing going on
 1814, Neopolian was defeated and the continential system ended so
England could import food from EU and 1814 and 1815 were good years
for harvesting which means there was more food on the market so the food
market in England collapsed.
 If you were an urban consumer this was great
 If you were a farmer and you had expanded your production
capacity assuming prices would remain high, all of the sudden
prices drop. You are taking a loss on your operations and you
cannot pay your bank loan back. You were paying the loan back
using your profits but when prices came down, profits vanished.
  The local bank had mainly invested in loans so they went from
being healthy to bankrupt. In a year, about 90 banks failed and in 3
years, around 200 banks failed
 When a bank fails, your savings are gone. When the local banks collapsed,
you had a major crash in the agricultural areas outside London but London
banks were lending to local banks so there was an area of contagion.
 Price of the stuff they were producing came down so the bank portfolios
were no longer generating income. Same kind of irrational illusion story –
because local banks did not diversify their portfolios as they focused on
the one local industry.
 Same thing happened in Ireland in 2008
o All started with one bank who was fairly small. Got itself
into trouble with housing developers. They were going to
money markets in Germany to lend to Irish land developers
– it had to attract them by raising interest rates.
o Heavily in finance. Paying high interest rates on deposit to
steer consumers away from other banks. Other banks had to
raise their interest rates to hang onto their depositors. They
have to find somewhere to make high interest rates on loans
and the only place paying high rates was housing
developers. So even though other banks may not have been
interesting heavily in housing, the only way to increase
profits is to increase loans.
o Profit comes from spread on loans and what they pay on
deposits. They make money by having a lot of loans.
o Incomes rose which means that more people are willing to
pay more so this attracted more developers
 Keltic Tiger Phenomenon
 Corn logs were protective tariffs on food as the prices of food were kept high because of
kidneys’
 English Agricultural technology
 Analysis of the dotcom boom in the 199’s
o This was the English railroad of the 1940’s
o 1935 bubble was driven by new technology. You had high pressure steam
engines.
 You can do more with high pressure steam engines like build trains.
 In 1990’s you had new internet technology
o You could see the technology was going to have an impact which means people
are going to want to invest in it – an influx. You cannot invest in an area, broadly.
o Opportunity to buy productive capital for cheap
o You have a new technology bubble which was driven by the technology that
would create creative destruction
o Distinction: for a tech bubble, once the bubble has burst the physical capital is
still there
o Industrial revolution was driven by capacity.
o Increase in England’s productive capacity was still there after the bubble
 o Think about how all of the bubbles discussed in this course are different.
 A lot of people think that bubbles are driven by poor monetary policy when money is
produced at a higher rate and interest rates are kept too low, for too long.
o Prices either slow or the central banks raise interest rates
 Think about the Mississippi bubble
 Austrian economic theory argues that most bubbles are the result of bad monetary policy
and the first example could be the Mississippi bubble
o Railroads – creative destruction
o South Sea bubble – element of new technology – new possibilities
 England in 1840, England was a national economy but transportation was either along the
sea costs or inland by canal
o Canals reduced the cost of transportation as it cost 1/10th as much to transport the
same by carrying goods on a buggy but then railroads became cheaper
o Creative destruction – railroads were going to wipe out the canals so you invest in
the railroads so you get an upswing of railroads being built so you get an over
capacity of railroads being built so competition is driving the price of the product
down – initial surge is Shumpeter and then its neoclassical model that comes into
play.
o If you can ship your products for cheaper, it drives down the price for consumers
o Your innovator makes a lot of money so by definition he does but in the long-run
compared to the shift of consumer surplus, it is pennies