Welcome to The Long Run

On behalf of the Economic History Society (EHS), it is a pleasure to welcome you to The Long Run, the EHS blog.

This blog aims to encourage discussion of economic and social history, broadly defined. We live in a time of major social and economic change, and research in social science is showing more and more that a historical and long-term approach to current issues is the key to understanding our times.

We welcome any contribution or suggestion – please contact us at ehs.thelongrun@gmail.com

 

ORIGINS OF BRITAIN’S HOUSING CRISIS: ‘Stop-go’ policy and the covert restriction of private residential house-building

by Peter Scott and James T. Walker (Henley Business School at the University of Reading)

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University of the West of England, The History of Council Housing. Copyright of Bristol Record Office

‘Stop-go’ aggregate demand management policy represents one of the most distinctive, and controversial, aspects of British macroeconomic policy during the post-war ‘long boom’. This was, in turn, linked to an over-riding priority among an influential section of policy-makers in the Treasury and the Bank of England to restore sterling as a ‘strong’ currency (second only to the dollar) and to re-establish the City of London as a major financial and trading centre, despite heavy war-time debts and low currency reserves.

This policy is often viewed as having had damaging impacts on major sectors of the British economy – especially the manufacture of cars, white goods and other consumer durables, which were deliberately depressed in order to support sterling and thereby facilitate the growth of Britain’s financial sector.

This research explores an important but neglected impact of ‘stop-go’ policy: restrictions on house-building. This has been overlooked in the general stop-go literature, largely because the policy was mainly undertaken covertly, without public announcement or parliamentary discussion.

In addition to publicly announced restrictions on public sector house-building – by restricting local authority borrowing and raising interest rates on that borrowing – the government covertly depressed private house purchases and mortgage lending by restricting house mortgage funds to well below market clearing levels.

The Treasury used a combination of informal pressure and, less frequently, formal requests, to get the building societies’ cartel (the Building Societies Association) to set their interest rates at levels that forced them to ration mortgage lending in order to maintain acceptable reserves. Officials particularly valued this instrument of stop-go policy owing to its effectiveness and its ‘invisibility’ (mortgage lending restriction was not publicly announced and was not generally even subject to cabinet discussion).

Meanwhile political pressure for action to increase house-building and home ownership (especially in the run-up to national elections) led to a perverse situation whereby government was sometimes simultaneously boosting demand for house purchases and covertly restricting the supply of mortgages – feeding into a growing house price spiral that has become an enduring characteristic of the British housing market.

This study shows that the application of stop-go policy to mortgage lending for most of the period between the mid-1950s and the late 1970s had a major cumulative impact on the British economy: depressing the long-term rate of capital formation in housing; creating inflationary expectations for house purchasers; having negative impacts on living standards (especially for lower-income families); and damaging the growth, productivity, and capacity of the house-building sector and the building society movement.

Democracy and taxation in Greece: a long history of rural favouritism

by Pantelis Kammas (University of Ioannina) and Vassilis Sarantides (University of Sheffield)

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Some of the basic characteristics of the current tax system in Greece seem to have deep historical roots. One is the amazingly low tax burden that has fallen on the incomes of the agricultural population throughout the history of the Greek state.

This is because governing authorities always keep an eye on the welfare of the politically powerful group of peasants and farmers to gain support. Another deep-rooted characteristic is significant reliance on indirect versus direct taxes, which can be attributed to analogous political economy reasons.

The main concern of the governing authorities in the agrarian new-born Greek state of the nineteenth century was the legitimisation of their authority. On this basis, a number of economic benefits through tax (and other) policies were provided to the rural population that became politically powerful after 1864, the date that voting rights were granted to all adult males.

In that way, authorities aimed to ensure a minimum level of social consensus and to convince the citizens of the young Greek state that the public demands of the war of Independence – ‘social justice’, ‘democracy’ and ‘equality of political rights’ – would be satisfied.

This research highlights the importance of economic development in the relationship between democracy and taxation, focusing mainly in the case of Greece during the nineteenth and early twentieth century. Notably, Greece established universal male suffrage in 1864 while it was still a developing, pure agrarian economy with 76% of the population in the agricultural sector.

