Lesson 1- The Big Picture
The long view: a timeline.
The mercantilist era 1500-1800
• Formation of modern, centralized states
• Very low economic and demographic growth
• Economic policy aim: secure plenty to build up political power
• Early modern globalization
• By 1913, the gap between richer and poorer countries was wider than in 1820 and has kept growing
since.
The Great Divergence, 1800-1913
• With the industrial Great Britain established a lead in income per capita
• In the course of the 19th century few countries in western Europe plus the USA closed the gap with Great
Britain, and they did so by pursuing a standard set of economic policies
• Unification of the domestic market
• Protectionism
• Modernization of banking
• Mass education
The big push in the 20th century
• Just a few countries have managed to join the “rich club”
• Japan,South Korea, Taiwan
• They have made it thanks to substitutional commitment and involvement of the state (-> ”development
state”).
The great divergence: what on earth… ?
World manufacturing distribution
1750: China’s share= 33%, India’s= 25%
1913: China has 4%, India 1%, UK + USA = Europe 75%
As Britain industrialized, its Asian competitors were forced out of business.
Normalized by population, in the 1750 industrial output was only slightly higher in W. Europe than in Asia,
but by 1913 output per capita in UK was 38 times that of China and 58 that of India.
UK lead in manufacturing lasted 2-3 generations:
• US took over in the 1880s
• Germany Surpassed Britain in the 1900s
• Other noteworthy changes in the 20th century are
• Industrialization in the USSR
• Industrialization of Japan and the Asian Tigers
• Industrialization of china
The Great divergence and how we measure it
The advantages of using labourer’s real wages (RWs)
• Labourers= unskilled workers, a homogeneous social group at the bottom of society
• Real wages= nominal wages divided be the price of a basket of goods and services; tell what unskilled
worker can buy out of his nominal income (-> purchasing power)
• Allen then defines the: Subsistence ratio= (wage) / (cost of bare-bones subsist)
Cross-Country comparison of RWs over time shows that
• Ca. mid-15th century RWs peaked!
• They were pretty closed to each other at 3.5 times the subsistence level; Amsterdam an outlier (4.5)
• In the 16th century, the standards of living stagnated or declined, except forAmsterdam- on the rise from
2nd half of 12th century, declining from late 17th centur
• London- irse in the 17th century, decline in the central decades of 18th century, then surge
,The great divergence and poverty
• In 1990, the World Bank set the poverty line (≈ subsistence) at $1 per person per day ⟶ $365 per year.
• Going back to Allen’s GDP per capita table, we get an idea of subsistence ratios over time around the
world
• 1820: world average = 1.8; west Eur and the USA ≥ 3;
• 1913: world average = 4.2; west Eur, western offshoots, AR, UR, CL ≥ 10; China, India, Sub‐Saharan
Africa, Asia (excl. JP), Middle East & N.Africa ≤ 3
When wages increase people
• Eat more, eat better -> become taller, healthier, more productive; live longer
• Diversify consumption-> buy “luxuries”, invest in education
• On the other hand, where labour abound and is cheap the incentive to increase productivity via capital
equipment is minimum-to-non-existent
• Brief, poverty turns easily into a trap
Explaining the great divergence
In the last 10‐15 years, economic historians have pushed the beginning of the great divergence increasingly
back, to the geographic discoveries and even to the Black death.
By the same token, a number of explanations for the great divergence have been put forward emphasizing
the role of geographic, demographic, institutional, and geopolitical factors
Demographic explanations emphasize higher mortality in Europe vis‐à‐ vis Asia ⟶ Gregory Clark, Joachim
Voth & Nico Voigtlaender.
“Mortality conditions also mattered, and here Europeans were lucky to be filthy people who squatted happily
above their own feces, stored in basement cesspits, in cities such as London. Poor hygiene, combined with
high urbanization rates with their attendant health issues, meant incomes had to be high to maintain the
population in eighteenth‐century England and the Netherlands. The Japanese, with a more highly developed
sense of cleanliness, could maintain the level of population at miserable levels of material comforts, and they
were accordingly condemned to subsist on a much more limited income.”
• Geographic explanations (⟶ Jared Diamond) insist on the fragmentation (mountain ranges, rivers) of the
European territory with respect to Asia: this made for political fragmentation instead of empire, hence
competition and greater effort to innovate.
