Transcript Lecture 1 (updated version)

LECTURE 1
The Making of Europe and What Economic History
can Tell You About It
Topics discussed today
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Why war and territorial conflicts were endemic in
Europe.
An inquiry into what made Europe into a regional
unit despite the wars and conflicts.
An analysis of the patterns of trade in Europe
supporting the ‘gravity theory of trade’.
What economic history is about.
The last topic is dealt with in the Introduction and
the other topics in Chapter 1.
Resources and efficiency
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Economic history explores how well mankind
transforms resources into income and wealth in history.
History confirms that mankind, over time, has
increased the degree of efficiency (= productivity) in
her use of renewable resources, as well as those in
fixed supply.
The constraints of resource endowments for producing
a given output have eased over time and use of
resources per unit of output has fallen dramatically.
What is efficiency?
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Efficiency (= productivity) means that you produce
more output, income, from given inputs or a constant
output from less input. Even better more from less.
Technology and institutions determine efficiency.
Institutional reform, say, changes in property rights or
taxation can improve the efficiency of resource
allocation.
Technological change is resource saving, for example
land-use per ton of wheat has fallen systematically in
history.
An example.
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Total factor productivity was about 0.1 per cent per
year between year 800 and 1800 and averaged
0.75 per cent per year between 1800 and year
2000.
Assume that at year 800 income per head was at a
subsistence level.
Implication: in year 2000 a subsistence income could
be produced by 8 per cent of the resources needed
in year 800.
So why worry about resource
constraints?
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Because at the same time population has increased
by a factor of 10 and income per head by a factor
of 40.
A ‘resource –neutral’ condition would be to have
TFP growth equal to population growth plus income
per head growth.
Pre-industrial economies were not far above that
rule, but industrial economies are.
Rival vs. non-rival goods
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Resources are rival goods and impose constraints on
growth.
Efficiency (productivity) enhancing technologies and
institutions are non-rival, your consumption does not
reduce the availability of them. Some non-rival goods
are (or become) public goods, that is they are nonexcludable and non-rival.
The impact of non-rival and public goods on growth
has increased in history, particularly since 1800.
More about institutions
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Some institutions emerge spontaneously, such as
exchange and markets, but will need a legal
framework, contract enforcement, to be well
functioning.
Some institutions, say, law and order, have public
goods (non-exclusive) characteristics and need coordinated public action to develop.
Privileged interests can delay the introduction of
beneficial institutions.
Sources of technological progress
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Until the 19th century technological knowledge was
based on learning by doing and trial and error.
By the middle of the 19th century scientific knowledge
became the basis for the development of new
products and technologies.
Deliberate Research and Development (R&D)
spending speeded up the rate of technological
progress significantly.
Note that knowledge is a non-rival good in the short
run and also non-exclusive, public, in the long run.
Lessons from history:13 propositions
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1.Economies which are richly endowed with natural
resources are not necessarily rich, but nations which
use resources efficiently are almost always rich
irrespective of resource endowment.
2. Europe trades therefore it is.
3. Gains from occupational and regional division of
labour is the basis for pre-industrial (pre 19th
century) growth.
4. Malthusian fears of land as a binding resource
constraint tend to ignore technological progress in
land use.
A few more propositions
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5. Population growth stimulates aggregate demand
and technological progress. (Pepys’ rule)
6. Efficient institutions are often stable, but stable
institutions are not necessarily efficient.
7.Banks are efficiency enhancing institutions (hard
to believe these days but we take a very long run
view) by increasing savings and efficiency in the use
of savings.
8. Transfer of non-rival technologies is the secret of
19th and 20th century convergence in Europe.
Three more
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9. Net gains but winners and losers from free trade
repeatedly foster protectionist backlashes in history.
10. Fixed exchange rates did not survive
democracy and the demand for domestic policy
objectives.
11. The Great Depression killed the idea that the
economy was self-equilibrating. Enter the political
economy.
Final propositions
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12. World inequality has peaked. More equality
ahead!
13. The present globalization hype underlines the
importance of knowledge of economic history. The
world economy was as (if not more) globalized 100
years ago.
The making of Europe.
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The Carolingian empire c.800 emerged from the
ashes of the Roman empire. But soon broke up in
smaller units.
There is a remarkable similarity between the
geography of the Roman empire and the present EU,
including candidate nations.
There is a remarkable similarity between the
geographical lay-out of the Carolingian empire and
the original members of the EU, or EEC as it was
called then.
The destiny of Europe
Forces of integration and dis-integration have
shaped Europe
 Dis-integration: wars and territorial conflicts.
 Integration: trade and transfer of ideas,
culture, law.
 The three maps (Maps 1.1-1.3 in the textbook)
illustrate the remarkable geo-political
continuity of Europe.
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The Carolingian Empire
European Union in year 2010
Why has war been a permanent characteristic of
European history?
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Elites maximize state income by capturing land rent
from land of constant quality. (MR=AR)
Next slide depicts a situation when the elites of two
nations, A and B, both strive to extend their borders
until marginal land rent equals marginal cost of
extending/defending the nation.
