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Economics 201 European Economic History Fall 2004 MWF 9-9:50 Castleman 212 R. N. Langlois Office: Room 322 Monteith Office hours: MWF 10:15-12 or by appointment. Books and readings.

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Economics 201 european economic history fall 2004 mwf 9 9 50 castleman 212 r n langlois

Economics 201

European Economic History

Fall 2004

MWF 9-9:50

Castleman 212

R. N. Langlois

Office: Room 322 Monteith

Office hours: MWF 10:15-12 or by appointment

Books and readings

Books and readings.

  • Rondo Cameron and Larry Neal, A Concise Economic History of the World. New York: Oxford, 2003.

  • Jared Diamond, Guns, Germs, and Steel. New York: Norton, 1997.

  • Douglass C. North, Structure and Change in Economic History. New York: Norton, 1981.

  • Nathan Rosenberg and L. E. Birdzell, Jr., How the West Grew Rich. New York: Basic Books, 1986.

  • Frances and Joseph Gies, Life in a Medieval Village. New York: Harper, 1990. .

Course requirements

Course requirements.

Points to remember

Points to remember.

  • Come to class.

  • Check online syllabus regularly for new links and materials.

Central question why europe

Central Question: Why Europe?

Economic growth

Economic growth.

  • Extensive growth.

    • Total income (Y) increases.

  • Intensive growth.

    • Per capita income (Y/N) increases.

      Example: India versus Australia.

Intensive economic growth

Intensive economic growth.





US$ 382,335 million*

US$ 1,702,712 million*


18.75 million

975 million


US$ 20,391

US$ 1,746

*1990 international $

Income per capita 1999

Income per capita 1999.

GNP per capita, 1999 international dollars, PPP method.

Source: The World Bank.

Economic growth1

Economic growth.

Growth in U. S. GDP per capita, 1789-2001 (1996 dollars).

Source: Johnston and Williamson (2002)

What is economic growth

What is economic growth?

  • Mercantilists: wealth is an excess of money or real goods.

  • Adam Smith: wealth is not stuff; wealth is productivity.

  • Productivity is total output divided by total input: Y/L.

  • Smith: the ability to command resources with labor time.

Adam Smith (1723-1790). Author of the Wealth of Nations (1776). Picture courtesy of the Warren J. Samuels Portrait Collection at Duke University.

Declining time price of food

Declining time-price of food.

  • 3-lb. Fryer:

    • 1919: 3.5 hours.

    • 1997: 27 minutes.

Falling death rates

Falling death rates.

Annual deaths per thousand, United States and Great Britain.

Source: Fogel (1986), p. 44, Table 9.1.

Increasing life expectancy

Increasing life expectancy.

U. S. life expectancy at birth in the twentieth century (years). Source: National Center for Health Statistics.

Decreasing price of computing power

Decreasing price of computing power.

The decreasing cost of computing power (1998 dollars per MFLOPS.) Source: Kurzweil (1999, pp. 320-321).

Decreasing price of illumination

Decreasing price of illumination.

Time price of light (hours of work per kilolumen-hour). Source: Nordhaus (1997).

Who is wealthier

Who is wealthier?

Louis XIV (1638–1715)King of France (1643–1715)

Economic growth2

Economic growth.

“[I]t is the cheap cloth, the cheap cotton and rayon fabric, boots, motorcars and so on that are the typical achievements of capitalist production, and not as a rule improvements that would mean much to the rich man. Queen Elizabeth owned silk stockings. The capitalist achievement does not typically consist in providing more silk stockings for queens but in bringing them within the reach of factory girls in return for steadily decreasing amounts of effort.”

Joseph A. Schumpeter (1883-1950)

Schumpeter, Capitalism, Socialism, and Democracy (1942).

Economic growth3

Economic growth.

Per capita income by region, selected years CE. (1990 International $.) Source: Maddison (2001)

World population growth


Population (millions)

25000 BCE


5000 BCE


1 CE


1000 CE


1400 CE


1800 CE


1900 CE


2000 CE


World population growth.

Source: Michael Kremer (1993), “Population Growth and Technical Change, One Million B.C. to 1990,” Quarterly Journal of Economics 108:3 (August), pp. 681-716.

Is intensive growth even possible

Is intensive growth even possible?

“It has been said that the great question is now at issue, whether man shall henceforth start forwards with accelerated velocity towards illimitable, and hitherto unconceived improvement; or be condemned to a perpetual oscillation between happiness and misery, and after every effort remain still at an immeasurable distance from the wished-for goal.”

Thomas Robert Malthus (1766-1834)

Malthus (1798), I.2.

Is intensive growth even possible1

Is intensive growth even possible?

Thomas Robert Malthus (1766-1834)

  • Malthusian population doctrine.

    • Population (potentially) grows exponentially but food supply (potentially) grows only linearly.

    • Any surplus above necessities leads to population growth, which reduces real wages back down to subsistence.

  • Diminishing returns.

    • Because land is a fixed factor, food supply actually grows less than linearly.

    • Rent of land sucks up all returns and brings growth to a halt.

David Ricardo (1772-1823)

Image courtesy of the Warren J. Samuels Portrait Collection at Duke University.

What malthus and ricardo forgot

What Malthus and Ricardo forgot.

Thomas Robert Malthus (1766-1834)

  • Diminishing returns.

    • Wildly underestimated the potential for productivity growth.

  • Malthusian population doctrine.

    • Missed the demographic transition.

David Ricardo (1772-1823)

Image courtesy of the Warren J. Samuels Portrait Collection at Duke University.

Malthusian responses

Malthusian responses.

Thomas Robert Malthus (1766-1834)

  • When a Malthusian society generates economic surplus.

    • Migration to new land.

    • A Malthusian crisis.

    • Technological, institutional, and organizational change to increase productivity.

What causes intensive growth

What causes (intensive) growth?

  • Resources help.

    • Climate, geography.

    • Guns, germs, and steel.

  • Lack of resources helps.

    • Hong Kong versus Argentina.

    • The resource trap.

The spread of human populations

The spread of human populations.

The neolithic era

The Neolithic era.

  • Pleistocene take-off (circa 50,000 B.C.E.)

    • Evolution of brain or voice box?

  • Cro-Magnon enter Europe (circa 40,000 B.C.E.)

Cave painting (32,000-30,000 B.C.E.) from the Chauvet cave at Vallon-Pont-d'Arc in the Ardèche region of France.

Hunter gatherer society

Hunter-gatherer society.