In contrast with Greece, other democratic European countries had significantly narrower agricultural sectors in the nineteenth century – the majority of them at a level below 40% of the total working population.

Building on a unique tax dataset that contains 13 different tax categories of the newborn Greek state during the period 1833-1933, the results conclude that the extension of the voting franchise in 1864 did not affect the size of the government – but it did change the structure of taxation in favour of the rural population.

Universal male suffrage was accompanied by a long-run reduction in the percentage of rural (for example, taxes on land) to total taxes by 8.25%. This reduction was balanced by increases in indirect taxes – mostly custom and excises duties – leaving the overall level of taxation constant over time.

The research interprets these empirical findings in terms of a political economy motivation. In particular, the Greek governments changed the composition of taxation, reducing rural taxes to satisfy the large majority of the electorate who were poor peasants and farmers.

In turn, the findings for Greece are compared with that for a sample of 12 West European countries that were substantially more developed on democratisation.

The analysis suggests that in more industrialised European economies, democratisation revealed the political preferences of a more urbanised electorate – mostly consisting of workers and middle class capitalists – leading to a different pattern of ‘reshapement’ of the tax system.

This is consistent with the theoretical priors that the level of development, and the consequent structure of the economy, will result in a differentiated effect of democratisation on fiscal policy.

 

Five hundred years of French economic stagnation: from Philippe Le Bel to the Revolution, 1280-1789

by Leonardo Ridolfi (IMT School for Advanced Studies Lucca)

In 2008, output per capita in France amounted to around $22,000 dollars per year. After the Second World War, in 1950, annual average income per capita reached $5,000 dollars, while in 1820, at the beginning of the first official national statistics, GDP per capita averaged $1,100 (Maddison, 2010). Nevertheless, precise knowledge of economic growth in France stops when we get back as far as 1820; before this date, the quantitative reconstruction of economic development is shrouded in mystery.

That mystery lies in the difficulty of uncovering sufficient resource material, devising adequate measures of economic performance in the past, and ultimately interpreting the complexity of the dynamics involved. These dynamics stretch far beyond just the mere economic sphere and concern the way a society is itself organised and structured. Nevertheless, several questions spring to mind.

What was the level of material living standards between the thirteenth and the late eighteenth century, from the early stages of state formation to the French Revolution? How did per capita incomes evolve over time? And were French workers richer or poorer than their European counterparts during the pre-industrial period?

This research provides answers to these questions by estimating the first long-run series of output per capita for France from 1280 to 1789.

The study reveals one important conclusion: the dominant pattern was stagnation in levels of output per capita. For the first time indeed, these estimates document quantitatively and in the aggregate what was previously known only qualitatively or for some regions by the classic works of French historiography (Goubert, 1960; Le Roy Ladurie, 1966): the French economy was an inherently stagnating growthless system, a ‘société immobile’, which at the beginning of the eighteenth century was not much different than five centuries earlier.

At the time of the death of King Philip the Fair in 1314, France was a leading economy in Europe and output per capita averaged $900 per year. Almost five centuries later, this threshold was largely unchanged, but the France of King Louis XVI now belonged to the group of the least developed countries in Western Europe. In the 1780s, per capita income was slightly above $1,000, about half the level registered in England and the Low Countries.

Nevertheless, stagnation was not the same as stability. The French economy was highly volatile and experienced multiple peaks and troughs. In addition, these results reject the argument that there was no long-run improvement in living standards before the Industrial Revolution, demonstrating that GDP per capita rose more than 30% between the 1280s and the 1780s.

Yet most of the rise was explained by a single episode of economic growth that took place prior to the Black Death between the 1280s and the 1340s and which shifted the trajectory of growth onto a higher path.

Overall, these estimates suggest that the evolution of the French economy can be suitably interpreted as an intermediate case between the successful example of England and the Low Countries and the declining patterns of Italy and Spain. Being neither a southern country nor a northern one, the growth experience of France seems to reflect this geographical heterogeneity.

 

References

Goubert, Pierre (1960) École pratique des hautes etudes, Laboratoire cartographique, Beauvais et le Beauvaisis de 1600 à 1730: contribution a l’histoire sociale de la France du 17e siècle, Sevpen.

Ladurie, Emmanuel Le Roy (1966) Les paysans de Languedoc Vol. 1. Mouton.