• Geopolitical explanations (⟶ Kenneth Pomeranz) finally highlight colonization and availability of raw
materials as a decisive factor of Europe’s rise.
•
• Institutional explanations focus either on the early diffusion of universities and the scientific method (⟶
Joseph Needham), or the quality of economic institutions and the spread of markets (North; Acemoglu)
Note on the meaning of growth
The Great Divergence has seen a few countries growing way faster than the rest of the world
Growth was not a merely quantitative phenomenon, it entailed huge qualitative changes as well
This combination of quantitative and qualitative change is what Simon Kuznets labels ‘modern economic
growth’-
PPP: purchasing power parity
Lesson 2- The Pre-industrial economy
A ‘slow motion’, diverse world
• Pre-industrial Europe (1500-1800 AD) was characterised by a very slow pace of change
• Slow population growth
• Slow economic growth
,Behind this dismal picture are
• Low rate of technological change
• Limited and uneven spread of markets
• Overall higher labour productivity
• The market also is a source of higher productivity -hence growth- even in the absence of technological
change
(1) By enabling people to the exchange the market allows workers to specialize according to each and
every one's skill.
• Specialization enhances productivity of the labor
(2) As Adam Smith taught us in the late 18th century,
• The higher demand, the bigger the room for division of labour, specialization, productivity increases
(increasing returns to scale)
The spread and enlargement of markets made for productivity gains.
Markets in early Europe, though were far behind from being the norm.
Pre-Industrial demography
Perhaps the best description of pre-industrial demographic behaviour is Thomas Malthus’s -> Essay on the
principle of population (1798).
Model’s assumptions
• Resources- land in the first place- are finite
• Population grows as income per capita increases
• Population grows faster than food supplies
• Technological change is non-existent
Put differently, in Malthus’s model the availability of resources contains pop growth
Based on Malthus’s assumptions, it follows that
1. As income increases families start to have more kids -> pop grows
2. Sooner or later the resource constraint causes pop growth to health and increased mortality brings
numbers back to square one -> in the long run, population cycles around the equilibrium, where
population and resources are in balance
3. In the equilibrium, households’ income is at the subsistence level, for whatever higher income level
would trigger a new cycle of population growth (1)
Hence, in the long run
• Population numbers fluctuate around an equilibrium figure: no growth
• At equilibrium, income per capita is at the subsistence level
Indeed, when pop increases more food is to be supplied
In food production each solution has drawbacks and tradeoffs
• More land under the plough.. But then what about farm animals, water sources, forests and mountains
• More men could be put to work… but sooner or later simply increasing labour or resource inputs will start
to diminish returns
To sum up, as pop growth ran against the resource constraint
• living standards worsen
• mortality increases
• pop is brought back to a sustainable balance w resources
The process is cyclical and there was no escape, hence the Malthusian ‘trap’.
Let’s have a closer look at the link btw income per capita and pop growth.
, When pop is far from the resource constraint
• job opportunities abound, diet is healthier, living standards well above subsistence
• women marry at an early age
• fertility (= number of children per woman) is higher
• child mortality is lower, etc.
ISSUE: If Malthus was right, why do we see pop increase during the pre‐industrial era? Why standards of
living above subsistence?
1. Productivity gains arising from technological progress or division of labour. MEMENTO: higher
productivity means more output per capital, hence room for larger population
2. Behavioral strategies to reduce fertility
• Less women getting married
• Women marrying at an older age
Increased productivity coming with the industrial revolution allowed to break free of the Malthusian trap ->
‘demographic transition’.
In European demography there have been four long cycles of growth and stagnation
• 9th to mid‐14th century
• mid‐15th to 17th century
• mid‐18th to first half of 20th century
• second half of 20th century onwards
Population from the mid-15th century
General trends in European population
1.Urban population growing faster than total population
• Result of migration from rural areas becoming overpopulated
• paradoxically , mortality in cities was way higher than in rural areas due to poor hygiene and low living
standards
2. Population growth is higher in areas where economic growth is faster -> in northwest rather than south,
central and east Europe. (Same applies to cities)
3. Population density is higher where agricultural productivity is also higher (This is because of the resource
constraint).
4. Sometimes after mid-16th century, population growth ran into the resource constrain which caused
increase in food prices-> decline in real wages-> lower living standards-> demographic stagnation.