  • Dependence on natural foodstuffs: nomadism.

  • Generate surplus with technological change.

  • Common-pool problem.

  • Migration when land abundant.

  • Intergroup warfare when land scarce.

Hunter-gatherers maximize population.

The first economic revolution

The first economic revolution.





Population (labor force)

Settled agriculture

Settled agriculture.

  • Population pressure creates “demand” for settled agriculture.

    • First stage: defending naturally occurring foodstuffs.

    • Women cultivate crops by while men hunt.

  • Climate, geography, resources create “supply” of settled agriculture.

Guns germs and steel

Guns, germs, and steel.

The major axes of the continents.

The advantages of eurasia

The advantages of Eurasia.

  • Plant domestication.

    • Large connected belt of Mediterranean climate.

    • Wider availability of domesticable varieties (cereals).

  • Animal domestication.

    • Coevolution of humans and animals.

      • Prevents mass extinctions during hunter-gatherer era.

      • Evolved immunity to animal-borne diseases.

The fertile crescent

The Fertile Crescent.

Sites of food production before 7,000 B.C.E.

The geographical distribution of the seven Neolithic founder crops in the Fertile Crescent (yellow) of the Near East. Large mapshows the distribution of wild chickpea (red line) in a core area (green line) within the upper reaches of the Tigris and Euphrates rivers (present-day southeastern Turkey/northern Syria). Inset maps show the distribution of founder cereal crops — einkorn wheat (cross indicates the putative site of its domestication), emmer wheat, and barley — and founder legumes (lentil, pea, bitter vetch). Blue lines delineate the range of genetic founder stocks for lentil and pea, and red lines the range of emmer wheat, barley, and bitter vetch (no data are available on their genetic founder stocks). Red lines also indicate the distribution of einkorn wheat, lentil, and pea beyond that of their genetic founder stocks.

Source: Simcha Lev-Yadun, Avi Gopher, and Shahal Abbo, “The Cradle of Agriculture,” Science2(288): 1602-1603, June 2000

The spread of agriculture to europe

The spread of agriculture to Europe.

The indo europeans

The Indo-Europeans.

  • Common origins of European and Indo-Iranian languages (4000-2500 B.C.E).

  • Who were the Indo-Europeans?

    • Theory 1: pastoral nomads.

      • Mobility of domestic horse, wheeled carts.

      • Economic advantages of pastoralism.

        • Capital intensity.

        • The secondary-products economy.

    • Theory 2: masters of settled agriculture.

      • Genetic evidence.

    • Population pressure from settled agriculture.

Diffusion of innovation

Diffusion of innovation.












Reconstruction of Ötzi the ice mummy (c. 3300 BCE), in the South Tyrol Museum of Archeology, Bolzano, Italy.






Years BCE

Bronze age europe

Bronze Age Europe.







Early cities and civilizations

Early cities and civilizations.

Jericho (c. 7,000 BCE)

Sumeria and Baylonia(c. 3100-1600 BCE)

Egypt (c. 2705-332 BCE)

Mycenaea(c. 2000-1350 BCE)

The urban revolution

The urban revolution.

  • Specialization.

    • Artisans.

    • Soldiers.

    • Kleptocracy.

    • Bureaucrats.

Irrigated settled agriculture.

Economic surplus.

Bull-headed lyre from the Royal Tombs of Ur. University of PennsylvaniaMuseum of Archeaology and Anthropology.

North s theory of the state

North’s theory of the state.

  • The state (monarch) is a revenue-maximizing natural monopolist in the use of force.

    • The minimum efficient scale of defense.

    • Revenue-maximization and the Laffer curve.

Revenue maximization

Revenue maximization.

The Laffer curve





Tax rate

Oriental despotism

“Oriental despotism.”

  • High MES of agricultural production.

    • Labor-intensive irrigation projects.

    • Slave or near-slave labor force.

      • Workers “deskilled” and can’t appropriate benefits of innovation.

  • Appropriation of surplus by aristocracy.

    • Lavish monumental construction rather than reinvestment.

    • Specialists focus on luxury goods for aristocracy.

    • Low rate of technological change.

    • Slow economic growth.

The phoenicians and greeks

The Phoenicians and Greeks.

The roman empire

The Roman Empire.

The rise of rome

The Rise of Rome.

  • Agriculture.

    • Irrigation and servile production.

    • But, unlike Egypt, agriculture private: the Villa system.

  • Organization and law.

  • Military technology.

    • Discipline and large numbers.

The Pont du Gard aqueduct, near Nîmes, France.

Early roman economic policy

Early Roman economic policy.

  • Importance of trade and commerce.

  • Octavian defeats Antony (31 B.C.E.)

  • The pax romana and the Mediterranean “common market.”

Head of the Emperor Augustus (ruled 27 B.C.E. – 14 C.E.), from the Kelsey Museum, University of Michigan.

The roman empire about 117 c e

The Roman Empire about 117 C. E.

International trade in the roman era

International trade in the Roman era.

The fall of rome

The fall of Rome.

  • External causes.

    • Change in military technology?

    • Learning by “barbarians.”

  • Internal causes.

    • End of expansion eliminates source of revenue.

    • Need to “bribe” political challengers.

      • Bread and circuses.

      • Tax exemptions for nobility.

         Spiraling fiscal crisis.

Roman fiscal crisis

Roman fiscal crisis.

  • Emperors raise tax rates to meet revenue demands.

  • Tax base erodes as goods and services flee the money economy.

  • Reduced tax base leads to further increases in the tax rate, and so on in a vicious cycle.

Roman coin bearing the likeness of the Emperor Diocletian (284-305 C.E.)

Tax revenue = tax rate * tax base

Monetary policy

Monetary Policy.

Debasement of the currency (another kind of tax) leads to hyperinflation in the third century.

  • Gresham's Law.

  • (“Bad money drives out good.")

Government controls

Government controls.

  • Diocletian reforms.

    • Strict wage and price controls.

    • In-kind system of taxation and requisition.

  • Constantine (308-337) ties workers to the land.

     “Demonetizing” the economy.

Barbarian invasions

Barbarian invasions.

  • Germanic expansion.

    • Population increase and Huns.

  • Augustulus deposed by barbarians in 476.

  • How dark the “Dark Ages”?

    • Evidence of population decline.

  • From roving bandits to sedentary bandits.


The feudal system

The feudal system.

  • Change in the MES of military technology.

    • The great stirrup controversy.

