ECONOMIC AND SOCIAL HISTORY

Universidad Rey Juan Carlos

 UNIT 1: INTRODUCTION TO ECONOMIC HISTORY AND ECONOMIC DEVELOPMENT
1. ADAM SMITH AND OTHER IMPORTANT ECONOMISTS

The economist Adam Smith is considered one of the most important of all times. He wrote a
ton of books but especially in The nature and causes of the wealth of nations he
consolidated that what enriched European nations was not importing gold and silver, but
opening up new free-trade markets in the world.
Apart from Adam Smith there are several economists that are well known such as David
Ricardo, Karl Max and John Maynard Keynes.

2. INDEPENDENCE OF THE USA

In 1776 the independence of the USA happened, which meant political freedom. Thomas
Jefferson was the one who proclaimed the Declaration of Independence becoming one of
the Founding Fathers of the nation; he proclaimed life, liberty and the pursuit of
happiness (prosperity), imitating John Locke.
Furthermore, in the same year, Adam Smith published the Wealth of the nations; which
gave another perspective of the economy. This represented the ideas of economic
freedom.

3. THE GREAT DIVERGENCE

In the early 15th century the gap between poor and rich started with the first Globalization.
Countries in the north (around the Netherlands) started to increase their capital. For example
in the UK the GDP (Gross Domestic Product) per capita increased, this is called the Great
Divergence or European Miracle (18th cent. -19th cent.).
Although the GDP can seem to be a measure of well-being, it is not adequate. It leaves out
many factors such as health, life expectancy, and educational attainment. To calculate
the real income we must calculate the real wages, the standard of living that can be bought
with one’s earnings. Real wages tell us about the standard of living of the average
person and help explain the origins; if we know the origins of the problem we would know
how to solve it.

Late in the 16th century and early 17th century a European-wide market emerged. England
took control of this new market, expanding its textile industry, competing with other countries
such as Italy. An also created an intercontinental trading network (including the Americas
and India) that depended on the acquisition of colonies, mercantilist trade promotion and
naval power.

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 4. INDUSTRIAL REVOLUTION

Between 1815 and 1870, the Industrial Revolution spread from Britain to the continent with
remarkable success, it became the turning point of sustained economic growth.
Technological change was the motor of the Industrial Revolution; in this period the steam
engine, the machines to spin and weave cotton and new processes to smelt and refine
the iron and steel using coal instead of wood fuels were created.

Institutionalists believe that continental development in the 18th century was held back
(retenido) by archaic institutions. These were swept away by the ones of the French
Revolution, which were exported to most of Europe by the armies of the Republic and
Napoleon, so these new institutions like the Parliament permitted Europe to develop.

In the case of England, after the Glorious Revolution, in 1689 there was an institutional
settlement between the Crown and Parliament, where the Declaration of Right made the
king subject to Parliament on matters of legislation and taxation; this caused the Parliament
to have more power than the king and that permitted the Industrial Revolution.
Furthermore, growth was also promoted by the Parliament’s power to take people’s property
against their wishes. This was not possible in France, but the British Parliament that
overrode property owners opposed to the enclosure of their land or the construction of
canals or turnpikes across it.
What the Glorious Revolution meant in practice was that the ‘despotic power’ of the
state that was only available intermittently before 1688…was always available
thereafter.

What could explain why the Industrial revolution was British lies in Britain’s 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.
As a result, the differences in wages and prices with other countries caused businesses in
England to find profitable the use of technology, which saved on expensive labor by
increasing the use of cheap energy and capital. With more capital and energy at their
disposal, British workers became more productive; the secret of economic growth. Although
in Asia and Africa, the cheapness of labor led to the opposite result.

There were many consequences such as the increase of life expectancy, especially in
northern countries because of better education or having a healthier diet. However, in
Spain or other countries like Italy, the life expectancy was lower due to the high infant
mortality around the 20th century.

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 5. WORLD INCOME DISTRIBUTION

Income distribution is extremely important for development, since it influences the

cohesion of society, determines the extent of poverty for any given average per capita
income and the poverty-reducing effects of growth, and even affects people's health.

When there is an unequal distribution of incomes across various groups of individuals and
households in an economy there is what we call inequality income and it can vary by social
factors such as sexual identity, gender identity, age, and race or ethnicity, leading to a wider
gap between the upper and working class. A great example of this can be the unequal
distribution that takes place in the frontier between Spain and Morocco that has the highest
differences in the distribution of income of all the times.

To calculate income distribution you divide the GDP by the nation’s population. To measure
inequality we must know how much income (money) the population have of the total
income

Geography, institutions and culture explains economic success and, of course, the levels
of inequality.

To explain inequality distribution of income the institutions play an important role because
countries differ widely in institutional quality (because of the corruption). The recent report by
Transparency International, an organization whose studies on corruption levels are typically
published in the popular press around the world. The report ranks countries such as Finland,
Iceland, Denmark and New Zealand as those with the lowest levels of corruption, with a
“cleanliness” score of 9.5 out of 10 points. On the other hand, countries such as Bangladesh,
Nigeria and Haiti are ranked at the highest levels of corruption.

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 6. DIFFERENCES BETWEEN POVERTY AND INEQUALITY

Beginning in the 1970s, economic growth slowed and the income gap widened.
We must differentiate between this two concepts:

- Poverty: is not having enough income for basic needs, it is focused on the lower end
of the distribution (1,2 billion people live on less than $1 a day; 1 billion children live
in poverty and according to UNICEF 30.000 die each day).
The headcount ratio (HCR) measures the population proportion living under the poverty
line.

- Inequality: is concerned with the full distribution of wellbeing (the GDP of the poorest
48 nations is less than the wealth of the three richest people). Globalization is a
factor of income inequality.

