September 28, 2017

 Change in the broader economic environment with the fall of the roman empire. There
was a Europe wide market with one set of laws. Effectively a single currency. Rome falls
and the whole market fragments. There was no actual business policy, what was lost was
peace, order, and good government. You could no longer ship your goods from one area
to another as there was no security that your goods would be raided. The markets shrank.
There was a change in the nature of production and farms got smaller as there were no
longer the large-scale estates or the large, one product producers.
o There were a lot of animal bones on farms during this period. Instead of trading,
they had to try and produce everything themselves. Same problem you had with
agriculture – the land was not always suited to that animal. You had a production
function with the wrong inputs when you were producing a little bit of everything.
 People stopped using coin around 400 AD. There were silver pennies that were used and
then they became of too high value to actually spend so people started cutting coins to
buy things. For example, one loaf of bread cost a quarter of a penny so people started
splitting their coins. There was a demonetization of money – there was an economic
stagnation. Money became irrelevant and people stopped using it. Total output was
reduced even though your resources are still there. The inefficient nature of small, local
production means you are getting less total output than you used to.
 Times turned when Alfred the Great came into play. There was a revival or market
activity. You did not have business policy such as subsidy policies for businesses. What
you had was more law and order. There was more public safety and one of the effects of
this was that you saw more market towns. Villagers now felt safer to take their goods to
the market town which meant they felt a bit safer about specializing a bit more in
whatever their soil was well suited towards. Market towns reappeared and local peasant
farmers moved a bit more towards specialization. The specialization meant that the
famers started the markets? It is argued that the market was there first because there
needed to be confidence that you could sell what you were specializing in and you take
the money you get from selling your goods, and you take that to buy the goods you are no
longer producing.
o Now talking about a subsistence economy. They are conservative and do not like
uncertainty. Subsistence Production – if you are uncertain about selling your
excess supply you are concerned about being able to buy what you need.
Uncertainty is a major obstacle to changing the way you do things.
 Economic conditions over the past decade. As a firm you have retained earnings that you
could spend on increasing your productive capacity – investment spending that you think
will stimulate the economy. Are you going to spend the money putting the equipment in
place if you are unsure if the macroeconomy will pick-up.
 “Dead-money”: most of it is sitting in government bonds. Money just sitting in the bank
not doing anything.
 Major obstacle to increase investment spending is uncertainty as you could end up
wasting your principles (shareholders) money.
 If you get a lot of firms hanging onto investible funds you stay in a slump because
investment spending stays low. If you aren’t going to risk changing your farming patterns
because they are concerned about not being able to sell their goods and they return they
 would get, this is an obstacle to economic growth. Investible funds would give a
Keynesian boost.
 Subsistence conditions. You get a lot of less developed countries to reduce their birth
rate. The implicit assumption is that if you can force them to bring the birth rate down,
you can overcome the consequences of their bad judgement and their “dumbness”. There
is no social security program.
o If you start with a society that is rational. You are part of a peasant couple and
your farm is producing close to the subsistence level, just above. There is no
social security. There will come a time where you are too old to work in the fields
and you don’t have savings. What is the alternative to a social security system?
Children. When you get too old, your kids take over and support you. Families
tend to be social security systems, they are your way of saving.
o Infant mortality rate will be high and that means if you only have a couple of kids
there is a good chance that they will die so there is no one there to look after you
so you have a large number of kids. If the birth rate and infant mortality rate is
high, there is a greater chance that there will be someone there to look after you.
No social security system and no method of saving cash, your way of saving is to
have kids.
o Development specialists say you need to bring down birth rate because they are
eating all your food, etc. But if the infant mortality rate stays high and the birth
rate is lower, then there is a greater chance that you will starve to death because
none of your children survived.
o When the infant mortality rate falls, the birth rate falls too as they don’t need to
have as many kids to ensure that the parents are looked after. That means the
amount of food available to the family will be larger giving you an uptake
progression. If you follow the development specialist advice, and bring the birth
rate down, there will be a disaster. However, if you bring the infant mortality rate
down first, there will be a boom and then it will slow down.
 Birth rate was high because there was uncertainty about who and how the parents will be
looked after. If you can remove the uncertainty, you can get people to change their
behaviour. The effects of uncertainty has a powerful way of blocking change and
discouraging people from doing something.