  • Feudalism as a “contract.”

    • Exchange of work for defense.

    • Why an in-kind exchange?

    • Serfdom: tying workers to the land.

      • Labor shortage and rent distribution.

      • Example: professional sports.

Charlemagne crowned emperor by Pope Leo III (800 C.E.), from Grandes Chroniques de France(14th Century), Bibliothèque Nationale de France.

Feudalism as a system of rights

Feudalism as a system of rights.

Although full-grown feudalism was largely the result of the breakdown of older government and law, it both inherited law from the past and created it by a rapid growth of custom based on present fact. In one sense it may be defined as an arrangement of society based on contract, expressed or implied. The status of a person depended in every way on his position on the land, and on the other hand land-tenure determined political rights and duties. The acts constituting the feudal contract were called homage and investiture. The tenant or vassal knelt before the lord surrounded by his court (curia), placing his folded hands between those of the lord, and thus became his ‘man’ (homme, whence the word homage). … The lord in turn responded by ‘investiture’, handing to his vassal a banner, a staff, a clod of earth, a charter, or other symbol of the property or office conceded, the fief (feodum or Lehn) as it was termed …. This was the free and honourable tenure characterized by military service, but the peasant, whether serf or free, equally swore a form of fealty and was thus invested with the tenement he held of his lord. The feudal nexus thus created essentially involved reciprocity.

— The Shorter Cambridge Medieval History

The manorial system

The manorial system.

  • Villein tenancy.

    • Disappearance of slavery.

    • The custom of the manor.

  • Demesne obligation.

    • Three days of week-work on the lord’s land.

    • An input-sharing contract.

October, from Les très Riches Heures du Duc de Berry (c. 1412). The Chantilly Museum, Paris.

Early medieval agriculture

Early medieval agriculture.

  • Traditional individualistic subsistence agriculture.

  • Shared common “wastes” with little common-pool pressure.

  • “Sedentary pastoralism” takes precedence over cultivation of arable.

  • Eventually: communal control over common-field grazing.

Evolution of the manorial system

Evolution of the manorial system.

  • Population growth leads to nucleation.

    • Peasants leave hamlets and assemble in villages.

    • Arable of hamlets merged to become village arable.

June, from Les très Riches Heures du Duc de Berry (c. 1412). The Chantilly Museum, Paris.

Evolution of the manorial system1

Evolution of the manorial system.

Population growth leads to increased demand.

  • Labor transferred from pastoralism to cultivation of the arable.

  • “Cerealization” and “destocking.”

  • “Common of shack”: grazing on the fallow arable.

  • Final element: scattering of arable holdings.

June, from Les très Riches Heures du Duc de Berry (c. 1412). The Chantilly Museum, Paris.

Crop rotation

Crop rotation.

Three-course rotation in wide use by ninth century.

  • Spring crop:

    • Oats/barley or peas/beans.

    • Harvested in summer.

  • Autumn sowing of wheat or rye, harvested following summer.

  • A year fallow.

    • Nitrogen fixing by soil bacteria.

    • Manure from pasturing.

Four seasons and seasonal labors. From Bartholomaeus Anglicus (Bartholomew the Englishman), On the Properties of Things. France, Le Mans 15th Century. Bibliothèque Nationale de France.

The open field system

The open-field system.

Representative village

Representative village.

Physical structure.

  • Division into arable and non-arable land.

    • “Waste” for grazing.

  • Arable divided into two or more fields.

    • Hundreds of acres each.

  • Arable subdivided into elongated narrow strips.

    • But waste not subdivided.

Representative village1

Representative village.

Ownership structure.

  • Villeins, copyholders, and freeholders.

    • Not much practical difference.

  • OFS as a village system, not a manorial system.

  • Commons owned collectively.

    • Not “unowned.”

Representative village2

Representative village.

Institutional structure.

  • Management of the Commons.

    • Changeover from private to collective rights.

    • Use of commons.

    • Joint expenses.

  • Manor court or village meeting.

    • Set planting and harvesting dates.

    • Prevented overuse of commons.

    • Controlled private exchange of strips.

Representative village3

Representative village.

Technological structure.

  • Little specialization in production.

    • Except near big cities.

    • Specialized farms didn’t use the OFS.

  • High transportation and transaction costs.

  • Some activities collective.

    • Grazing, plowing, harvesting.

  • Some activities private.

    • Sowing, weeding.

The ofs economic analysis

The OFS: economic analysis.

  • Fine-tuned adaptation to diversified autarkic production.

    • Pastoralism and crop rotation.

  • Many tasks, with different levels of economies of scale and different costs of monitoring.

    • Manage tasks collectively when economies of scale high and monitoring costs low.

    • Assign private property rights when economies of scale low and monitoring costs high.

July, from Les très Riches Heures du Duc de Berry (c. 1412). The Chantilly Museum, Paris.



Scattering early explanations

Scattering: early explanations.

  • Size of plow team.

    • Land in proportion to contribution.

    • But scattering observed even when light plow used.

  • Desire for equality.

    • But there were many inequalities among peasants.

  • Partible inheritance.

    • But this applies only to holders in fee simple.

  • Assarting.

    • Creating new arable form the waste.

 General problem: why does scattering persist?

 Active markets in strips.

Scattering and risk

Scattering and risk.

  • McCloskey: scattering as a form of insurance.

  • Variability of climate and soil over small areas.

  • Scattering as portfolio diversification in the absence of other assets.

Problems with the risk hypothesis

Problems with the risk hypothesis.

  • Landlords provide de facto “charity.”

  • Livestock another portfolio asset.

  • Optimal risk sharing through combination of rental, wage, and share-cropping contracts.

Scattering and the open field system

Scattering and the open-field system.

  • Dahlman: scattering helps preserve OFS.

    • By increasing costs of private enclosure, scattering reduces “hold-up” threats.

    • Scattering protects the system against the individual.

  • Fenoaltea: stands Dahlman on his head.

    • Collective activities (especially harvesting) capacity constrained.

    • Not all parts of all fields can be harvested in some years.

    • Scattering protects the individual against the system.

    • A different sort of risk-diversification argument.

The success of the ofs

The success of the OFS.

  • Population densities highest where the manorial/OFS was most extensive.

    • Northern France, Northern Italy.

  • Population growth in Eastern Europe the result of migration.

*All Europe includes Norway, Sweden, most of Eastern Europe, and Christian Spain.

Results of population growth

Results of population growth.

From 11th to 13th century, a frontier movement.