The reason that poor countries are poor is because they use technology that was
developed by rich countries in the past.

Poor countries do not adopt the methods and the policies that have made others rich. Their
starting point is different, the people in charge actually do not think it is convenient to them
because if they adopt those methods then everyone would start to live wealthy and they do
not want that because they are selfish.
Having an open economy=developed country

China's poverty reduction became the highest in the world, and then India.

7. ECONOMIC GROWTH AND DEVELOPMENT

Economic Growth: is defined as sustained increase in the total output of goods and
services produced by a given population. The GDP increases in a certain period of time
(minimum of 4 years).

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Economic Development: means economic growth accompanied by substantial changes in
the structure of the economy.

- Traditional economics: is concerned with the efficiency of scarce resources

(Neoclassical taught) with perfect markets.

- Political economy goes beyond traditional economics.

- Development economics analyses the economic structure and transformation of

developing countries (better education, working conditions, sanitary system…).

The determinants of economic development are:

- Land
- Labour (workers)
- Capital (money)
An economy's total output (what we produce) is determined by the quantity of production
factors employed.

This model assumes that technology and social institutions are fixed, but changes in
these other factors are the most dynamic source of improvement.

8. DEVELOPMENT AND UNDERDEVELOPMENT

The World bank establishes rich countries as high income countries (12.696 dollars per
capita), normal countries as medium income countries (between 12.696 dollars and 1045
dollars) and poor countries as law income countries (below 1045 dollars).
To convert money we use Purchasing Power Parity (PPP) which expresses the ratio
between the quantity of monetary units required in different countries to purchase the same
“basket” of goods and services.

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To measure development:
Human Development Index (HDI): It provides an index of human development .
- ⅓ Education: ⅔adult literacy (people who can read) and ⅔; school enrolment
(people that goes to school)
- ⅓ Health : life expectancy
- ⅓ Income (GDP)
It is between 0 and 1–> 0 not developed and 1 developed

Human Development Index (HDI)= ⅓ income index + ⅓ education + ⅓ health.

To measure income distribution:

- Lorenz Curve: graphic representation of the income or wealth distribution within a
population

To measure inequality:
- Gini Index: is a measure of the distribution of income across a population. We divide
the area A by the part summed up between A and B.
It is between 0 and 1–> 0 equality and 1 inequality.

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 9. THE MILLENIUM DEVELOPMENT GOALS

In 2015, 189 countries of the UN signed 8 goals to eradicate poverty; it is the strongest
statement yet to ending global poverty. This initiative is called Millenium Development
Goals (MDG). Thanks to this, less than 10% lived in poverty in 2015.

The goals are:

1) Eradicate extreme hunger and poverty
2) Achieve universal primary education
3) Promote gender equality and empower women
4) Reduce child mortality
5) Improve maternal Health
6) Combat HIV/ AIDS, malaria and other diseases
7) Ensure environmental sustainability
8) Develop a global partnership for development

Some criticism to the Millenium Development Goals (MDG):

- Target were not ambitious enough
- Setting 2015 as an end date
- Dumping

The new goals for 2030 are called Sustainable Development Goals (SDG). The intention
of these 17 goals is to continue with the previous goals.
Angus Deaton said “they do not close the door behind” which meant that the ones who
undertake first, show us the way (los que emprenden primero nos enseñan el camino).

KEY WORDS
Income: ingresos
Wages: salarios
Average: promedio
Trading network: red comercial
European-wide: a nivel europeo
Trade: comercio
Turnpikes: autopistas de peaje
Productivity: is the ratio of the output of a production process to the input of the factors of
production.
Human capital: results from investment in knowledge and ability or skill.
Production: is the process by which the factors of production are combined to produce the
g&s desired by the population
Political economy goes beyond traditional economics (raise taxes…)
Quintil: término que caracteriza la distribución del ingreso de una población humana
Development economics: structural change, economy depends more on manufactures; we
see human development.
Production: all the goods and services produced desired by the population
Productivity: is the ratio of the output of a production process to the input of the factors of
production.
Human capital: results from investment in knowledge and ability or skill

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 UNIT 2: THE PRE-INDUSTRIAL ECONOMY
1 PRE-INDUSTRIAL ECONOMY

The pre-industrial economy started in the 14th century. It is defined as the time before
industrialisation.
During this time period, most economic activity took place at the subsistence level, in which
goods are produced for the consumption of and survival of one's family group. In this
subsistence lifestyle, most goods were produced by the family for the family. For instance, a
farmer grew food for his family, not to sell at a market. And moms made clothes for their kids
to actually wear, instead of trying to sell them on a website dedicated to homemade
products. Adding to this, most people lived in rural farming societies rather than cities.

2. OLD DEMOGRAPHIC REGIME

In the 14th century:

- High levels in death and birth rates.
- Existence of some mechanisms that regulated natural growth; Malthusian
limitations (difficulties to give food to all the population and the only way for the
human population to survive is controlling birth rate).

Agricultural productivity became the reason for unequal growth. The anti-globalisation
people thought that the Earth was not prepared to give sustain to all population.

During the 15th century the population in Europe was 70 millions, reaching 105 millions in
the 17th century. This numbers can be explained by the extreme reduction that happened in
the previous century because of:
- Epidemic diseases: Black Death (1347-1352); when half of the population died;
came from Asia and it was the most dramatic event
- Wars: war of 100 years
- Famines

Although the population increased, it was not uniform; some areas grew but some others
didn't. A lot of people moved from rural areas to the cities and this was difficult for certain
groups because of the decrease in real wages and rise of prices.