Maddison, Angus (2010) Historical Statistics of the World Economy: 1-2008 AD, Paris.

Business before industrialization: Are there lessons to learn?

by Judy Stephenson (Wadham College, University of Oxford) and Oscar Gelderblom (University of Utrecht)

 

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Bruegel the Elder (1565), Corn Harvest (August)

Business organization is mostly absent from economic history debate about the rise of economic growth, but it was not always so  

As a new protectionist era in political economy dawns, it would be fair to ask what scholarship business and policy can draw on to understand how trade flourished before twentieth century institutions promoted globalization. Yet, pre-industrial business organization, once a central concern in scholarly debates about the rise of capitalism, and the West, currently plays only a marginal role in research on long-run economic development. Once a central pillar of economic history, the subject is almost absent from the recent global meta-narratives of divergence and growth in economic history. Since 2013 Oscar Gelderblom (Utrecht) and Francesca Trivellato (Yale) have been reviving interest, exploring finance and organization in early modern business thanks to a grant from the Netherlands Organization of Scientif Research (NWO).

“our survey suggests that a strong theoretical foundation and rich empirical data exist on the basis of which we can develop a comparative business history of the preindustrial world.”

In May they convened the last in a series of workshops ‘the Funding of Early Modern Business’, in Utrecht, bringing together speakers from around the globe to look specifically at means and methods of funding and finance in a comparative sense.

The old literature on western business focused, for the largest part, on the large chartered and state backed organizations of colonialism, possibly to the detriment of our understanding of domestic and regional business practice. The cases under discussion at the workshop were geographically and methodologically varied – but mostly they stressed the latter. Susanna Martinez Rodriguez (Murcia) examined the cases of Spain’s Sociedad de Responsibiliadad Limitata in the early twentieth century, highlighting the attractiveness of the hybrid legal form for small business. Claire Lemercier (CNRS Paris) showed the use of courts and the legal system by trading businesses in 19th century Paris were a last recourse for the complex credit arrangements of urban trading. A large number of trading women used the courts and this raises the question of whether this represents a larger number of women in business than expected, or whether other means were less accessible to them. Siyuan Zhao (Shanghai) showed the vast records available to the researcher of Chinese business forms in the 19 century. His case showed that production households operated with advanced subcontracting networks of finance. As the first day ended conversation among participants and discussants – including Phillip Hoffman, Craig Muldrew, Heidi Deneweth and Joost Jonker focused on contracts, enforcement, and the varied ways in which early modern businesses responded to costs and risk.

Meng Zhang (UCLA) delighted participants with meticulous research showing that small farmers and plot owners in 18th-century Southwestern China securitised timber production and land shareholdings with complex contracts risk mitigation among small agricultural operators that allocated future output and allowed division of land and produce. Her work challenges current narratives of China in the 18th century. Judy Stephenson described the significant credit networks of seventeenth century building contractors in London. The structure and process of the contract for works enabled the crown and city to finance major infrastructure development after the Great Fire. Pierre Gervaise showed that French merchants in the southwest were opportunist in using their de facto monopolies on supply of goods to Bordeaux to price gouge. His amusing and detailed archival sources give the opportunity for new analysis of French supply chains and transaction costs.

Thomas Safley needed no introduction to this audience. His work on fifteenth and sixteenth century Southern German family networks is well established, but here he demonstrated that norms and collective action institutions in southern Germany were distinctive. Mauro Carboni traced the development of the limited partnership to 15th century Bologna and described the contract stipulations made as the time of partnership formation.

One of the key areas that Gelderblom & Trivellato highlighted as of particular interest was that of women in business in the early modern period. Hannah Barker used her wide research in women and family business to discuss the high number of trading businesses in mid-19th century Manchester run by women, and make the point that existing accounts of welfare and output do not take women’s businesses into account. The area is one with active research.

The overall picture gained from the workshop was of the remarkable organization flexibility of early modern business co-ordination, most particularly y in relation to credit. Almost all cases showed businesses moderating and contracting the rights and involvement of creditors in varied ways non-financial ways. Almost all cases indicated that contracts entered into determined outcomes to the same or greater degree as the structure of the enterprise.