  • Clearing the waste.

  • Colonizing Eastern Europe.

  • The Crusades as a frontier movement.

Thirteenth century looming crisis

Thirteenth century: looming crisis.

  • Frontier movement ceases, population growth continues.

  • General increase in land rents.

    • Increase in relative prices of cereals.

    • Some shift from pasture to cultivation.

  • Diminishing returns and declining real wage.

Pieter Bruegel the Elder, The Harvesters (1565 ) Metropolitan Museum of Art, New York

Thirteenth century response

Thirteenth century: response.

Refeudalization: return to direct cultivation of the demesne.

  • Feudal obligations transformed into money rents in many places by 11th century.

  • Money rents seen as fixed: origin of the word “farm.”

    • A farmer (fermier) held a right to rents that were fixed or firm (ferme).

  • Why return to feudal obligations?

Pieter Bruegel the Elder, The Harvesters (1565 ) Metropolitan Museum of Art, New York

Why refeudalization

Why refeudalization?

  • Lords dig in their heels.

    • Fixed rents allows peasants to capture the gains from increasing land rents.

    • Return to demesne avoids renegotiation costs.

  • Proto-enclosure.

    • A move toward specialized production?

Pieter Bruegel the Elder, The Harvesters (1565 ) Metropolitan Museum of Art, New York

Either way: the failure of institutional transformation.

The calamitous fourteenth century

The calamitous fourteenth century.

Population of Western Europe, 1200-1550 (millions).

Albrecht Dürer, The Four Horsemen of the Apocalypse (1498).

The calamitous fourteenth century1

The calamitous fourteenth century.

Population of England, 1086-1603 (millions).

Albrecht Dürer, The Four Horsemen of the Apocalypse (1498).

Malthusian crisis

Malthusian crisis.

  • Famine.

  • War.

  • The Black Death.

    • Bubonic plague, 1348-51

    • Recurred many times through 15th century.

    • Population didn’t stop falling until mid 15th century, and did not recover until 16th century.

Les Quatres Morts, from the Danse Macabre of the Cemetery of the Innocents, Paris, 15th century.

Economic effects of population decline

Economic effects of population decline.

  • Price fluctuations, with general deflation after 1375.

  • Prices of agricultural goods fall relative to manufactured goods.

  • Real wages increase.

  • Rents decline, as does cultivation of marginal lands.






Supply and demand for agricultural products in Europe before (D) and after (D’) the plague.

Institutional effects of population decline

Institutional effects of population decline.

  • Transformation of servile obligations into property rights.

    • Competition for peasant labor leads to attractive rental contracts.

    • Rents fixed — renegotiated on death of peasant.

    • Eventually, life leases become hereditary by custom.

    • Inflation reduces value of “quit rent” to nominal sum.

    • Hereditary leases become rights in fee simple.

    • Soil tilled by free tenants and wage workers.

  • Trading rights for revenue.

Institutional transformation

Institutional transformation.

  • Like the 13th century, the 16th century was a period of rising population and increasing land rents.

  • But this time Europe responded with an institutional innovation that led to continual increases in productivity.

Pieter Bruegel the Elder, The Harvesters (1565 ) Metropolitan Museum of Art, New York

The enclosure movement

The enclosure movement.

  • Physical enclosure.

  • Legal enclosure.

    • Voluntary enclosure.

    • Parliamentary enclosure.

The timing of english enclosure

The timing of English enclosure.

Percentages approximate. Source: Wordie (1983).

Transaction costs of enclosure

Transaction costs of enclosure.

  • Voluntary enclosure.

    • Required unanimity, side-payments.

    • Complex property law geared to protect hereditary estates from profligate descendants.

    • Enclosures with highest net benefits take place first.

  • Parliamentary enclosure.

    • Case-by-case exemption from common law.

    • Majority not unanimity.

    • A form of eminent domain.

    • Not important until mid-18th century.

      • “Hardest” enclosures Parliamentary.

The benefits of enclosure

The benefits of enclosure.

  • Benefits of specialization and trade.

  • Greater appropriability of innovation.

  • Reduced costs of collective decision-making.

Enclosure for pasture in Britain reflected Britain’s growing comparative advantage in wool.

The benefits of enclosure1

The benefits of enclosure.

  • Enclosed land rented for twice common-field land.

  • £2.1 million per year gain in productivity, about 1.5% of national income or about 3.5% of agricultural income.

  • Rate of return of 17% per year.

  • An average village 13% more productive.

Source: McCloskey (1975)

Institutional transformation1

Institutional transformation.

  • Like the 13th century, the 16th century was a period of rising population and increasing land rents.

  • But this time Europe responded with an institutional innovation that led to continual increases in productivity.

Pieter Bruegel the Elder, The Harvesters (1565 ) Metropolitan Museum of Art, New York


A more developed market economy.

Institutional transformation2

Institutional transformation.

  • Agricultural transformation.

    • The enclosure movement.

  • Commercial transformation.

    • The requickening of trade.

    • The development of cities.

  • Political transformation.

    • The rise of the nation-state.

    • Mercantilism.

Rise of the nation state

Rise of the nation-state.

Increase in the MES of military technology.

  • Lower communication and coordination costs.

  • Population increase.

  • Change in military technology?

    • Pike and longbow.

    • Gunpowder.

The Battle of Crécy (1346). Jean Froissart, Chronicles. Flanders, 15th Century. Bibliothèque Nationale de France.

Rise of the nation state1

Rise of the nation-state.

Increase in the MES of military technology.

  • Increase in the geographic extent of dominions.

    • Overcoming “medieval particularism.”

  • “Shakeout” and fiscal crisis among rulers.

    • Search for new sources of revenue leads to institutional change.

The Battle of Crécy (1346). Jean Froissart, Chronicles. Flanders, 15th Century. Bibliothèque Nationale de France.

Institutions and economic growth

Institutions and economic growth.

  • Efficient institutions.

    • Secure property rights.

    • Reduce transaction costs.

    • Positive-sum game.

  • Inefficient institutions.

    • Redistribute wealth rather than create wealth.

    • Monopolies, trade restrictions.

    • Zero-sum (negative-sum) game.

Market integration

Market integration.

  • Tolls and internal customs barriers.

  • Coinage.

  • Weights and measures.

  • Law.

  • Market-enhancing institutions.

Rembrandt, detail from The Moneychanger (1627), Staatliche Museen, Gemäldegalerie, Berlin.

Tolls and internal customs barriers

Tolls and internal customs barriers.

