lecture 2 europe: from obscurity to economic recovery
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Lecture 2
Europe: from obscurity to economic recovery
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Issues discussed in this lecture
• We focus on the period from the decline of the Roman empire and the recovery starting c. 700 to c. 1500.
• Which are the essential pre-conditions for division of labour and which are the gains form specialization.
• The conditions for technological progress and regress, economic decline and economic recovery.
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The Eastern Mediterranean world was a cradle of civilizations
• First agricultural civilizations emerged in the Middle East.
• Centres of civilizations moved west and east (China).
• The Roman Empire was the last Empire to embrace the entire Mediterranean.
• Access to roads and cheaper maritime transport stimulate trade which is an integrating factor.
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A Roman menu
• A daily diet of an unskilled working male consisted of approximately 3700 calories (2000-2300) considered subsistence minimum)
• 1 kg of wheat
• 0.25 kg of meat
• 1 l of wine
• 1 dl of olive oil
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Roman per capita income
• Average income estimates range from 2 to 4 times a subsistence income or 813 to 1742 in so called International Dollars of year 1990, called $PPP
• Subsistence: $PPP 355-400 • Byzantium: $PPP 700 in year 1000 • England: $PPP 550 (year1044); 1418 (year
1688); Holland $PPP 1129 (year 1561)• $PPP 1767 in year 1850 (Denmark)• $PPP 23010 in year 2000 (Denmark)
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Meaning of international PPP$
• PPP stands for purchasing power parity.
• 1000 PPP$ means that with that income a Roman could by a basket of goods and services that would cost 1000 dollars in 1990.
• Used for international comparisons and comparisons over time.
• Fragile: Handle these estimates with care!
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Why don’t empires last?
• The tax base does not increase proportionally as empires expand into areas with lower income.
• Costs of ruling and protecting the border areas increase with the distance from centre.
• A gap (wedge) between spending and revenue stirs political unrest and financial stress.
• Empires become vulnerable for invaders who chase higher tax base in the centre of the empire
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Empires decline because of the spending- tax revenue gap
Denarius
Extent of Empire
Tax Revenue
Spending
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New masters, old habits
• Western and Eastern Europe were latecomers in the race towards civilization.
• Rome could not resist the attacks of German tribes, the Barbarians (that’s us!).
• Once settled in former Roman territories the intruders adopted language and law and religion of the christened Romans.
• Post Roman Europe remained fragmented.
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Economics of decline
• With political disintegration followed economic decline and falling income and trade.
• Cities were deserted.
• Population declined because of epidemics, wars and disorder.
• Skills and technologies were neglected or forgotten.
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The elements of economic recovery, 9th -14th centuries
• Political authority restored.
• Money supply increases.
• Population increases.
• Urban centres repopulated.
• Division of labour increases.
• All these factors are inter-related
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What GOOD government means
• Accountable political elites.
• Law and contract enforcement institutions.
• Provision of public goods such as defence.
• Safe transport networks.
• Monetary order.
• Property rights, private and collective, well defined and respected
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Conditions for division of labour
• DofL means that workers specialize in a small number of operations which are done repeatedly
• Demand must be sufficiently large to permit specialization
• Economies of repetition and practice improves output per worker, but it is not transferable between generations
• DofL also stimulates transferable learning by doing
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Adam Smith:DofL is limited by the extent of the market
• For ‘extent of the market’ read aggregate income or demand.
• Imagine a product which requires 12 separate operations each taking one month.
• Demand at one unit per year will not permit DofL.
• Demand at 12 units will permit each of 12 workers to specialize in one separate operation.
• Economies of repetition and practice will increase labour productivity of all.
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Adam Smith:DofL is limited by the extent of the market
• For ‘extent of the market’ read aggregate income or demand.
• Imagine a product which requires 12 separate operations each taking one month.
• Demand at one unit per year will not permit DofL.
• Demand at 12 units will permit each of 12 workers to specialize in one separate operation.
• Economies of repetition and practice will increase labour productivity of all.
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Consumption possibilities increase with specialization
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Division of labour changes opportunity costs of producers
• Figure 2.1 tells a story of full specialization: you either produce cloth or food.
• Reason is that you get better at what you specialize in the more specialized you get.
• The consumption possibility frontier (the straight line) is outside the production possibility frontier (the convex curve).
• What would happen if the production possibility frontier was concave?
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Division of labour is good for labour productivity and technological progress
K’
K
A
B
C
D
Output per Worker
Division of Labourdl B, Cdl A, D
y A
y B
y D
y C
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Elements of the Figure
• The shift from K to a superior level of technology K’ has to do with the fact that a higher level of DofL stimulates learning by doing, that is, new knowledge improves technology.
• The upward slope of K has to do with the fact that higher division of labour means a larger gains from economies of repetition (practice).
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Decline and revival
• At C we are in Roman Era, year 100 CE.• Political disintegration and population
decline brings us to D.• Lower level of DofL cannot sustain
technological knowledge level at K’.• Shift to A at K• The 9th to14th century revival brings us
from A over B to C, the decline is reversed.
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Urban growth is an indicator of economic progress
• A rise in the ratio of urban to total population tells you
• that the non-food producing labour force is increasing proportionally, fewer farmers feed more people.
• that division of labour is rising,• and that market exchange is more regular.• Welfare ranking of regions can be made
on the basis of urbanization.
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Trading networks in the early centuries of revival.
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Urbanization ratios increase,
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Long run trends in production
• On the basis of lead emissions found in the ice cap an approximation of manufacturing, non farm, output can be derived:
• Rise from early Civilizations until end of the Roman Era.
• Decline until 9th century,• and revival in production and increase
since then
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Metal production fluctuates a lot over time.
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When did Europe forge ahead?
• The economic renaissance from the 9th century brought Europe at par with other leading civilizations around the 14th to 15th century.
• The most advanced areas in Europe then took the lead and paved the way for industrialization.
• By the 16th century real wages were higher in the leading European economies relative to the most advanced Asian civilizations.
• More about this in Lecture 4.
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Conclusion
• Europe’s recovery was based on a combination of
• population growth which stimulated division of labour
• exchange which was made possible by a restoration of order and which lead to regional specialization
• slow technological progress stimulated by learning by doing
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