The long view: a timeline.
The mercantilist era 1500-1800
• Formation of modern, centralized states
• Very low economic and demographic growth
• Economic policy aim: secure plenty to build up political power
• Early modern globalization
• By 1913, the gap between richer and poorer countries was wider than in 1820 and has kept growing
since.
The Great Divergence, 1800-1913
• With the industrial Great Britain established a lead in income per capita
• In the course of the 19th century few countries in western Europe plus the USA closed the gap with Great
Britain, and they did so by pursuing a standard set of economic policies
• Unification of the domestic market
• Protectionism
• Modernization of banking
• Mass education
The big push in the 20th century
• Just a few countries have managed to join the “rich club”
• Japan,South Korea, Taiwan
• They have made it thanks to substitutional commitment and involvement of the state (-> ”development
state”).
The great divergence: what on earth… ?
World manufacturing distribution
1750: China’s share= 33%, India’s= 25%
1913: China has 4%, India 1%, UK + USA = Europe 75%
As Britain industrialized, its Asian competitors were forced out of business.
Normalized by population, in the 1750 industrial output was only slightly higher in W. Europe than in Asia,
but by 1913 output per capita in UK was 38 times that of China and 58 that of India.
UK lead in manufacturing lasted 2-3 generations:
• US took over in the 1880s
• Germany Surpassed Britain in the 1900s
• Other noteworthy changes in the 20th century are
• Industrialization in the USSR
• Industrialization of Japan and the Asian Tigers
• Industrialization of china
The Great divergence and how we measure it
The advantages of using labourer’s real wages (RWs)
• Labourers= unskilled workers, a homogeneous social group at the bottom of society
• Real wages= nominal wages divided be the price of a basket of goods and services; tell what unskilled
worker can buy out of his nominal income (-> purchasing power)
• Allen then defines the: Subsistence ratio= (wage) / (cost of bare-bones subsist)
Cross-Country comparison of RWs over time shows that
• Ca. mid-15th century RWs peaked!
• They were pretty closed to each other at 3.5 times the subsistence level; Amsterdam an outlier (4.5)
• In the 16th century, the standards of living stagnated or declined, except forAmsterdam- on the rise from
2nd half of 12th century, declining from late 17th centur
• London- irse in the 17th century, decline in the central decades of 18th century, then surge
,The great divergence and poverty
• In 1990, the World Bank set the poverty line (≈ subsistence) at $1 per person per day ⟶ $365 per year.
• Going back to Allen’s GDP per capita table, we get an idea of subsistence ratios over time around the
world
• 1820: world average = 1.8; west Eur and the USA ≥ 3;
• 1913: world average = 4.2; west Eur, western offshoots, AR, UR, CL ≥ 10; China, India, Sub‐Saharan
Africa, Asia (excl. JP), Middle East & N.Africa ≤ 3
When wages increase people
• Eat more, eat better -> become taller, healthier, more productive; live longer
• Diversify consumption-> buy “luxuries”, invest in education
• On the other hand, where labour abound and is cheap the incentive to increase productivity via capital
equipment is minimum-to-non-existent
• Brief, poverty turns easily into a trap
Explaining the great divergence
In the last 10‐15 years, economic historians have pushed the beginning of the great divergence increasingly
back, to the geographic discoveries and even to the Black death.
By the same token, a number of explanations for the great divergence have been put forward emphasizing
the role of geographic, demographic, institutional, and geopolitical factors
Demographic explanations emphasize higher mortality in Europe vis‐à‐ vis Asia ⟶ Gregory Clark, Joachim
Voth & Nico Voigtlaender.
“Mortality conditions also mattered, and here Europeans were lucky to be filthy people who squatted happily
above their own feces, stored in basement cesspits, in cities such as London. Poor hygiene, combined with
high urbanization rates with their attendant health issues, meant incomes had to be high to maintain the
population in eighteenth‐century England and the Netherlands. The Japanese, with a more highly developed
sense of cleanliness, could maintain the level of population at miserable levels of material comforts, and they
were accordingly condemned to subsist on a much more limited income.”
• Geographic explanations (⟶ Jared Diamond) insist on the fragmentation (mountain ranges, rivers) of the
European territory with respect to Asia: this made for political fragmentation instead of empire, hence
competition and greater effort to innovate.