Gelderblom & Trivellato have come to the end of the project but will continue to forge research links and networks on early modern business. Their work so far shows clearly that research into domestic and regional businesses before 1870 will bear fruit for historians, and very probably business leaders too.

The Travelling Kingdom during Medieval Period in England, France and the Holy Roman Empire: An Economic Interpretation

by Daniel Gottal (University of Bayreuth)

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Holy Roman Emperor Frederick Barbarossa on his Third Crusade

 Noblemen, knights and kings had always been on tour in Medieval Period. Weather on campaign, pilgrimage or on itinerant court – mobility was unexpected high to this specific aristocratic peer group. When capital cities had not emerged yet, the king as the political centre was on continuously travelling through his kingdom. This travelling kingdom had a political and an often missed out economic dimension.

At a time without newspapers, television or other mass media, dealing ‘oral contracts’ in personal relationships with his vessels, was essential. In the 13th century written documentation re-emerged and contributed to a slowdown of the royal itinerant court. Hence travelling kingdom was part of most mediaeval societies to a specific point of their cultural and institutional evolution.

The first modest beginnings originated from Merovingian dynasty on ox carts. Centuries later, Italian campaigns since Charles the Great (742-814) till the Ottonian dynasty, had a specific itinerant court character with their long stays in the three Italian capital cities: Pavia, Ravenna and Rome. Henry II (973-1024) – starting after his crowning in 1002 – bethinks on these older traditions and established the travelling kingdom in the Holy Roman Empire for centuries. Until the mid of the 15th century under Frederick III (1415-1493), where Late Middle Ages, Early Renaissance and Early Modern Period overlapped, the travelling kingdom survived, until it fossilised at the end of the century.

Besides of the fragility of the political system solely relying on personal relationships, the travelling kingdom had also an economic dimension. At the time food was rare in Europe in the Middle Ages and the king did not travel alone. He was accompanied by his royal court, including nobility, knights, bodyguards, and servants. This entourage could make up thousands of people. Because the transportation facilities were poor, the agricultural resources to provide the itinerant court food and shelter were scarce. Thus there was economic pressure for travelling around.

Unsurprising, that more frequented routes and stops were highly correlated with the most prosperous regions in Europe. In the Holy Roman Empire regional focus was on Franconia, Bavaria, Swabia and along the Rhine, the Franco-German border. The king and the king’s follower’s hostage were an enormous economic burden for cities and monastics they visited. Royal accommodation, the servitia regis, was an expensive duty for all his vassals. The average visit lasted three days but could be as long as two weeks. As prestigious as the king’s hostage might have been for a city, from a budgetary perspective his hoosts were relieved when he left for his next destination.

In contrast to continental Europe, England was once more special. A travelling kingdom was not common under Norman regimen. Power was less challenged than on the continent and Westminster early emerged as capital city. But John Lackland (1167-1216), king and heir to the throne after the death of his elder brother Richard the Lionheart (1157-1199), had done longer travels to secure his power, as well as his brother did before. But the tradition of a travelling kingdom was much more common to the north of the island, to the Scottish, than to the English.

Meanwhile, in the transition from the High to the Late Middle Ages the duty for king’s hostage was replaced by a financial grant – in France, Flanders and Bourgogne. Records from the French droit de gîte revealed, that most cities from 1223 to 1225 payed something in between 100 and 200 pound sterling silver a year. The combined income for the French crown was 3,000 pound sterling silver a year, covering 1% of Louis VIII of France (1187-1226) total expenses. The cities and monastics made a good deal in transforming the servitude into money. Fixing the amount via privilege, unadjusted by high inflation in the Late Middle Ages, the financial grant completely vanished over time – as well as the travelling kingdom.

 

 

Learning for life? Comparing miners’ education and career paths in Chile and Norway 1860-1940

by Kristin Ranestad (University of Oslo)

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Is formal education relevant and useful for industry? Do trained workers acquire relevant knowledge outside the school setting, and if so, where and how?

Much research has been done on technical education, industrial performance and economic growth. But we still lack knowledge of the content of teaching, and the direct use of formal education in daily work tasks and innovation processes. Moreover, our knowledge of the limitations of formal education is scarce.

