A long-term perspective of economic development

1. A long-term perspective of economic development Topics: • Trends and fluctuations in economic well-being • Economic approaches and categories • Economic development in the really long-run • Eurasian landmass versus the rest • Population and economic development • The Great Pestilence: a demographic catastrophe • The Malthusian model: attempt to explain population change • Summing up: determinants of economic well-being Reading: *Landes, D. S. Wealth and Poverty of Nations, ch.1 • Findlay & O’Rourke, Power and Plenty, ch. 1

2. Trends and fluctuations in economic well-being • “Economic well-being” has many dimensions: • income, wages, consumption (of different “goods”), output (aggregate?), mortality, stature (average height) • Economics focuses on a summary measure: output per capita • Commonly use “real wages”: wages measured in units of output • Why so crude? Data limitations. But, fundamentally, some level of abstraction is essential for any explanation (just be honest about it) • Focus on intensive measures, i.e. per person: total output divided by population; extensive measures are of aggregate amounts • “Subsistence income” = minimum needs, not minimum physical requirements; hence differs across time and among societies • What has been the long-term trend in economic well-being? • Very slow, almost imperceptible trend growth until around 1800/1820 • Sharp year-to-year fluctuations dominated human existence in pre-industrial societies: harvest failure, war, pestilence, disasters • Large inequalities that varied across the world and over time • Recovery from catastrophes could take centuries (e.g. Black Death)

3. Economic approaches and categories • Output (income): crude measure of `economic well-being’ • Extensive growth: expansion of total output • Intensive growth (`economic progress’): changes in output per person • Output is a function of factors of production (inputs): Land, Labour, Capital • Classical approach (Smith, Ricardo, Marx, and others) • Economic progress requires `division of labour’ (specialisation) • “Propensity to truck, barter and exchange” promotes the division of labour • “... the Division of Labour is Limited by the Extent of the Market” (Smith) • Economic progress generates output surplus to basic needs. • What determines the amount of surplus, its growth and distribution? • Neoclassical approach (modern mainstream economics) focuses on • Individual incentives and strategic interactions (decisions & optimisation) • Market mechanisms: allocation of resources via the price system • Technological advance as the stimulus for economic progress

4. Economic development in the really long-run (1) • Following the last glaciation, c11,000BCE, humans found that in some places, settled agriculture is preferable to hunting/gathering: • Domestication of plants: cereals, pulses, fruit trees, etc. • Domestication of animals: sheep, goats, cattle, pigs, horses. • Geographical distribution of wild plants and animals was uneven • Hence, some places domesticate them earlier than others. • Original locations: Mesopotamia fertile crescent & possibly China • Diffusion of domesticated plants & animals is easier across similar latitudes (east<->west, rather than north<->south) • Advantage for Eurasia, compared with Americas & Africa. • Settled agriculture enables higher population densities, but • greater opportunities for infectious diseases • greater likelihood for conflict (but hunter/gatherers were very violent too) • Settled agriculture may also allow surpluses above subsistence: • Opportunities for “taxation” (centralisation of resources) • Opportunities for “saving”: accumulation of capital and knowledge

5. Economic development in the really long-run (2) • Agriculture−>higher population density−>organised societies: • subdue interpersonal conflicts • centralisation more effective than communal decision-making • enable indirect exchanges of goods and services • increased opportunities for geographical specialisation • Trade & conquests−>amalgamation of densely populated areas • Centralisation of violence (coercion becomes a “state monopoly”) • Stratified societies evolve with centralised organisation • But there are also diseconomies of scale • technology limits communication and transport • Spread of ideas (also ideologies & religions): • Written languages • Technological innovation: initial advantages persist over long epochs • Diffusion of languages and technology, as communications allow: • Technological advances provide opportunities to exploit geographical opportunities (e.g. water transport) and surmount obstacles

6. Eurasian landmass versus the rest • Eurasian land mass (similar latitudes) develops technology (including food production), centralised organisations, dense populations, disease resistance • The Americas and Africa encompass greater variation in latitude with fewer plant & animal species that are easy to domesticate • Australia, Tasmania and Pacific islands relatively isolated • Hence, Eurasia well placed to conquer the others, not vice versa • But the Eurasian land mass is heterogeneous: • Europe: West and East (rough division) • East & South East Asia: dominated by China & Japan • South Asia: dominated by the Indian sub-continent • Asia minor & North Africa: Islamic nations and Ottoman Empire • Northern Asia: Russian steppes, Siberia, Mongolia • Tropical/sub-tropical regions face different challenges and opportunities relative to temperate zones (even more so, the northern extremes)