  • Not only tariffs at political boundaries but also internal tolls.

    • Roads and waterways.

    • Markets and towns.

  • Customs barriers every six miles on the best roads.

  • More than 60 tolls on the Rhine by the end of the Middle Ages.

  • In France, still 1600 tolls at the time of the French Revolution (1789).

Rembrandt, detail from The Moneychanger (1627), Staatliche Museen, Gemäldegalerie, Berlin.

Tolls and internal customs barriers1

Tolls and internal customs barriers.

  • England: monarch opposed tolls without a quid pro quo of service.

    • Royal permission needed.

    • Inhabitants could demand audit.

  • Gradual disappearance of tolls.

  • Separated foreign from domestic:

    • “customs” vs. “tolls.”

  • National customs system, 1275-1350.

  • Early power of monarchy.

Rembrandt, detail from The Moneychanger (1627), Staatliche Museen, Gemäldegalerie, Berlin.

The turnpike system

The turnpike system.

  • 1660 through eighteenth century.

  • Best one-fifth of English roads.

  • Privately constructed by “turnpike trusts.”

“The benefits of these turnpikes appears now to be so great, and the people in all places begin to be sensible of it, that it is incredible what effects it has already had upon trade in the counties where it is more completely finished.”

— Daniel Defoe



  • Unification quicker and easier.

    • Theory of money.

  • England: unification under Henry II in 12th century.

    • Depreciation ceases.

  • France: a talent for manipulating coinage.

  • Germany: coinage remains largest obstruction to internal trade.

Rembrandt, detail from The Moneychanger (1627), Staatliche Museen, Gemäldegalerie, Berlin.

Weights and measures

Weights and measures.

  • In Middle Ages, varied not only by locality but also by type of product.

  • Aids cheating, raises transaction costs.

  • England leader in unification, but local weights and measures not abolished until statute of 1835.

“... to bring the whole of His Majesty’s kingdom within the same statutes and within the same system of weights and measures, an undertaking very worthy of our great King …”— Jean-Baptiste Colbert (1665)

Rembrandt, detail from The Moneychanger (1627), Staatliche Museen, Gemäldegalerie, Berlin.

Evolution and unification of law

Evolution and unification of law.

  • On the continent, the rediscovery of Roman law.

  • In England, parallel development of Common Law.

    • Battle against royal monopolies.

  • The Law Merchant.

    • Enforcement at the Champagne Fairs.

Rembrandt, detail from The Moneychanger (1627), Staatliche Museen, Gemäldegalerie, Berlin.

Economic association without kinship

Economic association without kinship.

  • Trading within ethnic networks.

    • Ethnic culture and institutions promote trust, enforce sanctions.

  • The Community Responsibility System.

    • Intergroup trading.

    • Sanctions imposed at group level.

  • The Individual Responsibility System.

    • As groups grow, difficult to monitor members effectively.

    • Rise of legal institutions of nation-state and law merchant.

Hans Holbein the Younger, Portrait of Georg Gisze, a German merchant in London (1532). Staatliche Museen, Gemäldegalerie, Berlin.

Other market promoting innovations

Other market-promoting innovations.

  • Bills of exchange.

    • Development of banking.

  • Insurance.

    • Separation of marine insurance from financing.

  • Double-entry bookkeeping.

    • Helps detect errors.

    • Separation of business account from family account.



  • Medieval guilds.

    • Institutional structure for preserving and diffusing productive knowledge.

    • Institutional structure for coordinating commitments and enforcing contracts.

  • Decline of guilds.

    • Competition from rural industry.

    • State policy weakens guilds in England and the Netherlands, strengthens them in France.

Rembrandt, The Syndics of the Clothmaker's Guild (The Staalmeesters) 1662. Rijksmuseum, Amsterdam.

Medieval guilds integrated insurance, safety-net, and other functions.



Association of state power with economic power.

  • Microeconomic.

    • System of economic regulation

  • Macroeconomic.

    • Regulation of international trade and finance.

  • System of economic thought.

A sea depot in Amsterdam, 1750.

Patents and monopolies

Patents and Monopolies.

  • Creation of “artificial” property rights.

    • Right to exclude others from competition.

  • Monopoly transfers wealth from consumers to producers (PS)

    • Merchants willing to pay monarch up to PS for right to monopoly.

  • Dead-weight efficiency loss (DWL).


DWL loss represents foregone gains from trade.











Patents and monopolies1

Patents and Monopolies.

  • Origin of the word patent.

  • Typical Elizabethan monopolies:

    • Saltpeter, gunpowder, salt, paper.

  • In 1603, Elizabeth declares monopolies contrary to common law.

    • In re: playing cards.

    • Pressure from merchants and courts.

  • Statute of monopolies (1625).

Queen Elizabeth I (1533-1603). Ruled 1558-1603. Attributed to Nicholas Hilliard. The Tate Gallery, London.

Trade and monetary policy

Trade and monetary policy.

Balance of trade.

  • Control of export of bullion.

  • Staple policy.

    • Town as entrepôt.

  • Policy of provision.

    • Tariffs, etc., to retain or attract certain goods.

  • Sumptuary laws.

A sea depot in Amsterdam, 1750.

Mercantilism as a system of ideas

Mercantilism as a system of ideas.

Balance of trade.

  • Analogy with individual account.

    • From Italian accounting practices.

    • Fallacy of composition.

  • Struggling to understand growth in a zero-sum framework.

  • Adam Smith attacks “the mercantile system.”

A sea depot in Amsterdam, 1750.

Institutions and economic growth1

Institutions and economic growth.

  • Why did some countries create efficient institutions?

  • Why did others create inefficient institutions?



  • Charles VII takes over a destroyed country after Hundred Years War, 1422.

  • Medieval sources of revenue depleted by war.

  • Creating nation state requires large and growing revenues.

Jean Fouquet, portrait of Charles VII of France, c. 1444. The Louvre, Paris.



  • Charles effective in restoring order.

  • Estates General must approve levies.

    • Estates anxious to restore order.

    • Special right to levy turns into a permanent right.

  • Excluding nobles and clergy from taxation.

Jean Fouquet, portrait of Charles VII of France, c. 1444. The Louvre, Paris.



  • Guilds become fiscal agents for the crown.

    • Taxation more effective.

    • Compare JP system in England.

    • Strengthens guilds.

  • Administrative bureaucracy.

Jean Fouquet, portrait of Charles VII of France, c. 1444. The Louvre, Paris.