This research seeks to complement previous work with a detailed investigation of the connections between formal education, ‘learning by doing’, networking and innovation in mining from around 1860 to 1940. Analysing the connection between education, learning and innovation in mining is particularly interesting because mining education was one of the first technical training programmes aimed at a specific industry.

The reason it is possible to study this subject in detail is because of unique source material for the period. Student yearbooks from Norway for the years between 1855 and 1943, and for some years for Chile, provide exclusive information about the life and work of secondary school graduates after they completed their formal education.

This allows to follow the graduates from school into their practices, work and travels, and it is possible to make in-depth analyses of the functions of formal education and of knowledge and skills learned outside school settings.

The student yearbooks for Norway were published each year by the university and are collections of reports made by the graduates themselves about scholarships, continuing education in Norway and abroad (technical and higher), study travels, trainee positions, companies they worked at in Norway and abroad, working positions and personal experiences.

From these yearbooks and additional sources, we find that the formal mining education was relevant and useful for positions in a broad spectrum of mining organisations. Moreover, the radical technological changes that were happening in mining at the time were supported by increased diversification in workers’ educational background and an increase in the proportion of trained workers.

Workers with formal education were increasingly used by the industry. At the same time, we find that practice, work experience and especially study travels abroad, are key examples of essential supplementary knowledge to the formal and theoretical mining instruction, which was acquired outside a school setting.

Workers, technicians and engineers from Norway had a long tradition of travelling abroad. Out of 341 Norwegian mining engineers, 256 (75%) went abroad between 1787 and 1940, normally to Germany, Sweden, France, England, and the United States from the turn of the twentieth century – all countries with important mining industries. They went to study at a foreign universities or schools, to do geological surveys or acquire information about specific techniques, or to work for a longer period at a foreign company.

During these trips abroad, the engineers created networks, acquired knowledge about up-to-date mining technology and contacts and took specialised courses at universities. To understand all dimensions of technology, and especially how to select, transfer, adopt and modify techniques, hands-on experience and learning by doing on-site was key.

The trips abroad were vital to learn how to use, repair and maintain new mining machinery, tools and techniques and enabled knowledge transfer. They functioned as a form of networking and sometimes led to new investments and business opportunities in Chile and Norway. The knowledge acquired during these trips was different than the knowledge learned in school, but not less important.

 

 

When political interests block new infrastructures: evidence from party connections in the age of Britain’s first transport revolution

New research shows how party politics and connections slowed the diffusion of much-needed improvements in river navigation in Britain during the early eighteenth century. The study by Dan Bogart (University of California Irvine), which is forthcoming in the Economic Journal, reveals that modern concerns about powerful interests coalescing to block infrastructure projects that will benefit the wider economy are nothing new.

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Islington Tunnel in the early 19th century. Source: <http://www.islingtongazette.co.uk/news/a-look-back-at-regent-s-canal-history-200-years-after-plans-were-approved-1-1443464&gt;

 

The famous economist Adam Smith noted in The Wealth of Nations that landowners close to London petitioned Parliament against the extension of transport improvements because it threatened their rents. Was Smith right: do ‘downstream’ interests use their political connections to block ‘upstream’ transport improvements? The new research addresses this question in the context of river navigation, which before the development of canals and railways, was a key part of Britain’s early transport system.

A river navigation act established a company with rights to levy tolls and purchase land necessary for improvements in navigation. Through their statutory powers, navigation companies played a key role in the extension of inland waterways. Improved navigation lowered transport costs since freight rates by inland waterway were approximately one-third of the freight rates by road.

In light of their economic importance, it is significant that the diffusion of navigation acts was slow. It took nearly 50 years to extend navigation on most rivers in Britain. One immediate reason is that projects were proposed several times in Parliament as bills before being approved, and some were never approved.

In general, bills proposing infrastructure projects had high failure rates in Parliament. Opposition from interest groups was the most direct reason. Interest groups would appeal to their MP for assistance, and as this research shows, it was significant whether their MP was connected to the majority political party.

The Whig and Tory parties were in intense competition between 1690 and 1741, with the majority party in the House of Commons switching seven times. The two parties differed in their policy positions and their supporters. The Tories were favoured by small to medium-sized landowners, and the Whigs by merchants, financiers and large landowners.