3. THOMAS ROBERT MALTHUS

Thomas Robert Malthus (1766-1834) was the first important economic demographer. He is
best known for his theory called Principle of Population (1798) that establishes Earth
resources would not satisfy the demands of a growing population; and the pressure over the
limited resources, would maintain subsistence levels (poverty, limits of dying)—> in case we
don’t change anything—> In 1800 the population rapidly increased (6 billion).

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There are two laws of nature:
1. First Law: population tends to increase geometrically (1, 3, 4, 8, 16, 32…).
2. Second Law: Food production (resources) tends to increase only arithmetically (1, 2,
3, 4, 5, 6…)

Marxists rejected the ideas of Thomas Malthus. Malthus didn’t stand for 0 population growth
but wanted to keep it within limitations.

4. FEATURES OF THE PRE-INDUSTRIAL ECONOMIES

The features of the pre-industrial economies:

1. Subsistence farming: people produce most all of what they need to survive.
2. Hunting and gathering
3. Herding (pastoreo)
4. Barter system-trade goods and services for other good and services
5. Agriculture as the main sector.
6. Economies with low productivity
7. The weight of the industry was small
8. National markets were underdeveloped

5. ECONOMIC STRUCTURE AND STRUCTURAL CHANGE

Structural transformation is a key indicator of economic development.

In the 16th century, the economic structure changed between sectors (from primary to
secondary) due to the increase of GDP (increase in productivity). The wages became higher,
especially in the Netherlands and England.

% GDP WORLD BANK 2013

Until less than a century agriculture was the principal occupation, this was because of the
low productivity.

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Structural change is the shift in the proportion of labor force employed and of income
originated. What explains this structural change is the increase in productivity (supply side).
Because of this, wages of people became higher.

The Engel Law: states that as consumer income rises, the proportion of income spent on
food declines.

If people earn more money—> proportion of income spent on food declines.

6. AGRICULTURAL TECHNOLOGY AND PRODUCTIVITY

- Manual labour was by far the most important factor of production.

- Productivity is measured by units of land or labour (how much I produce).
- Agricultural and manufactures—> increase industry

7. CASE OF NETHERLANDS

Netherlands was the exception at the time. They started to do things differently, and that
increased productivity.
The two keys of their success are:
- Specialisation: fertilizantes, ganado…
- Market orientation: they produced a lot for themselves and for other countries too;
they didn’t keep everything to themselves.

8. INDUSTRIAL TECHNOLOGY AND PRODUCTIVITY

Innovation took place continuously, but at a very slow pace.

Greater market orientation in the industry than in agriculture.
There were many obstacles to innovation.

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 9. LAND OWNERSHIP

In Spain land was owned by a few. They hired the parcels for a short period of time for
people to work in it.
Due to the lack of capital to produce and the leases (arrendamientos) for long periods,
peasants took their own decisions (in different levels).

In other parts of Europe the ownership of the land changed (England). So there are two
types of management of the land:

Case 1: England
Peasant works with its own material or equipment—> takes its own decisions (money, where
to produce…)

Case 2: The rest of Europe

Peasant works with the landlord’s equipment—> landlord takes decisions

Lack of capital to produce and they were not in the land

In the middle age relationship of landlords and peasants—>produce less

SHARECROPPING was a type of farming in which families rent small plots of land from a
landowner in return for a portion of their crop, to be given to the landowner at the end of
each year (the risk between the landlord and peasant in north of Europe).

10. WEAKNESS OF THE DEMAND AND THE SUPPLY

The low levels of production in the agriculture and industry was because of
underdevelopment of the factors.
Types of energy and social structure didn’t help to boost production.
The main cause for the weak demand was the low income and the unequal distribution.

Some related datas:

- In the 15-17th centuries, 7-10% of the population of some cities had 53-66% of the
wealth.
- 5-20% of the population was composed of beggars.
- 80% of the income was used for food.

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 11. THE ROLE OF THE STATE

The weight of the State was small in the Preindustrial era if we compare it with the XIX
century, but increased after World War II.

Ways of State intervention:

- As a regulator of the economy and tax collector (minimum wage)
- As an applicant (demandante) and offerer (oferente) of goods and services

There are two types of thinkers related:

- Libertarians: they are committed to liberty and to the protection of property rights.
State is an obstacle. Example: Margaret Thatcher
- Government intervention: the State should intervene in the economy to have
economic growth.

In the 19th century emerged the German Historical School, which explicitly rejected
economics as practiced by the British Classical School of Ricardo and Mill. They believed
that law is made for people according to their changing needs.
Keynes promoted these ideas later on.

The Wagner Law:

He states that throughout history the State intervenes at an increased rate in economic
activity.

There are several philosophers:

HINTZE and HECKSCHER (1929)

State intervention was something good. Focused on rivalry between states. Racionalizar los
recursos para llegar al crecimiento económico.

ROSTOW
Assumes that all countries have an equal chance to develop, without regard to population
size, natural resources, or location

NORTH and THOMAS

They look at the essential factors for economic development (libertarians)
Protection of property rights
If a country does it well (protection of property rights) that leads to economic development.
KEY WORDS
Famines: hambrunas
Herding: pastoreo
Take off: despegue de la economía

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 UNIT 3: THE EVOLUTION OF THE ECONOMY DURING THE INDUSTRIAL ERA
1. TRADE EXPANSION IN THE 16TH CENTURY

During the 16th and 17th centuries, commercial revolution took place in the north of
Europe. The discoveries in Asia and America profoundly affected the course of economic
change in Portugal and Spain (eminent countries).

Example: Trade between India and Portugal

Vasco de Gama —> Pepper from India (cheap) that goes to Portugal
In 1498 the price of peppers was higher in Europe than in India.
In 1760 the price went down in Europe because of the improvement in technology—> other
countries started doing the same as Portugal—> England.