  • Jean-Baptiste Colbert.

    • Finance minister under Louis XIV (1661-83).

    • Colbertisme synonymous with mercantilism.

  • Economic reforms.

    • Efforts to reduce “particularism.”

    • But favored state monopoly and industrial control. Origin of laissez faire.

    • Frustrated by royal need for revenue.

  • Prohibitive tariffs lead to war with the Netherlands.

Spain in 1492

Spain in 1492.

  • Reconquest ends with capture of Granada, last Moorish stronghold.

    • Unification and consolidation of power.

    • Cortes grant taxing power.

      • Taxes increase 20 times between 1470 and 1540.

  • Expulsion of the Jews (and then Moriscos in 1609).

    • Loss of artisanal, commercial, and agricultural skills.

  • Columbus sets sail.

Queen Isabella of Spain. Ruled 1479-1504.

The mestas

The Mestas.

  • Sheep guild.

    • Granted Royal privilege in 1273.

    • Transhumance rights in exchange for funds to finance reconquest.

    • Decree of 1501 reserves in perpetuity all land on which sheep have ever grazed.

  • Effect on enclosure.

    • Price controls on cereals.

  • Consulado of Burgos.

Transhumance routes in Spain.

The spanish empire

The Spanish empire.

The spanish empire1

The Spanish empire.

  • Monopoly control.

    • Casa de Contratación.

    • Prohibition of colonial industry.

  • Bullion and Inflation.

    • Looted and mined gold and silver floods Spain and Europe.

    • Prices increase by more than a factor of three in Spain, and a factor of five in Brabant and England.

The spanish empire2

The Spanish empire.

Index of silver imported to Seville, 1501-1660. (1591-1600=100). Source: John H. Munro, “The Monetary Origins of the ‘Price Revolution.’”

The decline of spain

The decline of Spain.

  • Revenues.

    • Americas less than 20 percent.

    • Netherlands largest source.

  • Costs.

    • Far exceed revenues.

    • Hapsburgs spend on military and wars to expand empire.

  • Effects.

    • Borrowing and bankruptcy.

    • Fiscal spiral.

      • Confiscation, monopoly, sale of titles.

Titian, Charles V Seated (1548). Pinakothek Munich.

The netherlands

The Netherlands.

  • Passes from Burgundy to the Hapsburgs (1477).

  • Both Burgundians and Hapsburgs encourage growth and trade.

    • Small taxes on many items in exchange for secure property rights.

    • Discourage monopolies, guilds.

  • The goose that lays the golden eggs?

The Netherlands in 1543.

The netherlands1

The Netherlands.

  • Increased exactions lead to successful rebellion (1572-1581).

    • Antwerp sacked; commercial leadership moves to Amsterdam.

  • By 17th century, Dutch become commercial leaders of Europe.

    • Economic diversification.

    • The Dutch East India Company (1602).

  • “The First Modern Economy.”

Replica of Henry Hudson’s schooner, the Half Moon.



  • Government funded as an extended household.

  • Expenditures exceed revenues from Crown lands.

  • Sale of land to meet shortfall.

    • Elizabeth sells 25 per cent after 1588 war with Spain.

    • James I sells another 25 per cent.

    • Charles I (1625-1641) sells the rest.

  • Parliament controls taxes and customs.

King James I (ruled 1603-1625).

Stuart england

Stuart England.

Stuarts seek revenue outside parliamentary control.

  • New customs impositions.

  • Sale of monopolies.

  • Expansion of peerage.

    • Packing the House of Lords.

    • James: a baronet for £1,095; price later falls to £220.

  • Loans secured under threat.

  • Purveyance.

    • Charles I seizes £130,000 of bullion stored in the Tower of London (1640).

King Charles I (ruled 1625-1641).

Stuart england1

Stuart England.

  • Parliament withholds revenues.

    • Demands respect for traditional property rights.

  • Common Law courts oppose monopolies.

    • Coke invokes Magna Carta.

  • Charles responds with Royal Prerogative.

    • Prerogative courts.

    • Special laws for individuals.

    • Star Chamber.

    • Fires Coke and other judges.

Sir Edward Coke (1552-1634).

The english civil war

The English Civil War.

  • Coalition builds against the Crown.

    • Marginal incentive to support the king declines as costs of other people’s privileges mount.

  • Unlike continental monarchs, English king has no standing army.

Execution of Charles I (1649).

The english republic

The English Republic.

  • Star Chamber Abolished.

  • Restrictions against monopolies enforced.

  • Regular standing parliament.

  • Royal administrative mechanisms abolished.

  • Act of 1660 abolished feudal tenures, effectively making England a fee simple society.

Oliver Cromwell (1599-1658).

The restoration

The Restoration.

  • Cromwell unable to find a stable form of government.

    • Son proves a poor successor.

  • Stuarts restored to power (1660).

  • Royal abuses begin again.

    • “Rechartering” the Whigs out of parliament.

  • James II turns on his own followers (1686-88).

King Charles II (ruled 1660-1685).

The glorious revolution

The Glorious Revolution.

  • Parliament welcomes invasion by William of Orange and Mary, Protestant daughter of James II.

  • Parliamentary supremacy.

  • Fiscal revolution underpins political revolution.

  • A self-enforcing constitution.

William III (ruled 1689-1702.

Mary II (ruled 1688-1694).

A self enforcing constitution

A self-enforcing constitution.

  • Required parliament’s assent for major policy changes.

    • Allowed wealth-holders to veto what wasn’t in their interest.

  • Ways of reneging unilaterally eliminated.

    • Limited Crown sources of funds.

    • Audit expenditures.

    • Prerogative courts abolished.

    • Judicial tenure.

  • Self enforcing.

    • Credible threat of dethronement.

John Locke (1632-1704 ). Published Two Treatises of Government (1690).

The fiscal revolution

The fiscal revolution.

  • Parliament agrees to put government on sound financial footing in exchange for veto power.

  • Evidence: lenders now willing to supply funds.

    • After 1688, government has access to unprecedented funds.

    • Tenfold increase, 1688-1697.

William III (ruled 1689-1702.

Mary II (ruled 1689-1694).

The industrial revolution

The Industrial Revolution.

  • When?

    • 1780-1830.

  • Was it a “revolution”?

    • No: Cameron.

    • Yes: Landes.

The industrial revolution1

The Industrial Revolution.

  • Industrialization vs. economic growth.

    • U. S. wealthier than Britain in 1800, but little industrialization.

