Economic History

Lecture 1
Pablo Martinelli pablo.m
artinelli@uc3m.es Office:
18.2.C.11
Office Hours: Monday, 18:0019:00

OUTLINE
Presentation and Rules of the Game
What is this course all about:
Modern Economic Growth: the Big Picture
Proximate causes of growth
Ultimate causes: Macroexplanations

Rules of the Game (I)

Assessment: Continuous Evaluation
50% Final Exam
50% Weekly Tutorials. Further details: Wednesday

Attendance to Tutorials is compulsory!

4 unjustified* absences: each one counts as 0 in the
relevant activity
>4 (i.e., 5 or more): no continuous evaluation

Missing continuous evaluation

Final grade = 60% of the final exam
mark.

Rules of the Game (II)

Silence is compulsory
If questions, ask
If doubts persist, come to office hours
(but always write before and/or arrange
an appointment).
Lecture slides will be online. Suggested
readings at the end
Weekly readings for tutorials are
compulsory

Rules of the Game (III)

No textbook
Most subjects in some of the following:
Rondo Cameron and Larry Neal (2002, 4th ed.) A Concise Economic
History of the World
Robert C. Allen (2011), Global Economic History. A Very Short
Introduction
Karl G. Persson (2010) An Economic History of Europe
Broadberry and ORourke (eds., 2010, 2 vols.) The Cambridge
Economic History of Modern Europe.
Eichengreen (2008, 2nd ed.) Globalizing Capital
Eichengreen (2007) The European Economy since 1945

For specific topics, I will tell you in the

corresponding

TODAY:
INTRODUCTION TO
MODERN ECONOMIC GROWTH

Modern Economic Growth: Definition

A country's economic growth may be
defined as a long-term rise in capacity
to supply increasingly diverse economic
goods to its population (Nobel laureate
Simon Kuznets, 1971)
That is, MEG is a sustained increase
in income/output per capita and
means:
More of the same goods available
New goods available

World Economic History (according to

Clark)

MEG (data from Maddison)

Btw, subsistence is about here

(5.6 =ln(275) 1990 $)

Not much
room for
improvement
since
100.000 BP!

Modern Economic Growth

Feature #1:
Very Recent Phenomenon
Stagnation and income at subsistence not
sure before 1800 (or 1500), but extremely
slow
growth (if any)
Human economies experienced several
radical transformations (Upper Palaeolithic
explosion, the Neolithic revolution), but no

GDP p.c. (1990 GK int. $): A closer look...

Modern economic growth

Feature #2: Divergence
Differences are getting bigger, not smaller.
Difference in income per capita between
UK and India:
in 1500, only 30 %.
in 2010, over 700%.

Difference between poorest and richest

country
1960: 30 to 1
1990: 70 to 1

Modern economic growth

Feature #3: Persistence
Most countries that are rich today, were
already rich in 1800 or even 1500
(Western Europe).
Japan, first, then East Asia and now
China
and India are the exceptions.

Modern economic growth

Feature #4:
Conditional Convergence
MEG started in NW Europe and
eventually
spread to some countries All rich now
Some poor countries converge
towards rich ones, provided
something else happens
What? The Holy Grail of Economics!

Money matters for living

standards!

UK 2000

UK 1800

Modern Economic Growth:

Questions
Proximate causes
Why does it happen?

Ultimate causes
Why did it start in UK around 1800?
Why did it spread to some countries and not to
others?
Why are some countries so rich and others so poor?

Modern Economic Growth:

Proximate causes

What are we measuring?

Economic growth: the change of the total output

produced by an economy in a given time interval

Why does this happen?

Remind the production function! Either you
use more inputs or
use them more efficiently (i.e. Technological
progress)

Production factors, technology, markets

Demographic
Education
behavior
LABOR
Inputs
(Entradas)

LAND
CAPITA
L

BLACK
BOX

OUTPUT
(Salidas)

Saving
AVAILABLE TECHNOLOGIES
26

Changes in
Y

Changes in
L

Changes in
K

Solow
residual
Unexplained
part of
growth27

The Solow Model

Production (Y) is obtained by combining labour (L)
and capital (K) into a production function (F), with a
given level of technical efficiency (A or Total Factor
Productivity, TFP)
Y=F(A, L, K)
If F is well behaved, you get diminishing returns
to
either L or K
In terms of welfare, production per capita is the
relevant variable. Hence, it is convenient to express
everything in terms of labour units: Y/L=F(A,K/L)

Solow Model: more ingredients

Capital is accumulated by saving a portion s of
income and investing it (I)
Every year, population grows at rate n.
Hence, new capital has to be allocated to new
individuals if K/L is to remain constant
Moreover capital depreciates at rate d (machines
broke after a certain period of use, etc).
Hence, new capital has to be allocated to replace the
depreciated capital.