Manufacturing became more productive in Europe, cutting costs there. Industrial

technology, however, was not cost-effective in other parts of the world where the wages were
lower. There was no point, for instance, in the Indians trying to compete against English
textiles by using spinning machines since they increased the capital costs of spinning in
India, more than they lowered the labour costs.

Before Vasco da Gama reached Calicut (India), market connections between Europe and
Asia were tenuous. Each continent was effectively cut off from the rest of the world. This
isolation evaporated with the development of the:
- Square-rigged sailing ship (velero de aparejo cuadrado)
- Global navigation
- Steamship (buque de vapor)
- Suez Canal
- Railway
- Telegraph
- Panama Canal
- Automobile
- Airplane
- Container ship (barco mercante)
- Telephone
- Motorway
- Internet

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All of this has reduced the costs of international transactions, integrated markets, and
brought countries more intense competition with each other.

2. THE PRICE REVOLUTION

During the second part of the 16th century and the third part of the 17th century, a high rate
of inflation occurred across the western of Europe.

At the beginning of the 16th century the flow of gold and silver from Spanish colonies
created a long period of inflation, and money supply increased; during this century prices
were 3 or 4 times higher than at the beginning of the century, which meant an increase in
the bread’s price.

An economic theory suggests that the price level increased in the 16th century in Europe
because of the discovery of new silver and gold deposits and the productivity increase in the
silver mining industry. This “monetary” view of the Price Revolution is questioned by
historians who attribute the secular increase of commodity prices to population and income
growth as well as urbanization and wars.

There are two school of thoughts (theories) that explain the inflation (Price Revolution):
- Non-monetarist: as population increases the prices of goods and services are
higher (increase in the demand but not in the production).
- Quantity theory of money: in the 20th century, according to Fisher, as the quantity
of money in circulation increases the other things remain unchanged. The price level
also increases in direct proportion as well as the value of money decreases and
vice-versa.

Irvin Fisher—> if money supply doubled prices will doubled as well.

Fisher’s Equation:
M · V(cte) = P · Q(cte)

Money supply: oferta de dinero.

Velocity of money: the amount times a note changes the owner.
Price level: nivel de precio.
Quantity of goods and services: cantidad de bienes y servicios.

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 3. ECONOMIC NATIONALISM AND IMPERIALISM

In the 19th century, some states sought (buscó) revenues to maintain and expand their
military forces to become more powerful economically, so they could enrich their own
empires.

In places like Spain, internal institutions and local authorities had lots of power when it came
to politics and internal economics. The policies from economic nationalism represented a
transfer from local to the national level (central government).

Between countries, there was competence for the extension of territory and the control of
trade (mainly Spain, France, Portugal and England). Their main goal was being
self-sufficient and the only way of achieving it was thought to be done at the expense of
others.

Spanish Imperialism started in the 15th century (as well as Portugal’s) unlike countries like
France and England that started in the 17th century. Some countries like England, France or
Netherlands developed their imperialism through private companies, which allowed them to
be really competitive and outreach Spain and Portugal, as their private companies were not
a priority nor as much developed.

Around the 15th century, the expansion of the development of private companies, made
the economic structure change specially in England and Netherlands.
Even though Spain had been highly successful in expanding its territory, their average
population did not get the profits from those trades and the structure of the economy stayed
the same. In England and Netherlands the whole opposite happened, as they were able to
increase their average income and direct it to other things that were not food (Engel Law).
This helps us understand why the Industrial Revolution had such a high impact in those
countries and not as much in countries like Spain or Portugal.

4. MERCANTILISM

Mercantilism is an economic policy that was designed to maximize the exports and
minimize the imports for an economy; creating a positive balance. It promotes monarchy,
aristocracy, clericalism, militarism, imperialism, colonialism, tariffs and subsidies on traded
goods to achieve that goal. It was an alliance between the government and the traders, and
the philosophy behind it was to get rich at the expense of others.

Also, it promotes government regulation of a nation’s economy for the purpose of

augmenting state power at the expense of rival national powers; high tariffs, as well,
especially on manufactured goods, were almost universally a feature of mercantilist policy.

The first goal was to discover and to accumulate gold. For them, wealth meant money (gold
and silver at the time), nothing else was taken into account.

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The second goal was to have a positive balance of trade. They put barriers to imports
(taxes) to promote national commerce and self-sufficiency, and they promoted exports to
create a positive balance. “What is good for traders is good for the Nation”.

With the higher taxation of the imports, local commerce was enriched, increasing prices and
the average consumer was affected; as products coming from outside were extraordinarily
expensive and there was a price increase on products coming from the nation.

5. SPAIN AND THE POLICIES FROM THE “AUSTRIAS”

The Austrias were the monarchy governing in the 16th century (Carlos I de España, V de
Alemania), when Spain became the first power of that time.
Despite the great advantage Spain had, as being the first country to colonise America, the
economy did not grow that much and the structure did not change; as the average
population was not enriched at all.

The issue was due to bad economic policies and huge ambitions. Both Charles I and his
son Philip II tried to unify christian kingdoms (both protestant and catholics) by forcing all
European kingdoms to be catholic; but they were unsuccessful as new enemies came.
Furthermore, there was a great expense on resources to finance this religious goal, through
taxes imposed to the average population.
These monarchs also used 40% of gold and silver that came from America to finance their
goal. This gold and silver was only 25% of their income, as it was mainly obtained by
taxation to the Spanish population. In other way or another, they became indebted to other
European countries, though this was not new as both Isabel and Fernando (RRCC) became
also indebted to finance their kingdom and war against Muslims.