 Medieval England: The revival of the market town is associated with a little
specialization happening about 800 AD and when you get to about 1066, England was
quite a wealth country, based on agricultural production.
o It looks like travelling merchants started the process. When law and order was
imposed, people were willing to take risks selling their goods outside their town.
o Travelling merchants knew their local village markets who have a stagnant
equilibrium in their village but then they come along and know what is sold in
what market. They will buy your turnips and take them to another village where
they reckon they could sell them. Imposed market conditions over a larger area.
Market towns started reappearing and they started to get together in one central
location. Market towns began growing and when they start growing more
merchants come because they know that other merchants would be there. Think
about Athens and the port of Parous. You start to move to specialization and a
more efficient production. The organization of production is changing and the
 way that the resources is being used is changing with inputs all staying the same
(same quantity).
 In the early Futile period, the way you met your futile obligations were working on the
Lords land which took away time from working on your own land. This was inefficient,
one due to forced labour but it was also not well organized. Large scale land ownership
was less efficient than a lot of small scale producers. This was locked in until the lord’s
futile obligations changed. Chain of obligations from you to the King. One of the
obligations of your futile lord to his futile lord was to go to war when he was called on.
They started to commute their futile obligations so instead of providing shitty soldiers,
they provided cash to their lord. Therefore, they had to find a way to get cash. You’re
providing your obligation by working on the fields. The change that occurred at the same
time the market towns started reappearing was that futile lords started to say “forget
about providing us labour but give us cash”. You could get this in the market towns if
you producing things and sold them on the market to get cash to give to the lord. The
other part of the commutation of futile obligations was that once your futile dues were
converting to money, he specified a monetary rent for your land. The nature of the
change of this is you provide me with a rental payment and anything that you earn above
that, you can keep. He just had to meet his obligation to the king. The more you could
earn, because your rent was fixed, the more you got to keep yourself. Family farms
suddenly became an efficient industry because they had a much greater incentive than
before and the principal-agent problem was less when you were talking about the family
farm.
o The farm is both the principal and the agent. There was no problem with the
incentive as the family’s interests were aligned which means that incentives were
increased to do better.
o Before there was a major principal-agent problem as you would do the bare
minimum working for the king (principal). Incentive structure changes when you
are working on your own long.
o Peasant farms became more productive even though there weren’t economies of
scale. This is something you see reoccurring throughout history.
o Also occurred in China – they were allowed to keep any profit they made in
excess of what they owed the Red Army. After the economic reforms, the
agricultural areas became more efficient. The first liberalization was in the rural
areas – same pattern as seen in Medieval England. History repeats itself because
the circumstances under which people are living recur.
 Transfer of the risk and growing the market area has been sparse throughout history
because as market areas grew, production became more efficient. There is a middle man
taking the risk off of you, and making you shift towards a production of something that
you are suited to and can be efficient at producing.
o This happened with wool in England. They could produce good quality cloth
made from the wool.
o You have large and small scale production.
 Benediction Monasteries: monks needed to be fed and they were out in the middle of
nowhere. They became large scale, but self-sufficient producers.
o The monks were supposed to spend most of their time praying, contemplation,
and copying manuscripts. To optimize the amount of time they had to spend
 producing something so they had more time praying, they had to be efficient so
they did not spend more time than absolutely necessary.
o The way they organized producing the wool, not only for their own but for sale.
They started dealing with wool merchants, who were mainly Italian merchant
bankers. The small scale producers (Ronald Coast), you had a village who were
sheering and producing the wool, but spinning and producing cloth was
something you did in the winter or in the evening. The travelling merchants would
come along and if the woman was good at spinning the wool, the merchant knew
someone who would take the wool and take it to someone who was good at
spinning. If you were to increase the production of yarn, the merchant would buy
it from you. He entered into a verbal contract. Merchant would buy the cloth once
it was spun and then sell it to someone who would use it to make coats or
something. It was mainly women who did this in their spare time, on a part-time
basis as their main job was providing food for the family. But if you can profit
from this, it becomes a way that you can provide for your family.
o You start with the wool where it winds up in a large market town where it can be
cut into clothing, and all of this is being linked by a series of individual market
exchanges.
 Coase said that if all of this can be done by market exchanges, why have a vertically
integrated firm? The vertically integrated firm was otherwise referred to as the domestic
system of the putting-out system. Only happens in production where you have clearly
defined stages. This was the first stage in the process in moving from linking things from
individual market exchange to the evolution of a vertically integrated production process.
Instead of things being linked in an unplanned manner, they are linked in a planned
manner. England is Coase’s question in action (wool). Individual actions with no
deliberate connection between them.