ECONOMIC HISTORY-UNIT 1

1.1 CONCEPT AND OBJECTIVES OF ECONOMIC HISTORY

Economic history studies how different societies use their resources and tries to answer the question: Why
isn’t the whole world equally developed?
 Great Divergence: over the past three centuries, the economic performance of Europe differs from
the rest of the world.
 Business history: studies economic development though the business firm, the primary social
organization of capitalist system.
Some economic historians:
 Douglass North: remarks institutional structures that account for the performance of an economic
system and how these institutions change over time.
 Rondo Cameron: studies the reasons for the unequal levels of development in the world.
 David Landes: tries to analyze the main reasons for economic advances and modernization.

Economic theorist has constructed a unified theory of economic growth; initially the dominant idea was to
increase the capital stock of an economy (especially in the manufacturing sector). Economist noticed that
machinery could increase productivity (adoption of the steam engine in 18 th century England). However,
the key factor was to increase the capital per worker (what provoked an increasing number of workers in
an economy).
Eventually, economists explained that technological advances are a result of education of the workforce
and scientific research.
By 1990 economic growth could be summarized in four rules:
1. Increase investment in manufacturing
2. Raise education level
3. Reduce birth rate
4. Increase exports
These four rules worked well for some countries, such as Asia tiger economies (oil shocks in the 70´s);
although in some other countries such as Russia, as excess following of the rules got to collapse.
As a consequence, economic theorists integrated institutional elements into economic models.

MINI CASE 1-INDUSTRIAL REVOLUTIONS

Industrial Revolutions: sharp transitions in technological paradigms determined by aspects such as

technical skills or scientific knowledge.
 1st Revolution (1765): Mechanization
Transition from an agricultural economy to an industrial one, steam was harnessed for mechanical
production. Most revolutionary one.
 2nd Revolution (1870): Mass production
Mass production powered by electricity was first introduced. The assembly line was invented.
 3rd Revolution (1969) Automated production
Advances in computing led to machine programming
 4th Revolution (nowadays): New Technologies
Fusion between leading-edge production techniques and smart systems.
1.2 LONG TERM PERSPECTIVE

1400-1758
 Bills of exchange become a standard method of payment in Europe
 1492: Columbus arrives in America and money supply increases in Europe
 Mercantilism policy
 1689: Locke states that wealth is delivered from labour
 1758: Hume states that public good should be paid for by governments
 Macroeconomy

1776 – MAGIC YEAR

 Adam Smith publishes ‘’Nature and causes of the Wealth of Nations’’
 1st Industrial Revolution starts after the apparition of the first steam engines in British factories
 The American Declaration of Independence is accepted by US government

1841-1920
 The theory of economic bubbles appears
 J. Stuart Mill lays the foundations for liberal economics
 Marx publishes Capital
 Marginal utility term is coined
 Schumpeter describes the vital role of innovation for industrial development

1930-1970
 1929: Wall Street Crash marks the beginning of the Great Depression
 1933: Keynes writes an open letter to Roosevelt with economic recommendations for the US
 Roosevelt introduces the ‘’New Deal’’ plan for US economy
 1944: Bretton Woods agreements are signed (post-war international financial regulations)
 1950: Milton Friedman advocates a monetarist policy

1970-2008
 US president Nixon breaks the link between US dollar and the price of gold
 1973: Oil embargo provokes a worldwide economic crisis (OPEC)
 2006: global warming is identified as a problem
 2008 banking crisis causes a worldwide recession

1.3 BASIC CONCEPTS AND ECONOMIC INDICATORS

Private property:
o Plato: rulers should hold property collectively for the common good
o Aristotle: ‘’property should be private’’ (when property is common, no one takes responsibility to
take care after it)
o Classical roman law (1-250 CE): states that the sum of rights and powers sb has over sth is called
‘’dominium’’.

Just prices
o Roman Courts: protect landowners from being forced to sell land below the just price (‘’at great
loss’’)
o Aquinas: the ‘’just price’’ is simply the price that freely the buyer accepts to pay
o Alfred Marshall (1890): the prices are automatically set by supply and demand
o Ludwig von Mises (1920): socialism cannot work bc prices are the only way to establish need.
Money
o Mesopotamia: shekel is used as a unit of currency (small percentages of gold or silver)
o Oldest known coins come from Greek islands
o 13th century: Marco Polo bring promissory notes from China to Europe (used by Italian bankers).
o 1696: The bank of Scotland issues bank notes for the first time

Inflation
o 1492: Columbus brings silver and gold to Spain, prices raise in Europe
o 1911: Fisher develops a mathematician formula to explain ‘’the quantity theory of money’’.
o 1936: Keynes states that ‘’velocity’’ of money in circulation is unstable
o 1956: Milton Friedman argues that a change in the amount of money can have an effect on
people’s incomes

Specialization in labour
o Plato: explains that a city emerges and grows by exploiting the gains made by dividing a labour
o David Ricardo: free trade and specialization in labour
o Karl Marx: states that the division of labour alienates workers, and this system will eventually be
replaced
o Ludgig von Mises: argues that work division brings huge benefits, including greater leisure time.

Enlightment
Beginning 18th century starts the Age of Enlightment which took a scientific approach to ‘’political
economy’’. Such an optimistic view was intrinsic to the spirit of the time and to the faith in the triumph of
Reason.
Economists tried to measure economic activity, describing only the working of the system (without moral
implications). Enlightened thinkers began to consider the possibility to improve society trough social and
economic reforms.