During the Austrias kingdom, ⅔ of income was directed to pay the debt.

The Austrias use 3 different sources to finance their religious goal:

- Taxes from the Spanish population.
- Money from import of gold and silver.
- Borrowing money.

In Spain—> 1552 not to pay interests in payments—> partial bankruptcy

1557–>not to pay the debt—> declared bankruptcy of the spanish kingdom, the first one
(8 bankruptcy until 1680)
The king, in order to borrow money, promised new ways to pay for the debts—> they
negotiated with the bank to have more time to pay the debt. They reorganized short-term
debt into long-term debt.

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 UNIT 4: THE INDUSTRIAL REVOLUTION IN ENGLAND
1. THE INDUSTRIAL REVOLUTION (1760-1850)

The Industrial Revolution (1760-1850) (the word Industrial Revolution came from the
historian Arnold Toynbee); it was a turning point in world history, it inaugurated the era of
sustained economic growth. Besides, it was the transition from agrarian society to another
one that is dominated by industry and machine manufacturing.

2. BACKGROUND OF THE INDUSTRIAL REVOLUTION

The modern factory system came from the evolution of Proto-industrialisation. It all
started with the custom made system. In England before factories they had small
workshops in different parts; a trader or merchant coordinated some workshops (families) by
providing raw materials to sell manufactures abroad. Scale of production, and long
distances, as consequence of the custom made system, made factories possible. The
trader convinced workshops to work together (industry) under the same roof in order to
increase production.

The first factory (of silk) was created in 1719 by Thommas and John Lombe in Derby. In
1771, they could build the first cotton factory.
Not everyone could buy silk (luxury) so cotton became the main upar in the Industrial
Revolution.

3. GREAT TRANSFORMATIONS OF THE INDUSTRIAL REVOLUTION

Characteristics of the Industrial Revolution:

1. Increase in productivity and agriculture; people who could work in the factories.
2. New machines were invented (steam engines).
3. People started to use carbon instead of wood.
4. Improvements in the transportation routes.

Two theories that explain why the Industrial Revolution happened in England:

RONDO CAMERON
Intellectual changes
Different way of thinking; higher levels of education—> open mind (KNOWLEDGE IS
POWER).
Political changes
Glorious Revolution (1688)—> civil war between those who wanted the Parliament to be a
ruler (won) and the ones who wanted the king to have all the power.
The parliament could control the public finance (the King)—> could help control money
spent—>they build canals and roads—> England is the first country that has a Parliament
monarchy.
Innovation in agriculture
Productivity was similar to the one in the Netherlands.

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Development of trade and finance
In the middle of the 17th century (1660) there was a development of GoldSmith bankers
which meant the origin of the banking system; they issued banknotes after receiving money
in order to pay things—> the Bank of England (1694).
Transportation system and communications
In the 17th century canals in Manchester, London…that were well communicated.

ROBERT ALLEN
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.
As a result, the differences in wages and prices with other countries caused businesses in
England to find profitable the use of technology, which saved on expensive labor by
increasing the use of cheap energy and capital. With more capital and energy at their
disposal, British workers became more productive; the secret of economic growth. Although
in Asia and Africa, the cheapness of labor led to the opposite result.

4. THE COTTON INDUSTRY

International competition was the spur that led to the mechanization of cotton spinning.

England started to produce clothes made of cotton because of its cheapness. France
decided to ban England's exports.
They produce a lot because they put in a lot of capital.
Bengal (India)—> 1750, 85 millions pounds of cotton
England—> 3 millions pound of cotton
England competed with India and China for the cotton industry.

Spinning engines (Spinning Jenny) were only in England and not in other places. Invented
in 1765 by James Hargreaves, it became the first commercially successful machine.
The rate of return is the profitability that I would have with the sinning machine—> tasa de
retorno.

In the 18th century, cotton became the main industry in Britain.

This expansion happened at the expense of India, China and the Middle East.

5. TECHNOLOGICAL INNOVATIONS: THE STEAM ENGINE

The steam engine was the most transformative technology of the Industrial Revolution.
Thomas Newcomen created a motor in 1712.
The Steam Engine shows how important are economic incentives in order to introduce
inventions.

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 6. THE DEBATE ABOUT THE LIVING STANDARDS

The factors generated deep changes at work and family life.

Entrepreneurs who changed things:
- Robert Owen (1771-1858)
- Lord Shaftesbury

Number of weavers:
1820–> 240.000
1860–> 7.000
The number of weavers decreased because of the improvements in technology.Because of
this, new jobs arise due to the creation of technology (spinning Jenny, steam engine…), that
are well paid and that didn’t mean a great effort.

John Clapham—> real wages increased 60% during the Industrial Revolution—> increased
in life expectancy.
John Hammon—> real wages.

UNIT 5: THE DISFFUSSION THE INDUSTRIALIZATION

1. THEORIES ABOUT THE EXPANSION OF THE INDUSTRIAL REVOLUTION

ROSTOW
Imitation without differences (same as England).
According to him there are 5 stages that every country has to complete to become
<<England>>:
1. Traditional society: low productivity.
2. Transition: increase education to increase productivity—> preconditions that I need
to have a take-off (despegue).
3. Take-off: moment of economic growth, certain industries.
4. Maturity: sustainable economic growth and new sectors appear.
5. Age of mass consumption: third sector started—>services

GERSCHENKRON
Theory about the imitation with differences. In 1962 wrote a book.
He focused on the stages of transition and take-off and tried to explain how other countries
could industrialize with other resources.

GERSCHENKRON: “They can reach the leader with substitute factors”.

ARTHUR LEWIS
The Structural Change Theory. He wrote an article in 1954, where he explained the
structural transformation.
He focused on the mechanism by which underdevelopment economies transform from
agricultural to the modern economy.