7. Eurasia: economic integration & development to c1500 • Europe was in relative decline after collapse of Roman Empire • Dark Ages and Middle Ages, through to c1500 • Centuries of change, not stagnation but not sustained progress either • Contact with rest of world (Asia) via Middle East: upheavals of political & religious conflict, but trade continues too, even expands • East Asia: Chinese civilisation developed early relative to Europe • Subject to Mongol invasion & domination from 12th to 14th centuries • Sea-borne trade with south Asia, gradually extending westwards • Overland trade via “silk road”, the Levant and Venice • South Asia: long history of diverse civilisations • Subject to periodic invasions (e.g. Moghuls) overland from the west • Sea-borne trade via Arabia, the Levant and Venice • Development of the “European exception” (economic success) • A “great divergence” emerged, but when? Probably not until after 1500, some argue not until as late as 1800 (the “California School”)

8. Population and economic development (1) The Great Pestilence, now known as “The Black Death”: • “… undoubtedly the greatest catastrophe to strike the Western World during the last millennium …” (Findlay & O’Rourke, p. 111) • Infectious disease(s) that arrived in Europe from Asia, 1348/51, killing 1/4 to 1/3 of population; with successive epidemics until late 1500s • Economic consequences: fall in total output; but rise in output per capita • Reduction in Labour/Land ratio: increased wages relative to rents; labour gains both absolutely and relatively to land (the other major input) • Expansion in land-intensive outputs: animal products, e.g. wool, fall in price, promoting growth of textile industries • Increased demand (and higher prices) for beer, wine and oriental spices • Stimulus for labour-saving technologies, e.g. printing press; firearms • Shift of power in Western Europe’s political institutions from feudal organisation to more modern centralised states • More effective capacity to raise revenue, via taxation, possibly promoting expansion of competitive markets and trade • “The path to the Industrial Revolution began with the Black Death” (R.C.Allen)

9. Population and economic development (2) • Population fluctuations and growth in pre-industrial societies: • Long-term growth rate positive but negligible (almost zero) • Allow for large fluctuations of, say 30-50%, lasting for centuriesWorld population more stable than local (some complete depopulation) • About 2.005 surviving children per female before 1800 (G. Clark) • Some convenient shorthand: • Let “economic well-being” = “income” (short-hand for “living standard”) • “birth rate” = indicator of fertility; “death rate” = indicator of mortality • “population” = population density, i.e. per unit land area • Malthusian model: a theory of population, that assumes: • Birth rates vary positively with income (“preventive check”) • Death rates vary negatively with income (“positive check”) • Population growth forces a decline of income (per capita) • If births>deaths, population grows driving down well-being • If deaths>births, population declines driving up well-being

10. Population and economic development (3) • Crucial issue: how sensitive were the assumed relationships? • How much do births and deaths respond to well-being, and how swiftly? • How much does well-being respond to population, and how swiftly? • Some `stylised facts’ (rough generalisations): • Fertility responds more slowly than mortality to income • Fertility differed substantially across cultures • Mortality sensitive to disasters (geophysical, climatic, biological, social) • Technological progress allows higher income for a each population level • But technology progresses slowly and intermittently before c1800 • Strengths and weaknesses of the Malthusian model: • Population is limited by available resources in the long-term (as predicted) • But “shocks” (disasters, technological progress, cultural changes) may dominate so that population is always far from its equilibrium level • Focus on average income neglects the effects of inequalities in societies

11. Summing up: determinants of economic well-being • Environment and resources • Geography, climate, disease and demography (human and animal) • Human and non-human capital; Land • Culture, philosophy and religion • Impact on motives, incentives and opportunities • Political and social institutions • Individual freedom vs. authoritarian control • Rule of law: extent of arbitrary confiscation or taxation • Order vs. anarchy: stimulate or retard economic expansion? • Markets: “the Division of Labour is Limited by the Extent of the Market” • Incentives to trade and save (requires protection of property rights) • Competition versus exercise of monopoly power • Extraction of surplus: what remains for capital accumulation? • Technologies and their application • Diffusion of new ideas and incentives for their application(Commercial links promoted the spread of new technologies) • Freedom to reap the rewards from investment (capital accumulation)