Solow in a nutshell

y=Y/L
Steady
state
y0

y0=F(TFP0,k)

(d+n)*k

I0=sy0

Steady
state k

k=K/L

y=Y/L

y1=F(TFP1,k)

Technical Change
shifts upwards the
Production
Function

y0=F(TFP0,k)

(d+n)*k
I1=sy1
I0=sy0

K/L

y=Y/L

y1=F(TFP1,k)

Steady
state
y1

y0=F(TFP0,k)

(d+n)*k
I1=sy1
I0=sy0

K/L

y=Y/L

y1=F(TFP1,k)

Steady
state
y1

Contr
. of
k
Contr.
of
A

y0=F(TFP0,k)

(d+n)*k
I1=sy1
I0=sy0

K/L

In words:
In a Solow world, growth by mere K accumulation has limits:
the steady state.
Changes in technology shift upwards the PF and allow
further
growth.
Hence both TFP and K accumulation are the main proximate
causes of growth.
How do we measure the contribution of each factor?
i) We try to find the form production function with statistical
techniques
ii) We decompose output growth in its measurable
components (K and L).
iii) The residual is attributed to changes in TFP (Solow

Residual very important in the 20th century.

Contribution of residual to overall growth
18731913

19131950

19501973

19731992

26 %

31%

40%

44%

US

47%

41%

8%

Germany

23 %

55 %

65 %

39%

26%

UK

Japan

What causes Technological Progress?

A) First models: Is exogenous (i.e., we dont really know).
B) Endogenous Growth Theories: it is another production
factor (Human K), with no diminishing returns. But, then, why
did growth start so late in history?
C) Unified Growth Theories: similar to EGT, but
incorporates demography in order to explain the delay in HK
accumulation, secular stagnation, the demographic transition
and sudden growth
Most of these macroeconomic models focus on how
countries grow once MEG starts; some (UGT) even explain
why it should start at some point in human history
but none explains why are some countries that adopt
MEG

Ultimate causes. Big theories,

explaining who was rich in 1500 or 1800
Non-human made
Geography Jeffrey Sachs
Ecology (Sophisticated geographical hypothesis)
Jared Diamond
Natural resources, coal, position

Human made

Imperialism
Culture Landes, Weber
Scientific revolution and the Enlightment Mokyr
Institutions North & Thomas, Acemoglu

37

Geography: the direct effect

Distance to equator is positively correlated with
development (Jeffrey Sachs)
Many parts of Africa have high prevalence of
malaria
and other diseases, also poor soils
Land-locked countries have higher transport costs and
more difficult access to main markets
Many of the poorest countries in the world are
landlocked (no access to sea): Mali, Burkina-Fasso,
Afghanistan, Laos, Mongolia, Bolivia, Paraguay
Being close to the main markets is also good for exports
38
(although the effect of distance is fading over time).

GDP p.c. (PPP) today

39

Population density 1918

Geography (2)
Limitations:
Nogales (Mexico) and Santa Cruz county (New Mexico,
US) are a few kilometres away: Nogales has an
income per capita of 10,000$ and Santa Cruz of
30,000 $. Geography alone cannot explain this
difference
Haiti and the Dominican Republic: same island but Haiti
income per capita in 2007 of 1,155 $ and Dominican
Republic of 6,705 $.
Some remote economies are among the richest of the
planet (Australia)
Does not explain income differences at similar latitudes

42

Ecology
Jared Diamond: Guns, Germs and
Steel
European or Asian empires in the
15th and 16th centuries
Eurasian superiority: shipping, military
technological superiority (powder,
iron, horses etc), contagious diseases
43

Ecology - 2
Eurasia develops first because
Europe and Asia go from West to East as opposed
from North to South (like Africa or America)
Easier to transfer crops
Greater preponderance of plants with high ratios of
grains to plant/tree (wheat, rice) (means plants grow
fast, making agriculture possible) (wheat, rice also
superior to corn or yams)
Got lucky in the domestication of big mammals
(cows
and pigs as opposed to buffalos or elephants)
Proximity to large domesticated mammals greater
immunity to flu, tuberculosis, etc (reason why
European diseases killed millions of indians)

Ecology (3)
These cumulative effects made the
Neolithic Revolution begin earlier in
Eurasia than in any other independent
origin of agriculture
Surplus food production allowed larger
sedentary and stratified societies, with
specialists non engaged in food
production
technological and military superiority

Ecology-3
Limitations
Does not explain superiority of Europe over
Asia until late 20th and 21st century
Does not explain large differences among
European countries (Spain vs UK for
example)
Does not explain decline (Italy after 1600,
Spain after 1600 etc)
Does not explain the Reversal of
Fortunes

Imperialism
Earliest capitalist institutions appear in
the colonial trade (East India Company,
etc)
Primitive accumulation
Cheap raw materials
Captive markets for metropolitan exports

But (and without endorsing imperialism!)