This study is one of first to test empirically whether Britain’s early parties contributed to different development policies and whether they targeted supporters. The research uses new town-level economic, political and geographical data to investigate how party connections and interest groups worked in this important historical period.

The results show that the characteristics of river navigation supporters and opponents in neighbouring areas had a large effect on their diffusion. For example, more towns with roads in upstream areas (generally supporters) increased the likelihood of a town’s river bill succeeding in Parliament and more towns with harbours downstream (generally opponents) reduced the likelihood of the bill succeeding. Such factors were as important as project feasibility, measured by elevation changes.

Another important factor was the strength of majority party representation in neighbouring political constituencies. Having more downstream MPs in the majority party (a measure of opposition connections) reduced the likelihood of a town’s bill succeeding in Parliament and getting blocked from navigation acts. The identity of the majority party was also relevant. Whig majorities increased the probability of river acts being adopted.

These findings confirm the forces highlighted by Adam Smith and show that the institutional environment in Britain was not always favourable to rapid adoption of infrastructure. Interest groups were powerful and could block projects that went against their interest. The Whig and Tory parties contributed to the blocking power or bias from interest groups, although the Whigs appear to have been more pro-development.

More generally, this case focuses attention on the distributional effects of infrastructure and efforts to block projects. Political connections matter and can have important economic consequences.

‘Party Connections, Interest Groups, and the Slow Diffusion of Infrastructure: Evidence from Britain’s First Transport Revolution’ by Dan Bogart is forthcoming in the Economic Journal.

Globalisation and Economic Development: A Lesson from History

by Luigi Pascali (Pompeu Fabra University)

History teaches us that globalisation does not automatically translate into economic development.

How does globalisation affect development? This question has a long tradition in economics and has been much debated both in the academia and in policy circles. Neoclassical theories tell us that reducing trade barriers across countries should provide net benefits to individual economies by making markets more efficient and stimulating competition. Testing these theories, however, turns out to be difficult: rich countries are generally also those that trade the most, but is it trade that makes them rich, or do they trade more because they are rich to start with?

The ideal way to answer to these questions would be through an experiment, in which we randomly divide all the countries of the world into two groups and then we reduce trade costs for one group, while keeping trade costs constant for the other group. The difference in the observed GDP growth in the following years between the two set of countries would eventually provide us with an estimate of the impact of trade integration on development.

It turns out that history can provide us with such an experiment. The invention of the steamship in the late 19th century greatly reduced trade costs for some countries but not for others; whether a country was able to reduce its trade costs as a result of this innovation was the result of its geography, rather than economic forces. In a recent paper (Pascali, forthcoming), this natural experiment is used to assess the causal impact of trade on development.

The Experiment

Before the steamship, sea routes were shaped by winds. As an example, consider Figure 1, which illustrates a series of journeys made by British sailing ships in the 19th century, between England, the Cape of Good Hope and Java, and Figure 2, which depicts the prevailing sea-surface winds in the world.  Winds tend to follow a clockwise pattern in the North Atlantic; consequently, sailing ships would sail westward from Western Europe, after travelling south to 30 N latitude and reaching the ‘trade winds’, thus arriving in the Caribbean, rather than travelling straight to North America. The result is that trade systems historically tended to follow a triangular pattern between Europe, Africa, the West Indies and the United States. Furthermore, because in the South Atlantic winds tend to blow counterclockwise, sailing ships would not sail directly southward to the Cape of Good Hope; rather, they would first sail southwest toward Brazil and then move east to the Cape of Good Hope at 30 S latitude.

Figure 1. 15 journeys made by British ships between 1800 and 1860

fig 1

Notes: These journeys were randomly selected from the CLIWOC dataset among all voyages between England and Java comprised in the dataset. 

 

Figure 2. Prevailing winds in May (between 2000 and 2002)

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Note: direction of wind defined by the direction of the arrow and speed by the length of the arrow. 

 

The invention and subsequent development of the steamship was a watershed event in maritime transport and was the major driver of the first wave of trade globalisation (1870-1913), an increase in international trade that was unprecedented in human history. For the first time, vessels were not at the mercy of the winds, and trade routes became independent of wind patterns.

