Economic History

Lecture IV
Preindustrial Economy and Society
continued (Institutions)
 Endogenous Fertility and the
Demographic Transition

• Basic idea: Households “target” a certain number of offspring

• Due improved nutritional status, better sanitation, medical progress,…death
rates eventually decline
• Households observe this and adjust their fertility downwards after a time-lag
 Economy endogenously terminates Malthusian stagnation
The Demographic Transition in Historical Data
 Something more, Malthus did NOT think of…

• Higher population density might trigger aggricultural

progress  intensive growth
• Model by Ester Boserup:

Population growth is the motor of development

– Forces societies to adopt more intensive techniques
– In sparsely populated areas we observe technological regress
(like after decline of Rome)
Investment in infrastructure requires a critical mass of resources
that cannot be raised by small groups.
Population Growth and Agricultural Intensification:

Food
supply

Total Ester Boserup,

population
Danish economist,
1910-1999

5
 Taking Stock:
Malthusian population dynamics cannot have been
the only causes of slow income growth in the
pre-industrial period.
Reasons:
– Data show slow but notable increase in both
population and income levels
– Endogenous adjustments of fertility probably more
important than assumed by Malthusianists
– Population growth might contribute to intensification
of economic growth
 Non-Malthusian Explanations:
“Institutions” and intensive growth:

Initial Conditions
(“Soil”) Economic
GROWTH Outcomes
Policies, (Growth,
Institutions Distribution,…)
(Fertilizer)

𝑇𝑜𝑡𝑎𝑙 𝑂𝑢𝑡𝑝𝑢𝑡 𝑌 (→ 𝑰𝒏𝒔𝒕𝒊𝒕𝒖𝒕𝒊𝒐𝒏𝒔)

𝑃𝑒𝑟𝐶𝑎𝑝𝑖𝑡𝑎𝐼𝑛𝑐𝑜𝑚𝑒 =
𝑃𝑜𝑝𝑢𝑙𝑎𝑡𝑖𝑜𝑛 𝑁 (→ 𝑴𝒂𝒍𝒕𝒉𝒖𝒔)
 What are Economic Institutions?

• Definition according to “New Institutional

Economics” (introduced by Douglass North and
currently the most widely used methodology…) :

“Institutions are the humanly devised constraints that

structure political, economic, and social interactions.
They consist of both informal constraints (sanctions,
taboos, customs, tradition, and code of conduct) and
formal rules (constitutions, laws, property rights).”
 Institutions and Economic Performance:
“The factors […] innovation, economies of scale, education, capital
accumulation, etc. are not causes of growth; they are growth.”
(North and Weingast, 1973)

 How do we get there?

 Set appropriate incentives which induce individuals to behave
in certain ways. Important: “Right” incentives (“bananas”??) will
“nudge” people towards growth-promoting activities by providing
them with rewards they desire to enjoy…
Do “Bad” Institutions Hamper Growth?
Institutions and Efficiency

“Production Possibilities Frontier”

(PPF)

Efficiency enhanancing
institutional reforms
 Institutions and Efficiency
• Economic theory defines “efficiency” typically in terms of
“Pareto-efficiency”. An allocation is Pareto efficient if it is
impossible to make someone better off without making
someone else worse off.
• If markets are perfect  individuals are perfectly free to
exchange resources till they have reached a point
where no more mutually beneficial bargains can be
made  No matter what the initial allocation of
resources, the final allocation ought to be Pareto
efficient. BUT…
 Causes of Persistant Institutional Inefficiency
Trade costs:
– Transaction costs (finding a partner, making sure he pays, etc.)
– Transport costs (moving goods in space, infrastructure)
– Financing trade

“Market failures”:
– Occur when a market exchange affects the wellbeing of more
than just the contract partners ( “externality”)
– this means: private benefits/costs ≠ social benefits/costs
Institutions and Incentives in Pre-Industrial Europe

• Economists have identified a number of institutions that set

incentives which might have prevented allocative efficiency:
• Examples:
– Common/insecure property rights
– Administrative/economic fragmentation
– Estate society/lack of civic and economic liberties
– Serfdom
Example (I): Serfdom, Common Property and Agricultural
Productivity (In Europe: Middle Ages – 19th Century)

 Take a look at the

mediaeval “Manor”
 The Manor Economy
 Lords had a conditional grant of land tenure in return for
military services to overlords like the king
 Peasants were given a conditional grant of tenure (land
rights) in return for compulsory labor services (corvée)
 Peasants were serfs  could not leave their land or
marriage without permission
 Peasants were typically allowed to use part of the
assigned land for private production. These plots were
scattered aroud the village
 Villagers could collectively use certain plots/ forests/
lakes/ pastures…
 Your Turn:
• What kinds of incentives did this
organizational structure arguably produce?
• Were they (in)efficient?