    • Growth can come from improvements in traditional activities, e.g., agriculture.

  • Per capita growth not “revolutionary” during industrial revolution.

    • Steady balanced growth.

    • But denominator growing rapidly.

      • Increased output sustains rapid population growth.

    • Did growth in “new” sectors contribute to growth in “old” sectors?

The industrial revolution2

The Industrial Revolution.

Qualitative transformations.

  • Technological transformations.

    • Energy: animal to water and steam power.

    • Materials: wood to iron and steel.

  • Organizational Transformation.

    • The factory system.

James Watt’s steam engine, 1769.

Britain in 1700

Britain in 1700.

  • Population on England and Wales: 5.2 million.

    • Would grow to 9.1 million by 1800.

    • Would almost double again to 17.8 million by 1850.

Ogilby’s Britannica (1675)

Britain in 17001

Britain in 1700.

  • English peasant ate better than continental counterpart.

    • Spent lower proportion of income on food.

    • Implies increased demand for manufactured goods.

  • Lower tolls and improved transportation.

    • Canals and turnpikes.

  • More urban.

    • By 1800, 25% in cities larger than 5,000 persons.

    • Compare with 10% in France.

    • Cities centers of commerce.

Britain in 17002

Britain in 1700.

  • Increased extent of the market.

    • Large internal market.

    • Merchant fleet spurs international trade.

  • Relative wealth of peasantry.

    • Focus on standardized, low-cost items.

    • Useful also in trade with Asia, Africa, and Americas.

    • Quantity not quality: search for lower costs.

Manufacture in 1700

Manufacture in 1700.

  • Local crafts shops.

  • But pressure on urban guilds from rural industry.

    • The putting-out system.

  • Woolens dominate.

    • 70% of English exports in 1700.

      • 50% in 1770.

    • Not localized: spread all over England.

    • Link to labor freed by enclosure.

The putting out system

The putting-out system.

  • Merchant clothier.

    • Commissions spinners and weavers.

    • Provides wool.

    • Hires workers for finishing and dyeing.

  • Cottagers.

    • Own tools: handloom, spinning wheels.

    • Division of labor within household.

      • Men weave, women spin.

      • Children and hired labor.

    • Paid on piece-rate basis.

    • May have garden, cows, etc.

      • Continue to participate in agriculture.

Also called the “domestic” system.

Early textile innovation

Early textile innovation.

  • John Kay’s flying shuttle (1733).

  • Spinning becomes a bottleneck.

  • Wyatt-Paul spinning frame (1738).

  • Never technologically successful.

  • Difficulty of wool as material.

The cotton textile industry

The cotton textile industry.

  • Cotton arrives in Britain from India.

    • Efficient, skill-intensive hand production.

  • Instant popularity of colorful calicoes.

  • Woolens industry clamors for protection.

    • Act of 1700 forbids import of printed fabrics.

    • Act of 1719 forbids wearing calicoes.

  • British entrepreneurs seize opportunity.

    • Using linen for warp and cotton for weft.

    • Ancient right to produce fustian.

Wall hanging (detail). Painted and dyed cotton. Madras-Pulicat Region c. 1640-50.

The cotton textile industry1

The cotton textile industry.

  • Import prohibitions encourage development of indigenous British cotton textile industry.

  • Originally, cotton cloth produced by domestic system, on woolens model.

    • Rise of the “fustian masters.”

  • Tendency of weaving to concentrate.

    • Manchester and Lancashire.

  • Favorable ground for mechanical invention.

    • Cotton more easily mechanized than wool.

  • Trajectory of mass production.

Innovation in cotton spinning

Innovation in cotton spinning.

  • Hargreaves’ jenny.

    • Patented 1770.

    • Basically a multi-spindle spinning wheel.

    • Powered by a single human.

  • Arkwright’s water frame.

    • Based on Wyatt-Paul and thus not patentable.

    • Uses two rollers.

    • Designed for non-human power.

Innovation in cotton spinning1

Innovation in cotton spinning.

  • Hargreaves’ machines smashed by angry spinners.

  • Patent held invalid.

  • Hargreaves flees to Nottingham and dies in 1778.

  • By 1788, 20,000 jennies in England.

  • Completely ousts spinning wheel in Lancashire, which gives up wool for cotton.

Innovation in cotton spinning2

Innovation in cotton spinning.

Sir Richard Arkwright (1732-1792)

  • Itinerant barber and hair merchant.

  • Persuades Nottingham hosiers to back large-scale water-driven factories.

  • Makes strong warp thread, allowing all-cotton cloth.

  • Arkwright dies with a fortune of £500,000.

Mather Brown, Portrait of Sir Richard Arkwright (1790). New Britain Museum of American Art.

Innovation in cotton spinning3

Innovation in cotton spinning.

  • Combined principles of water frame and jenny.

  • Produced thread with fineness of jenny and strength of water frame.

  • A “dominant design”: improved but never superseded until the late nineteenth century.

Crompton’s mule (1779)

Innovation in cotton spinning4

Innovation in cotton spinning.

Mule spinning, mid-nineteenth century.

Innovation in weaving

Innovation in weaving.

  • Power loom: Edmund Cartwright (1787).

    • Catches on slowly as engineering standards improve.

    • Speed/breakage tradeoff.

  • Technical advantage of 7.5:1 by 1820.

    • Single operative tends more looms rather than increased output per loom.

The british textile industry

The British textile industry.

  • Import substitution turns into export powerhouse.

  • Leads British economic growth into 19th century.

  • Surpasses woolen trade as principal export by 1803.

    • More export oriented than woolens.

  • Britain surpasses India in 1790 as largest exporter of calico, not to be overtaken until 1933 (by Japan).

British exports of cotton textiles.

Organizational transformation

Organizational transformation.

  • Crafts production.

  • The putting-out system.

  • The factory system.

Jedediah Strutt’s Milford mills.

A paradox

A paradox?

  • The enclosure movement.

    • Move way from collective “team” working of village land.

    • Unbundling of joint-ownership rights.

  • The factory system.

    • Move to collectively organized modes of production.

    • Ownership rights to capital unified in joint-stock company.

The factory system

The factory system.

  • What is a factory?

    • Expensive or indivisible technology.

    • The concentration of workers in a single location.

    • Close monitoring or supervision of work.

      • “Factory discipline.”

Monitoring and supervision

Monitoring and supervision.

  • The putting-out system.

    • Contractor relationship.

    • Product monitoring.