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He focused on a 2 sector model:
Model 1–> agriculture
Model 2–> industry

Labor marginal productivity is 0–> the last worker does not add something to the output (the
productivity is the same, so there is a surplus).
model 1–> model 2 (higher wages—>accumulation of capital (investment) that permits
workers from the model 1 move to the model 2; they transfer).

2. THE DEVELOPMENT OF THE “CLASSIC MODEL”

Many thinkers started to invest in the complexity of the business economic organization.
The thinkers founded the English Classical School, which focused on economic growth,
economic freedom, advocating laissez-faire ideas and belief in free competition. They
continued with the Industrial Revolution.

3. ADAM SMITH

His book, The Wealth of the Nations, was printed in 1776. This publication promised a new
world. When it came out, they called his model <<the system of natural liberty>>, today
we call it the classical model.
This model was based on the thought that economic progress depended upon a trinity of
individual prerogatives:
- Pursuit of self-interest.
- Division of labour.
- Freedom of trade.

Very little progress had been achieved over the centuries because of mercantilism, as huge
inflation happened consequently, and there was only enrichment on the trader’s side. Smith
denounces the trade barriers, as other trading barriers would be imposed on the exported
products of the nation by the other countries.
According to Adam Smith, there is no superior management technique than the “division of
labor”. Through productivity, saving and hard work, the world’s output could increase.

4. PRINCIPLES OF ECONOMIC FREEDOM

According to Adam Smith economic freedom is a basic need of human rights. And he
believes that a wealthy nation is possible. Behind this idea, there isn’t going to be any
conflict of any interest.

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The pursuit of self-interest under conditions of competition. His doctrine of self-interest is
often called “the invisible hand”.
- Justice.
- Freedom.
- Competition.

Characteristics:
1. Self-regulation of the market (invisible hand).
2. Not in favor of fraud.
3. Economic efficiency does not replace morality (ignoring needs of others—> is the
opposite).

5. DAVID RICARDO (1772- 1823)

David Ricardo promoted free trade and hard money (currency banked by a gold standard
or other precious metal, or types of lending, political contribution, and government funding).
There were barriers in England (Corn Laws) where he used to live, so he convinced
people/rulers to put down those barriers. Due to this, the money supply decreased and so
did the inflation.

He developed the Law of comparative advantage; countries don’t have to be the best at
something but they can benefit from other countries as well, and other principles like the
Law of diminishing returns; which explains that scarcity of land leads to lower economic
growth. By increasing the number of workers, the output will increase as well but not at the
same time.

England became the workshop of the world, thanks to David Ricardo.

His most famous book was On the Principles of Political Economy and Treaties.
He focused on distribution instead of production—> that is different from Adam Smith

- Landlords
- Capitalists
- Workers

ADAM SMITH DAVID RICARDO

Production Distribution
· How do we distribute the wealth between How is the distribution between classes?
classes?

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The Ricardian Vice is the tendency for economists to make and test theories that areńt
troubled by the complexities of reality.

6. KARL MARX (1818- 1883)

Associated with communism.

He criticized classical economists.
He wrote with passion and simplicity—> to convince people. Communist Manifesto (1848)
and The Capital (1867).

Marx’s exploitation model of capitalism. He attempted to introduce an alternative model

from Adam Smith. He tried to demonstrate through laws that the capital system was bad
because only benefited big companies and exploited workers (children and woman)

Theories of Karl Max:

· Labor theory of Value
Comes from the idea of David Ricardo (focused on distribution). He focused on the fight
between classes and not individuals. Labor is key for determining the value of the
commodity (price)—> it produces value.
The value of a commodity should be equal to the average quantity of the labor hours used in
creating the commodity.

· Theory of Surplus Value

Profits and interests are the surplus value. All the profits are subtracted from the real value
of the commodity.
P= S/ R
P: profit
S: surplus value
R: final product

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 UNIT 6: THE WORD ECONOMY IN THE 19TH CENTURY
1. THE WORD ECONOMY IN THE 19TH CENTURY

Interdependence between countries increased. Started in USA and moved to Europe

A new international monetary system—> Gold Standard
A new technological innovations that came with the Second Industrial Revolution

2. THE DEBATE BETWEEN FREE TRADE AND PROTECTIONISM

Classic economists did an effort trying to show that economic freedom was better than
mercantilism. Great Britain in the middle of the 19th century, was the leader of this
economic thought.

Inclusion of the <<most favored nation clause>>. Started between France and England.
We call this kind of treaty the Treaty of Cobden Chevalier (1860)–> agreement to reduce
tariffs.
They added this important clause: If one party negotiates a treaty with a third party then both
parties will benefit, not only one—> Adding this clause leads to reduction in tariffs in the
surroundings.

More trade, more division of labor, more productivity.

3. THE SECOND INDUSTRIAL REVOLUTION

There were huge steps in mechanization and standardization that generated reduction in
the cost per unity.
As hard it is to conceive, the Second Industrialization happened at the same time as the first
one.

Innovations rely much more on the application of science to the Industrial process.
Methods of working:
1. Taylorism: simplifying the kind of jobs people do in the factory in order to increase
productivity. He used negative incentives…The main goal is to maximize the profits.
2. Fordism: job fragmentation and task simplification. The main goal is to lower the cost
of manufacturing the automobile.

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Modern enterprise appears. Clear division between owners and workers.

4. FACTOR MOBILITY

The mobility of factors are the unprecedented movements of people from one country to
another, and some of them didn't come back.

Positive effects in the communes of provenance (comunas de procedencia: formas de

organización social, política y económica) and those who receive immigrants. This
generates cultural and economic links.