• Geopolitical explanations (⟶ Kenneth Pomeranz) finally highlight colonization and availability of raw
materials as a decisive factor of Europe’s rise.
•
• Institutional explanations focus either on the early diffusion of universities and the scientific method (⟶
Joseph Needham), or the quality of economic institutions and the spread of markets (North; Acemoglu)
Note on the meaning of growth
The Great Divergence has seen a few countries growing way faster than the rest of the world
Growth was not a merely quantitative phenomenon, it entailed huge qualitative changes as well
This combination of quantitative and qualitative change is what Simon Kuznets labels ‘modern economic
growth’-
PPP: purchasing power parity
Lesson 2- The Pre-industrial economy
A ‘slow motion’, diverse world
• Pre-industrial Europe (1500-1800 AD) was characterised by a very slow pace of change
• Slow population growth
• Slow economic growth
,Behind this dismal picture are
• Low rate of technological change
• Limited and uneven spread of markets
• Overall higher labour productivity
• The market also is a source of higher productivity -hence growth- even in the absence of technological
change
(1) By enabling people to the exchange the market allows workers to specialize according to each and
every one's skill.
• Specialization enhances productivity of the labor
(2) As Adam Smith taught us in the late 18th century,
• The higher demand, the bigger the room for division of labour, specialization, productivity increases
(increasing returns to scale)
The spread and enlargement of markets made for productivity gains.
Markets in early Europe, though were far behind from being the norm.
Pre-Industrial demography
Perhaps the best description of pre-industrial demographic behaviour is Thomas Malthus’s -> Essay on the
principle of population (1798).
Model’s assumptions
• Resources- land in the first place- are finite
• Population grows as income per capita increases
• Population grows faster than food supplies
• Technological change is non-existent
Put differently, in Malthus’s model the availability of resources contains pop growth
Based on Malthus’s assumptions, it follows that
1. As income increases families start to have more kids -> pop grows
2. Sooner or later the resource constraint causes pop growth to health and increased mortality brings
numbers back to square one -> in the long run, population cycles around the equilibrium, where
population and resources are in balance
3. In the equilibrium, households’ income is at the subsistence level, for whatever higher income level
would trigger a new cycle of population growth (1)
Hence, in the long run
• Population numbers fluctuate around an equilibrium figure: no growth
• At equilibrium, income per capita is at the subsistence level
Indeed, when pop increases more food is to be supplied
In food production each solution has drawbacks and tradeoffs
• More land under the plough.. But then what about farm animals, water sources, forests and mountains
• More men could be put to work… but sooner or later simply increasing labour or resource inputs will start
to diminish returns
To sum up, as pop growth ran against the resource constraint
• living standards worsen
• mortality increases
• pop is brought back to a sustainable balance w resources
The process is cyclical and there was no escape, hence the Malthusian ‘trap’.
Let’s have a closer look at the link btw income per capita and pop growth.
, When pop is far from the resource constraint
• job opportunities abound, diet is healthier, living standards well above subsistence
• women marry at an early age
• fertility (= number of children per woman) is higher
• child mortality is lower, etc.
ISSUE: If Malthus was right, why do we see pop increase during the pre‐industrial era? Why standards of
living above subsistence?
1. Productivity gains arising from technological progress or division of labour. MEMENTO: higher
productivity means more output per capital, hence room for larger population
2. Behavioral strategies to reduce fertility
• Less women getting married
• Women marrying at an older age
Increased productivity coming with the industrial revolution allowed to break free of the Malthusian trap ->
‘demographic transition’.
In European demography there have been four long cycles of growth and stagnation
• 9th to mid‐14th century
• mid‐15th to 17th century
• mid‐18th to first half of 20th century
• second half of 20th century onwards
Population from the mid-15th century
General trends in European population
1.Urban population growing faster than total population
• Result of migration from rural areas becoming overpopulated
• paradoxically , mortality in cities was way higher than in rural areas due to poor hygiene and low living
standards
2. Population growth is higher in areas where economic growth is faster -> in northwest rather than south,
central and east Europe. (Same applies to cities)
3. Population density is higher where agricultural productivity is also higher (This is because of the resource
constraint).
4. Sometimes after mid-16th century, population growth ran into the resource constrain which caused
increase in food prices-> decline in real wages-> lower living standards-> demographic stagnation.