Huge empires did not benefit Spain or Portugal, which started

to decline in the 16-17th centuries.
US: massive success without empire.
Colonial trade is tiny part of aggregate 18th century economy,
although London and Amsterdam
Not as good a business as we think (lots of risk and high
costs)
Capital flows in the 19th century go to the empire (railroads in
India for example) not the other way round. Further
investment in guaranteeing order, infrastructure, and
administration. It is not clear that a cost-benefit analysis of
empires throws a positive number.
Not the best market for European exports: low incomes, and
slow growth.

Culture

Concept is difficult to define.

System of shared beliefs, values, customs, behaviours,
that the members of a society use to cope with the world
and with one another and that are transmitted
generation through generation.
Entrepreneurship, hard work, social capital (trust), risk
taking are important for development
Corrupt practices need no to be permanent: US very
corrupt in the early 20th century.
To what extent are corruption and poor institutional
quality related to culture?

Culture: Fertility and development

European marriage pattern vs the traditional
marriage pattern
Increases age of marriage (to about 25
years old)
Many women remain single
Reduces fertility rate by about 40 %.
But is the fertility transition a universal
phenomenon?

I am not sure there are

different cultural patterns

52

Culture: Religion
Max Weber thesis (The Protestant Ethic and
the Spirit of Capitalism, 1905):
Original version: Protestantism favours individual freedom
and responsibility, hardworking etc.
Modified version: Promotes literacy and education good
for growth (Becker and Woemann, QJE 2009)

In Muslim countries: rights of women, high

fertility rates (may distort resource
allocation).
More generally, Landes: Judeo-Christian
beliefs are anthropocentric favour

How strong correlated after MEG steps in?

Culture: Limitations
East Asia Fast growth after decades of stagnation,
keeping same cultural traits
Religion does not account for income differences among
(Jamaica vs Canada) or within (Italy, Germany) countries,
nor for the timing or spread of MEG
The adoption of religions also depends on economic,
political, social, military factors
Is culture immutable?
Huge differences in economic outcomes for countries close
from each other sharing the same culture and geoenvironment. Example: North and South Korea.
55

Institutions
Almost all human-made explanations
collapse towards institutions:
incentive mechanisms explaining why
some behavioural scheme is adopted
Explain North vs South Korea
Haiti vs Dominican Republic
Central idea: incentives matter,
incentives
to specialise, trade, invest, innovate.

57

Institutions 2: Definition
Douglas C. North (1993 Nobel prize in
economics) Institutions are the humanly
devised constraints that structure
political, economic and social interaction.
They consist of both informal constraints
(sanctions, taboos, customs, traditions,
and codes of conduct) and formal rules
(constitutions, laws, property rights).
Throughout history, institutions have been
devised by human beings to create order
and reduce uncertainty in
58

Institutions 3
North, a leading figure in New
Institutional
Economics Institutions central to MEG
An institution is efficient (in the NIE
sense) when it brings the private benefits
of an economic activity closer to the
social (public) net benefits by reducing
Externalities
Negative (pollution): producers win, society loses
Positive (invention):
Transaction
costs producers lose, society gains 59

Institutions 4. Transaction costs

time needed to set up a business, World Devel opment Report
2005, World Bank
300

250

200

days to start a
business

150

100

50

5000

10000

15000

20000

25000

30000

35000

-50
GNI per capita 2005

40000

45000

50000

55000

60000

60

5. Judicial / Legal Effectiveness. Source: World Bank

120.0

100.0

judicial
effectiveness

80.0

60.0

40.0

20.0

0.0
0

10,000

20,000

30,000

GNI per capita, 2005 $

40,000

50,000

60,000

61

Investor protection index, 2005

12

investor protection

10

5000

10000 15000 20000 25000

35000 40000 45000 50000 55000
30000
60000
GNI per capita
62

4. Public Sector Ethics Index (PSEI) source: World Bank (2005).

120.0

1 0 0 .0

index of public sector

ethics

8 0 .0

6 0 .0

4 0 .0

2 0 .0

0 .0

10,000

20,000

30,000
GNI p e r capita (2005 $)