Marginal costs increase with distance from centre of
nation (to the right from A, to the left from B).
War erupts because there is a contested area over
which both states (elites) can increase income.
€
Land rent,
marginal
=average
A
core
Marginal cost
of
extending/def
ending empire
Contested area
Distance from
centre A and B
€
B
core
An ’arms race’ peace might develop.
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Peace can be established in a classical ’arms race’
scenario even if there is, initially, a disputed area.
The condition is that each nation (elite) increases
armament spending as a response to the expected
increase of the other until each nation (elite) is
equalizing marginal land revenue with marginal
armament cost.
The implication is that the marginal defence cost
curve shifts upwards for both until an equilibrium
border is established which leaves no disputed
area.
€
Land rent,
marginal
=average
Marginal cost of
extending/defen
ding empire
€
Arms-race peace
border
A
Contested area
Distance from
centre of A and B
respectively
B
Integrating forces
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Despite endemic political conflicts Europe did not dis-integrate.
Integration is helped by a lingua franca, a common language,
spoken at least by the elite.
Religion has been both a dis-integrating and integrating force.
Mobility of people. There was a remarkable interaction
including inter-marrige of the land-owning elites and
intellectuals.
Trade was the most important economic force in the making of
Europe.
Trade relied on a network of transport routes, by land and
water.
The determinants of trade.
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Trade is stimulated by proximity and similarity of
trading partners.
Proximity means that a nation trades more with
neighbouring nations because of low transport costs
Similarity relates to equal income levels, preferences,
language and culture, commercial law and institutions.
Lack of similarity generates border effects.
Large core economies exert a force of
gravity on smaller neighbouring economies.
What border effects do to trade.
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Border effects represent an additional trading cost
on top of the costs imposed by distance, that is
transport costs, and tariffs.
Border effects impede trade also between
hetrogeneous (non-similar) neighbouring nations
thereby reinforcing initial differences (lack of
similarity) in preferences and income.
Border effects determine the extent of a regional
unit like Europe.
The impact of distance and border
effects on trade.
Trading Costs,
Trade
Trade Outlier
(Large Economy)
Trading Costs
Germ
any
Border effects
Trade
Distance from Ith Economy
Trade and geography
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Trade between nations of equal size falls with
distance.
Trade with a relatively larger economy will be
relatively larger than with an economy of equal
size at equal distance. (The German outlier case in
the Figure).
Border effects create a negative shock to trade.
The Pirenne thesis.
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Henri Pirenne did not use the terminology but was the first to
discuss the essence of border effects.
Thesis: ‘The Arab conquest of territories formerly in the Roman
Empire (Spain, Northern Africa, Middle East) introduced a
religious and cultural heterogeneity (lack of similarity) which
impeded previously flourishing trade between the
Mediterranean and Western and Northern Europe’.
Additional factor reducing trade: Income levels in Europe had
fallen below levels in the Arab world which made Europe less
attractive as a trading partner.
The extent of integration of the Mediterranean world existing
in the Roman period has still not been restored!
Exploring the pottery-map!
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The diffusion of archaeological find spots indicate a
clear border effect along the limits, roughly the
Rhine and Donau rivers, of the Roman empire.
Northeast of the Rhine and Donau, income levels
were presumably lower, preferences and language
different, and political conflicts frequent, which
impeded the penetration of Roman type pottery.
The geographical diffusion of French
pottery in the Roman era.
Europe trades, therefore it is
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The present trading pattern of European nations
confirms the impact of proximity and similarity.
Denmark trades more with Sweden than with Italy,
Spain and France combined.
Since proximity is positively associated with similarity,
the combined effect is to impede trade with distant
partners which generates regional integration, for
example the European Union.
European trade pattern.
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Table 1.1. Intra – European trade and trade with ROW (Rest of the World), in year 2005. Percent of total trade
Importing
Country
Exporting
country
EU25
Norway
Switzerland
Denmark
76%
France
67%
1%
Germany
72%
2%
11%
Italy
65%
1%
13%
14%
Netherlands
82%
2%
9%
25%
6%
Spain
76%
1%
20%
12%
9%
3%
Sweden
72%
7%
5%
11%
4%
5%
3%
United
Kingdom
67%
1%
10%
12%
5%
7%
6%
Denmark
.
France
Germany
Italy
Netherlands
Spain
Sweden
United
Kingdom
ROW
5%
18%
3%
5%
3%
13%
9%
24%
15%
9%
4%
10%
1%
8%
33%
7%
4%
5%
2%
8%
28%
2%
8%
1%
7%
35%
4%
2%
9%
18%
1%
9%
24%
8%
28%
2%
33%
Summary
Regions such as Europe were shaped by:
 the force of gravity of large core economies.
 the proximity and initial similarity which stimulated
trade.
 Trade that reinforced similarity in preferences and
income levels.
 initial border effects which tended to be selfperpetuating by limiting trade with border regions
and setting a territorial limit.