    • Pecuniary incentives.

  • The factory system.

    • Employee relationship.

    • Process monitoring.

    • “Factory discipline.”

The factory system in cotton

The factory system in cotton.

Power loom perfected.

Factory workers and handloom weavers in Britain, 1806-1862 (in thousands).

Source: B. R. Mitchell, British Historical Statistics. Cambridge University Press, 1988, p. 376.

The factory system in cotton1

The factory system in cotton.

  • Early factory workers.

    • Women and children.

      • Oldknow employs men in agriculture.

    • Poorhouses.

    • Need to build dormitories.

  • By 1784, key position in spinning goes to adult males.

    • The multicellular mill.

  • Recreating the cottage contracting system within factories.

    • Master spinner responsible for supervision, hiring.

    • But doesn’t own tools (machines).

    • Majority of child labor employed by masters, not capitalists.

The rise and decline of britain

The rise and decline of Britain.

  • Aspects of British industrial success.

    • Industrial organization.

      • Industrial districts.

    • International trade.

      • The British Empire.

    • Free trade.

  • The debate over British industrial decline.

    • Did Britain decline?

    • Theories of decline.

      • Culture.

      • Technological trajectories and timing.

Industrial organization in britain

Industrial organization in Britain.

When an industry has thus chosen a locality for itself, it is likely to stay there long: so great are the advantages which people following the same skilled trade get from near neighbourhood to one another. The mysteries of the trade become no mysteries; but are as it were in the air, and children learn many of them unconsciously. Good work is rightly appreciated, inventions and improvements in machinery, in processes and the general organization of the business have their merits promptly discussed: if one man starts a new idea, it is taken up by others and combined with suggestions of their own; and thus it becomes the source of further new ideas. And presently subsidiary trades grow up in the neighbourhood, supplying it with implements and materials, organizing its traffic, and in many ways conducing to the economy of its material.

— Marshall, Principles of Economics, IV.x.3.

Alfred Marshall, 1842-1924

Industrial districts.

External economies.



Original advantages.

  • Poverty.

    • Pastoral farming lends itself to small-scale enterprise.

  • Indigenous textile tradition.

    • Woolens under Yorkshire influence and linens under Irish influence.

  • Climate.

    • Cotton “hydroscopic.”

    • An east wind reduces output and quality by 10 per cent.

  • Water and coal.

  • Lack of institutional constraint.

    • Manchester a new town.

    • Grows from 7th largest in 1775 to 3rd largest in 1801.

An Industrial Landscape in 1833: Swainson, Birley and Co., near Preston, Lancashire, England.



External economies.

  • Transportation.

    • Port of Liverpool develops with Manchester.

    • Canals, turnpikes, and railways.

      • World’s first passenger railway.

    • Later, telegraph and telephone turn Manchester into communications center.

  • Markets.

    • Cotton exchanges create thick market for worldwide imports.

    • Power loom and mule adapted to wide variety of cotton types and quality.

    • Worldwide network of commissioning agents.

The Manchester Cotton Exchange.



External economies.

  • Vertical specialization.

    • Low barriers to entry.

    • Tens of thousands of establishments.

    • Specialization by type of yarn or cloth.

    • One firm may lease space in several mills and one mill may contain several firms.

    • “Flexible specialization.”

  • Subsidiary industries.

    • Textile machinery industry.

    • Banking and finance.

    • Transportation and communication.

An Industrial Landscape in 1833: Swainson, Birley and Co., near Preston, Lancashire, England.



International trade.

Sales worldwide, but especially to subtropical areas of India, China, Latin America.

The british empire

The British Empire.

  • Beginnings in Mercantilist trading monopolies.

    • East India Company (1600).

  • Trading companies take on political and military functions.

    • Creating trading institutions and preserving openness of markets.

  • British government takes over functions of trading companies.

    • East India Company nationalized 1773.

    • Monopoly abolished 1813.

Britain and free trade

Britain and Free Trade.

  • Smith’s Wealth of Nations attacks mercantilism.

  • The Corn Laws.

    • Import controls after Napoleonic wars.

    • Ricardo discovers comparative advantage.

    • Anti-Corn-Law League founded in Manchester, 1836.

    • Corn Laws repealed, 1846.

    • Reflects shift of economic power from agriculture to manufacture.

  • Anglo-French commercial treaty (1860) virtually eliminates tariffs.

David Ricardo (1772-1823).

Image courtesy of the Warren J. Samuels Portrait Collection at Duke University.

The decline of britain

The decline of Britain.

  • Relative or absolute decline?

  • Timing of decline.

The Crystal Palace, site of the Great Exhibition of 1851, which showcased British technology to the world.

The decline of britain1

The decline of Britain.

GDP per capita in 1990 dollars.

Source: Angus Maddison, Monitoring the World Economy, 1820-1992. OECD, 1995, p. 23-24.

The decline of britain2

The decline of Britain.

  • Britain retains lead in traditional industries.

    • Textiles, textile equipment, shipbuilding, cable.

  • Britain cedes lead to US and Germany in new areas.

    • Organic chemicals, electrical products, steel.

A Bessemer steel converter. Kelham Island Museum, Sheffield, England.

The decline of britain hypotheses

The decline of Britain: hypotheses.

  • Culture.

    • Sons of nouveau riche capitalists study classics at Oxford and Cambridge.

    • Culture of the gentleman: anti-technology and anti-business.

  • Educational system.

    • Britain relies on on-the-job training.

    • No system of technical education.

  • Costs of empire.

    • Civil service drains off talent.

The decline of britain hypotheses1

The decline of Britain: hypotheses.

  • Institutional inertia.

    • The “disadvantages” of an economic head start.

  • Technological trajectories.

    • The case of the ring spindle.

The ring spinning frame.

Neoclassical growth theory

“Neoclassical” growth theory.

Y = f(K, L)

  • But: growth in capital and labor don’t account for growth in GDP.

    • The “residual.”

Robert Solow (1924-)

Neoclassical growth theory1

“Neoclassical” growth theory.

Y = f(K, L; )

  • But: growth in capital and labor don’t account for growth in GDP.

    • The “residual.”

Robert Solow (1924-)

Neoclassical growth theory2

“Neoclassical” growth theory.

Y = f(K, L; )

  • But: growth in capital and labor don’t account for growth in GDP.

    • The “residual.”

Robert Solow (1924-)

  • Or else K and L have “improved.”

  • Either way: something is missing.

    • Knowledge.

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