40,000

50,000

60,000

63

Good institutions are good for growth

But what is cause and what is effect?
For example better paid and better trained
judiciary can appear because a country is now
richer
Better paid public servants are less corrupt
(policemen in Mexico City vs policemen in
Madrid)
A literate and richer population is easier to
tax
64

Institutions 5
Acemoglu & Robison (2012)
2 kinds of institutions:
Economic institutions: determine economic
incentives of individuals
Political institutions: set the economic
institutions

2 possibilities:
Extractive or inclusive institutions

 Extractive economic institutions:

rent
seeking, privileges for few
(monopolies,
guilds, etc), no free
entrance
Inclusive economic institutions:
allow
people to freely allocate their resources
Political exclusive institutions: closed
elite has the power.
Political inclusive institutions: political

 Inclusive economic institutions are the

key to MEG
They allow creative destruction
Innovators invest and implement their
innovations without fear to be
expropriated
Economic losers from innovation have
no way to prevent failure but to innovate
themselves
In the long run, only inclusive political

EXTRACTIVE POLITICAL
INSTITUTIONS

EXTRACTIVE
ECONOMIC
INSTITUTIONS

INCLUSIVE
ECONOMIC
INSTITUTIONS

INCLUSIVE
POLITICAL INSTITUTIONS

UNSTABLE
EQUILIBRIUM

UNSTABLE
EQUILIBRIUM

EXTRACTIVE POLITICAL
INSTITUTIONS
EXTRACTIVE
ECONOMIC
INSTITUTIONS

Rulers extract rents from the

economy with help of the state,
which is put in charge of avoiding
the emergence of alternative
sources of economic power

INCLUSIVE
ECONOMIC
INSTITUTIONS

Political power concentrated and

freedom to allocate resources:
Political elites incentives to
close
economic
institutions (fearing to be
overthrown)
Emerging economic power
incentives to:
a) capture political power for
themselves
b) turn to inclusive political
institutions

INCLUSIVE
POLITICAL INSTITUTIONS
Political power widely distributed
makes rent extraction insecure:
Economic elites incentives to
overthrow existing
institutions
Economic privileges eroded

Political power widely distributed

and freedom to allocate
resources incentives to MEG

OK, but how did we get here?

Acemoglu: Its politics
Basically, interaction between economic
and political institutions is not predictable
At some point in history, something
happens (critical junctures) that
reshapes the existing political-economic
equilibrium
Then there is a chance to end up with both
inclusive ec&pol insitutions

If chance is so important, keep

trying!
Maybe Europeans get institutions right simply
because they had more trials
Dense sedentary societies but politically
fragmented continent:
Institutional competition among polities

Why fragmentation?
Difficult to keep unified, difficult to conquer;
several physical barriers, different environments,
lots of coast and rivers, etc (Jones).

They all
failed...

But then...
A) We end up with a complex interaction
between non-human and human made
factors!
B) Why some countries adopt
right institutions while other dont?
We really need to further deepen on
this

Yet, against long run determinants,

there are cases of successful adoption
Meiji Japan in the late 19th century
Other East Asian countries in second half
of XXth century
China?

74

Conclusions
The biggest question in economics (Why
some countries are rich and others
poor?) has not yet a definitive answer
This is good news! The question is still
open and attracts the best minds in
the profession

75

Key books about some important issues in this class

Basic readings:
Jared Diamond, 1997, Guns, Germs and Steel. Have a look at Chapter 4
(Farmer Power), though the whole book is worth reading.
Daron Acemoglu and James A. Robinson, 2012, Why Nations Fail. The Origins
of Power, Prosperity and Poverty. Interesting book that has become a bestseller.
Theoretical and general insights are much more worth reading than some of its
applications. Have a look at Ch. 3 and 4, where their main point is made.

Further readings:
Eric Jones, 1981, The European Miracle. Environments, Economies and Geopolitics in the
History of Europe and Asia. One of the most authoritative assertor of the thesis of
Europes optimal degree of fragmentation.
Douglass North and Robert Thomas, 1973, The Rise of the Western World: A New
Economic History. Their main points are made in ch. 1 and 2.
Joel Mokyr, 1990, The Lever of Riches: Technological Creativity and Economic
Progress.
David Landes, 1998, The Wealth and Poverty of Nations. A modern classic,
advocates for
a key role of values.