6. INTERNATIONAL GOLD STANDARD

Gold was the unity of monetary value throughout it was possible to convert into other kinds
of coins.
The exchange of coins is done at a fixed exchange rate.
The system had basic rules.

UNIT 7: THE ECONOMY BETWEEN WORLD WARS

1. CONSEQUENCES OF WORLD WAR I

The World was not the same after the Great War (1918)
Millions of deaths and economic, political and social consequences.

People lost trust and this justified the intervention of the State.
If the 19th century was the century of “economics” and more “liberal”, the 20th century was
the century of “politics, where the Government could solve everything with intervention on
both sides, left and right.

In this period they signed the Versailles Treaty, the Soviet Union was adopted and the
Great Depression took place.

2. THE VERSAILLES TREATY

As you know in 1919 Germany signed in France this treaty, where they recognise culpability
or guilt for what happened. Germany compromised to pay and repair most of the
consequences of the war.

France was the only one who benefited the most because most of the War happened in
France.
This generated huge levels of inflation in Germany since 1922.
Delay in payments and due to this the invasion of the Ruhr Area started. Nazis from
Bavaria claimed to react.
Keynes appeared in 1919 with this book: Economic consequences of Peace.

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 - They printed more money to pay that debt.
- After months, in 1923, what 1$ supposed to be 4 marks, it became worth 4 billion
marks.
- New currency Rentenmark depends on support of properties, land as industry after
the same exchange rate as before.

On the other hand Germany needed to pay this debt:

- Relief package first Plan Dawes 1924 later Plan Young 1929 increase periods (both)
58 years.

3. SOVIET UNION WAS ADOPTED

The Russian economy was running well from the late 19th century to the beginning of
the 20th century.
Huge amounts of investments from the end of 19th century and beginning of 20th century
thanks to finance minister Sergei Witte (Witte count) members of the Gold Standard since
1897. They could industrialize many sectors: train, energy, etc.

The problem was inequality. Due to the protest in St. Petersburg (capital) in 1905, they
could achieve some freedom of religion and more representation in the parliament
(DUMA).

The Revolution from October, done under the “Bolsheviks”, was led by Vladimir Ilich
Uliánov (7th of November 1917).
No more Tzars regime and followed by 4 years of Civil War, Bolsheviks.

Political organization based on the soviets.

Like councils and assemblies.

The constitution of the Soviet Union (1918) had a strong hierarchy, where each Soviet had
a Supreme Soviet in any socialist republic that belonged to the Soviet Union.
- The Soviet Union had its own supreme soviet.
- This was the legislative power.
- Lenin was in charge of the Council of commissioner’s executive power.
- That was “democratic centralism” (Lenin).

4. ECONOMIC ORGANIZATION OF THE USSR

During the period of communism there was the abolition of private property.
Everything was under control of the Government but many times there was a shortage of
food, so Lenin understood that it was better to have an open economy.

Lenin could open the economy through the NEP in 1922.

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Especially to raise production of agriculture. Lenin gave peasants an incentive to sell their
surplus (excess) under market conditions. Also conceded peasants' demands for ownership.

Stalin didn’t continue with the NEP and opted for a centrally planned economy (1927).
He wanted to boost the industry (in any way).
- Five-year plan especially in the heavy industry (goals).
- Soviet business directed from the top (plan).
- Agriculture collectivized (farms), shortages and famines.

5. THE GREAT DEPRESSION (1929-1933)

The Great Depression is one of the most traumatic events of the 20th century.
Because of the consequences in unemployment, production, etc.
Datas:
- Industrial production 30%.
- ½ banks failed.
- Shares dropped 88%.
- Unemployment 25%.

There is still a debate about which were the causes of the Great Depression.
2 or 3 theories:
- Text, article in aula virtual
- Keynes: demand driven.
- Friedman: monetarist.

High reductions in industrial production and many banks failed.

Situation promoted the rise of extremism.

Some said that stock market crash was the cause but is it true? Stock market crash was not
the cause of the Great Depression because of several reasons:
- In summer of 1928, American banks decided to sell German bonds (debt) and
others.
- 1929 the GDP was at the top.
- 1929 car production in March 622.000 and in September 416.000.
- In Europe: Germany, Italy and UK happened as well
- October 24 1929: Black Thursday; and October 29: Black Tuesday.
- December 1929 car production 92.000.

The creation of non-capitalist solutions—> Marxism

People were scared to lose their job—> not having food to eat.

Keynes gave a solution for the Great Depression.

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 9. JOHN MAYNARD KEYNES

Capitalism faced its greatest challenge. The system founded by Adam Smith was under
attack.
- Balanced budgets, low taxes, gold standard…all this living standard achieved in the
Great Depression.
- Austrians Mises and Hayek.

Who would save Capitalism?

Some intellectuals sought an alternative to socialism,
nationalization and central planning
John Maynard Keynes leader of the new Cambridge school

John Maynard Keynes wrote a book in 1936 called The General Theory of
Employment, Interest and Money, in this book he…
- He represented an alternative to socialism (a solution).
- He preached that capitalism is inherently unstable and has no natural tendency
toward full employment.
- He rejected the need to nationalize the economy—> he is not in favor of nationalizing
(Repsol, telefónica..). The price of the wages should be something the demand and
the supply gave—> the market is in charge of it.

10. THE NEW DEAL

Franklin D.Roosevelt won the elections in 1932 and did a program to face the economic
crisis, measures to take the US out of the Great Depression. Those measurements were:
1. Agrarian subsidies (prices were low).
2. Social peace (demos, strike) deal with the trade Unions: an agreement with workers,
Government and the worker’s boss.
3. Stock market: no more autogulation (SEC, Securities Exchange Commission, 1933;
transparency, protect savings). Deposit insurance to protect my money—> the
government gives me a part of my money in case the bank becomes bankrupt.
4. Protectionism kept smooth—> Hawley Tariff repeal of Dry Law.