Inventions drive the economy

o 1771: cotton mill in England (important for industrialization)
o 1776: James Watt’s steam engines are introduced into British factories
o XVIII: the Industrial Revolution starts in Britain (rapidly accelerated economic growth, fueled by new
technologies and innovation). It transformed agricultural nations into industrial economies.

Revolutions that reshape societies

o 1517: Martin Luther and the Reformation
o 1688: The Glorious Revolution (new regime in the UK, confirms the primacy of a Parliament over a
Crown and paves the first worlds industrial revolution).
o 1715: Age of Enlightment undermined the authority of religion and monarchies, facilitating political
and scientific revolutions in 18th and 19th centuries.
o 1776: American Revolution (ideological and political revolution in the USA, first modern
democracy).
o 1789: French Revolution (social and political upheaval overthrew the monarchy and stablished a
republic inspired by new radical ideas, such as equality before the law).
o 1848: European Liberal Revolutions (series of republican revolts against European monarchies
beginning in Sicily, ended in failure and repression).
o 1917: Two Russian Revolutions (first in February and second in October, placed the Bolsheviks in
power).
The Great Divergence
Between 1500 and 1800, today’s richer countries forged a small lead that can be measured in GDP (gross
domestic product) per person. In 1820, Europe was the richer continent, led by the Netherlands. The
Industrial Revolution made Britain the second richer economy; and the rest of the world was left behind.
Between 1820 and nowadays, the countries that were richer at the time have grown the most, although
there are some exceptions to income divergence (East Asia is the most important).
Industrialization and de-industrialization have been major causes of divergence in the world’s incomes.
From 1750 to 1880, British Industrial Revolution was the major event, British manufacturing increased
from 2% to 23%, destroying traditional manufacturing in Asia.
Between 15th and 18th century, a great divergence occurred in Europe, most people lived at subsistence,
and the surplus was extracted by the state, the aristocracy and rich merchants. This made poor nutritional
diets, life expectancy cuts and poor health conditions appear. By this time, high wages in London and
Amsterdam contributed to economic growth by sustaining good health and supporting widespread
education.
Finally, these conditions lead to a situation in which labour was so cheap that businesses had no incentive
to adopt machinery to raise productivity. High wages in London and Amsterdam contributed to economic
growth by forcing entrepreneurs to look for ways to substitute man work by machinery.
As a consequence, Industrial Revolution was the result of high wages.

1.4 SCHOOLS OF ECONOMIC THOUGHT

The term ‘’economics’’ is derived from the Greek and means ‘’household management’’. The first true
economists appear at the end of 18th century, when the study was known as ‘’political economy’’, emerged
from politics and considered a soft science.
The first lesson of economics is scarcity (there is never enough to satisfy those who want it).

Mercantilism
Began in the 16th century and continued until late 18th, with the rise od Dutch and English seaborne trade.
Mercantilists think that the state should behave like a merchant (grow business, acquire gold and interfere
in the economy).
Thomas Mun insisted that what is most important is how trade and payments finally balance out

Physiocrats
They wanted to understand the whole economy as a system, and these ideas lead to the modern
macroeconomics. They believed that nations gained economic wealth from nature, though the real
economy. The economy was naturally self-regulated; and favoured free trade, low taxes, secure property
rights and low government debt.
Quesnay’s economic table is considered the firs macroeconomic model.

Utilitarism
Claims that choices should be made in order to increase happiness for the greatest number of people.
Jeremy Bentham sets out this theory in the 19th century.
Italian economist Pareto disagreed, and his definition of social welfare has come to dominate modern
economics.

First economics
Modern economics emerge firstly from the publication in 1776 of The Wealth of Nations, by Adam Smith.
This coincided with the advent of the Industrial Revolution.
The book offers an explanation of the competitive market system, suggesting that the market is guided by
a ‘’invisible hand’’, where the actions of self-interested individuals will eventually balance out the
economy.
Free trade
Adam Smith state that what matters is the ‘’wealth of all nations’’, and this can only be acquired if trade
between nations is unrestricted.
In 1817, David Ricardo states that foreign trade can benefit all nations.
In the 70’s the US economist Milton Friedman insists that free trade helps countries development.

Freedom or state intervention

Many economists advocated a ‘’hands off’’ or ‘’laissez-faire’’ approach, in order to let the competitive
market, create wealth and stimulate technological approach.
On the contrary, other economists identifies failings on the system, and stated that these could be
overcome by state intervention, so governments should provide certain goods and services as well as curb
the power of producers.

Public goods
o 500 BCE: indirect taxes are used in Athens to finance city festivals, temples…
o 1421: the first patent is granted to an Italian engineer
o 1752: Hume states that governments should provide citizens some public goods that are not
profitable for individuals or firms to produce.
o 1848: The Communist Manifesto advocates collective ownership of the means of production by the
workers.

Micro and Macro economics

Macroeconomics tries to look to the economy as a whole (national or international level), while
microeconomics looks to the interactions of individual people or firms within the economy (supply and
demand, markets and competition).
o Classical economics: developed by A. Smith and D. Ricardo, focusing on the growth of nations and
free markets.
o Austrian school: by Carl Megner, attributes all economic activity to the actions and free choice of
individuals, opposes all forms of government intervention at economy.
o Keynesianism: based on Keynes’s ideas, governments pulling economies out of recession.
o Neoclassical economics: dominant approach today, based around supply and demand and rational
individuals.
o Chicago School: free-market group of economists linked to the University of Chicago, whose ideas
about market liberalization and deregulation became predominant in the 80’s.
o Monetarism: believes that the primary role of governments is to control money supply, linked to
Milton Friedman and conservative governments of the 70’s and 80’s.