The steam engine, however, reduced shipping times in a disproportionate manner across trade routes, depending on the type of winds that vessels used to face throughout their journeys. In some routes, shipping times were cut by more than half, while in some others the change was minimal.

These asymmetric changes in shipping times (and related trade costs) across countries are used as a natural experiment, to explore the effect of international trade on economic development.

 Findings

Exploiting the random variation in trade costs, generated by the transition from sail to steam, this research documents that the consequences of the first wave of trade globalisation on development were not necessarily positive. On a sample of 36 countries, the average impact, in the short run, was a reduction in per-capita GDP, population density and urbanisation rates.

This average negative impact, however, masks large differences across different groups of countries.

Firstly, the initial wave of trade globalisation turned out to be particularly detrimental in countries that were already less economically developed to start with and it was probably the major reason behind the Great Divergence, the economic divergence observed between the richest countries and the rest of the world, in the second-half of the nineteenth century.

Secondly, trade turned out to be very beneficial for countries that were characterised by strong constraints on executive power, a distinct feature of the institutional environment that has been demonstrated to favour private investment.

Why should we expect institutions to be crucial to benefiting from trade? A common argument is that a country with ‘good’ institutions will suffer less from the hold-up under-investment problem in those industries that intensively rely on relationship-specific assets. In this sense, good institutions are a crucial source of comparative advantage in non-agricultural sectors, in which the hold-up problem is more binding. These results confirm this theoretical prediction: a reduction in trade costs increased the share of exports in non-agricultural products, and the share of the population living in large cities, only in those countries characterised by stronger constraints on the executive power.

Conclusions

How did the rise in international trade affect economic development? This research addressed this question using novel trade data and an historical experiment of history. It finds that 1) the adoption of the steamship had a major impact on patterns of international trade worldwide, 2) only a small number of countries, characterised by more inclusive institutions, benefited from trade integration, and 3) globalisation was the major driver of the Great Divergence.

Policymakers who are willing to learn from history are advised to consider that a reduction in trade barriers across countries does not automatically produce (at least in the short-run) large positive effects on economic development and can increase inequality across nations.

 

This article is based on research presented in the following paper: “The Wind of Change: Maritime Technology, Trade and Economic Development”, The American Economic Review, forthcoming. The associated working paper is available on the CAGE website

The long-term negative impact of slavery on economic development in Brazil

by Andrea Papadia (London School of Economics)

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Jean Baptiste Debret (1826). From “The Atlantic Slave Trade and Slave Life in the Americas: A Visual Record”, https://makinghistorymatter.ca/2014/04/02/journal-of-an-african-slave-in-brazil/

 

Slavery has been at the centre of many heated debates in the social sciences, yet there are few systematic studies relating slavery to economic outcomes in receiving countries. Moreover, most existing work on Brazil – which was the largest slave importer during the African slave trade and the last country to abolish the practice – has failed to identify any clear legacies of this institution.

This research overcomes this impasse by highlighting a distinctly negative impact of slavery on economic development in Brazil. More precisely, it illustrates that in the municipalities of the states of Rio de Janeiro and São Paulo, where slave labour was more prevalent in the nineteenth century, fiscal development was lower in the early twentieth century, long after slavery was abolished.

The identification of this negative effect is tied to separating the true effect of slavery on fiscal development from the fact that the huge expansion of coffee production that Brazil underwent from the 1830s attracted large numbers of slaves to booming regions. In fact, the research shows that:

  • A naïve analysis of the data would suggest that for relatively low levels, more slavery in the nineteenth century was associated with higher successive fiscal development.
  • For population shares of slaves above 30-35%, more slavery was clearly associated with lower fiscal development.
  • Taking account of the impact of the coffee boom on both the demand for slave labour and development, slavery was unambiguously associated with worse developmental outcomes later on.
  • Comparing two hypothetical municipalities – equal in all respects except for their reliance on slave labour – one with 30% of slaves among its citizens would have had revenues 70% lower compared with one with 20%.
  • These results persist even when taking account of a wide variety of other factors that could explain difference in fiscal development across municipalities.

Fiscal development is widely considered as an essential building block in the creation of modern states able to foster economic growth by providing public goods and protecting the rule of law. While the historical process of fiscal development on the European continent is relatively well understood, in other parts of the world the study of the evolution of fiscal institutions is still in its early stages.