11. INCORPORATION OF THE WOMAN TO WORK AND THE RIGHT TO VOTE

In the period between wars, some human rights were conquered (to vote).
At the end of the Great War in Germany, Weimar Republic (1918) then in the UK and
US.
With restrictions in the UK.
Spain 1931, when the Second Republic was proclaimed.
World War I was an opportunity to work for many women.

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 UNIT 8: THE INTERNATIONAL ECONOMY AFTER THE SECOND WORLD WAR
1. INTERNATIONAL ECONOMIC ORGANIZATION

The International Economic Organization started the cooperation between countries and
searched for clear rules of the game. Was developed around the international economic
problems that flourished in this period (Second World War).

As a result of the Second World War the US became an economic power. The US was the
one lending money to other countries.

In 1941 before ending the war, Churchill (first minister of UK) and Roosevelt established a
statement of intentions and wanted to restore multilateralism (discussion of problems
between many countries).

2. BRETTON WOODS

Meeting conference to put the statement of intentions and to restore multilateralism, in use.
In this discussion, the US gave a loan to Ik in order to sign the Bretton Woods agreement.

44 countries signed an agreement; they desire the creation of the IMF and the World Bank.
And at the same time these countries negotiated the creation of the WTO—> this did not
work.

Thanks to Bretton Woods, 3 institutions were created:

- International Monetary Fund (IMF).
- World Trade Organization.
- International Bank for Reconstruction and Development: now the main goal of
the Bank is giving loans to poor countries.

3. MONETARY SYSTEM AFTER BRETTON WOODS (1947-1973)

The creators of the IMF designed a system with a fixed exchange rate—> the main idea is
that all the currencies were related to the dollar to the gold. Countries have to fixed its own
coins to the dollar ones in order to get gold in return; this means that the price is in dollars. In
case the fixed exchange varies 1% (up or down), the Central Bank of each country has to
intervene.

Some adjustments were permitted under the conditions of “fundamental imbalance”.

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 4. BACKGROUND OF THE EUROPEAN INTEGRATION

Marshall Plan was a program with a specific plan for the reconstruction and estimation of
resources created in 1947.
Some countries recovered sooner from the war, but no thanks to the Marshall Plan. The
Second World War finished in 1945 and the Marshall plan started to operate in 1948.
How much money each country could receive thanks to the Marshall Plan?

The countries that receive more money were, in order:

1. England
2. France
3. German
A new organization was created to deliver the aid (OECD, 1948).

5. GOLDEN AGE AND THE ROLE OF THE STATE

After the Second World War, there was more economic growth—> Golden Age.
This was because of the US aid, high levels of savings and investment.

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 UNIT 9: THE SPANISH ECONOMY DURING THE 19TH AND 20TH CENTURY
1. SITUATION OF THE SPANISH POPULATION

Life expectancy was very low.

Spain was an example of spectacular change that started far behind.
At the beginning of 20th century, Spain was “The country of death” (Reher 2011).
Difficulties to start the “Demographic Transition”.

2. THE SPANISH ECONOMY DURING THE 19TH CENTURY AND 20TH CENTURY

The economic history of Spain is characterized by a 19th century of low growth and a 20th
century of fast growth.

In 19th century and 20th century we have as well sub-periods:

19th century 20th century

1800-1840 1900-1950
Stagnant economy Stagnant economy

1840-1900 1950-2020
Economic growth Economic growth

Existence of a Latin pattern.

3. DELAY FACTORS

Existence of demand and supply factors that explain this delay.

Productivity of agriculture—> low.
Spain was an agrarian country.
Institutional, social and educational factors.

4. 19TH CENTURY

The Spanish Empire was lost—> that created an imbalance in finance (decrease the
money received because of the colonies lost).
Through this fiscal crisis, policy makers changed things with reforms—> disentailments.

5. DISENTAILMENT OF MENDIZABAL 1836

The main objective of the agrarian reforms were to collect money for the State.
Land was sold to the ones who could pay its price, so rich people became richer.
Productivity also increased; peasants could work in many lands.

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Types of disentements. Mendizabal 1836, Espartero 1841, Madoz 185

6. 19TH CENTURY

Bad fiscal policy and high State indebtedness.

Protectionism was dominant as trade policy.
Monetary policy didn’t exist and fiduciary money came gradually.

7. ARTICLE

Fiscal reform—> 1845, Mon-Santillan.

Another investment—> 1899, Fernandez Villaverde.

8. 20TH CENTURY

This period was the period of theme with high economic growth in the Spanish economy.
We lost the last colonies (Cuba, Puerto Rico, Filipinas).
The exodus from the countryside to the cities created social tension—> strikes.

In the middle of the century we started to have a kind of industrialization.

The Hoffman Law states we have to start with consumption industries (the product goes
directly to clients—> business to clients) and then, industries should evolve to basic
industries (business to business).

9. SPANISH ECONOMY DURING THE TIME OF FRANCO

From the point of view of economics Franco Era can be divided into two stages:
First period: Stagnation (1939-1954)—> autarquía (Self-sufficient; produce all).
INI: based on Mussolini’s ideas; Spain’s business was 100% spanish.

Second Period: Growth and social change (1955-1975).

· 1959: Spain decided to open to the world to take part in the economy.
· 1977: Pacto de la Moncloa: agreement between parties to make reforms:
The most important fiscal reform is the IRPF: is the most important direct tax.
Also they created the IVA (the added value tax) when we started articulating in the European
Union (1986).

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