There are many reasons why a high incidence of slavery would hamper fiscal development and the provision of public goods:

  • First, a higher incidence of slaves in the population will translate into lower political representation for the masses, even in only partially democratic regimes such as nineteenth and early twentieth century Brazil.
  • Second, the provision of key public goods, such as education, will be less salient in areas that rely heavily on slave labour. These areas will also be less keen to attract workers from other areas of the country and abroad, thus making the provision of public services to their citizens less important.
  • Finally, slavery might make resource sharing though taxation more difficult due to increased ethnic, geographical and class cleavages in the population.

The history of Brazil, which was characterised by large-scale use of slave labour from the sixteenth century until the nineteenth century, provides an idea testing ground to investigate how this clearly extractive institution affected the developmental path of countries and their subdivisions.

The research shows that by accounting for confounding effects due to Brazil’s coffee boom, the pernicious effects of slavery on a key factor for economic growth – fiscal development – can be strongly identified.

British engineering skills in the age of steam

by Harry Kitsikopoulos (academic director, Unbound Prometheus)

Side-lever_engine_1849
Wiki Commons. The side-lever Engine, 1849 ca.

 

Engineering skills in Britain improved during the eighteenth century but progress was not linear. My research uses a novel approach to quantifying the trends from the first appearance of the technology of steam power (1706) through to the last quarter of the century (the Watt era), using a large amount of data on fuel consumption rates.

Britain was a very unlikely candidate for the invention of steam engines, as I argue in my 2016 book, Innovation and Technological Diffusion: An Economic History of the Early Steam Engines. It was French and Italians who first rediscovered, translated and published the ancient texts of Hero of Alexandria on steam power; they also discovered the existence of vacuum in nature, the main principle of a steam engine’s working mechanism.

But Britain had two advantages: first, a divorce-obsessed king who detached the island from the Catholic dogma and its alliance with the Cartesian epistemological paradigm, both denying the existence of vacuum in nature. The same king also brought a seismic institutional transformation by passing monastic properties under the ownership of lay landlords, a class far more keen on solving the water drainage problem plaguing the mining industry in its drive to exploit mineral wealth.

Britain was also fortunate in another respect: it was relatively backward in terms of mining technology! That proved to be a good thing. While mining districts in Germany and Liège used a technology that resolved the drainage problem, Britain failed to imitate them, hence forcing itself to seek alternative solutions, thereby leading to the invention of the steam engine.

Grand inventions earn glorious references in school textbooks, but it is the diffusion of a technology that contributes to economic growth, a process that relies on the development of relevant human capital.

The records reveal that there were not much more than a dozen engineers who were active in erecting engines during the period 1706-75, including Thomas Newcomen, the obscure ironmonger from Devon who came up with the first working model. The figure increased to at least 60 during the last quarter of the century through the action of the invisible hand: the initial scarcity of such skills raised wages, which, in turn, acted as stimuli transferring talent from related engineering occupations.

My new study traces the production and marketing strategies of this group, which ranged from the narrow horizons of certain figures concentrating on the erection of engines in one locality, a single model, or focusing on one industry all the way to the global outlook of the Boulton and Watt firm.

The last question I pose is perhaps the most interesting: did British engineers get better during the eighteenth century in managing these engines?

Measuring skill is not a straightforward affair. Two well-respected experts at the time came up with tables that specified what the ideal fuel rates ought to have been for engines of different hp. When plotted in a graph these two variables depict a curve of ideal rates.

My analysis uses two distinct datasets with 111 fuel rate observations recorded in working engines – one for the older Newcomen model and another for the newer Watt engines. These actual fuel rates were plotted as bullet points around the respective ‘ideal’ curves. A progressively narrower distance between the curves and the bullet points would indicate higher efficiency and improved engineering skills.

The results reveal that for the first 25 years following the appearance of both models, there was no consistent trend: the bullet points alternated coming closer and moving away from the ideal curves. But the data also reveal that these initial patterns gave way to trends revealing consistent progress.

In an era of practical tinkerers lacking a formal educational system when it comes to this particular skill, British engineers did get better through a classic process of ‘learning-by-doing’, But this only happened after an initial stage of adjustment, of getting used to models with different working mechanisms.