Lecture 2 Europe: from obscurity to economic recovery.

Lecture 2

Europe: from obscurity to economic recovery

Issues discussed in this lecture

• We focus on the period from the decline of the Roman empire and the recovery starting c. 700 to c. 1500.

• Which are the essential pre-conditions for division of labour and which are the gains form specialization.

• The conditions for technological progress and regress, economic decline and economic recovery.

The Eastern Mediterranean world was a cradle of civilizations

• First agricultural civilizations emerged in the Middle East.

• Centres of civilizations moved west and east (China).

• The Roman Empire was the last Empire to embrace the entire Mediterranean.

• Access to roads and cheaper maritime transport stimulate trade which is an integrating factor.

A Roman menu

• A daily diet of an unskilled working male consisted of approximately 3700 calories (2000-2300) considered subsistence minimum)

• 1 kg of wheat

• 0.25 kg of meat

• 1 l of wine

• 1 dl of olive oil

Roman per capita income

• Average income estimates range from 2 to 4 times a subsistence income or 813 to 1742 in so called International Dollars of year 1990, called $PPP

• Subsistence: $PPP 355-400 • Byzantium: $PPP 700 in year 1000 • England: $PPP 550 (year1044); 1418 (year

1688); Holland $PPP 1129 (year 1561)• $PPP 1767 in year 1850 (Denmark)• $PPP 23010 in year 2000 (Denmark)

Meaning of international PPP$

• PPP stands for purchasing power parity.

• 1000 PPP$ means that with that income a Roman could by a basket of goods and services that would cost 1000 dollars in 1990.

• Used for international comparisons and comparisons over time.

• Fragile: Handle these estimates with care!

Why don’t empires last?

• The tax base does not increase proportionally as empires expand into areas with lower income.

• Costs of ruling and protecting the border areas increase with the distance from centre.

• A gap (wedge) between spending and revenue stirs political unrest and financial stress.

• Empires become vulnerable for invaders who chase higher tax base in the centre of the empire

Empires decline because of the spending- tax revenue gap

Denarius

Extent of Empire

Tax Revenue

Spending

New masters, old habits

• Western and Eastern Europe were latecomers in the race towards civilization.

• Rome could not resist the attacks of German tribes, the Barbarians (that’s us!).

• Once settled in former Roman territories the intruders adopted language and law and religion of the christened Romans.

• Post Roman Europe remained fragmented.

Economics of decline

• With political disintegration followed economic decline and falling income and trade.

• Cities were deserted.

• Population declined because of epidemics, wars and disorder.

• Skills and technologies were neglected or forgotten.

The elements of economic recovery, 9th -14th centuries

• Political authority restored.

• Money supply increases.

• Population increases.

• Urban centres repopulated.

• Division of labour increases.

• All these factors are inter-related

What GOOD government means

• Accountable political elites.

• Law and contract enforcement institutions.

• Provision of public goods such as defence.

• Safe transport networks.

• Monetary order.

• Property rights, private and collective, well defined and respected

Conditions for division of labour

• DofL means that workers specialize in a small number of operations which are done repeatedly

• Demand must be sufficiently large to permit specialization

• Economies of repetition and practice improves output per worker, but it is not transferable between generations

• DofL also stimulates transferable learning by doing

Adam Smith:DofL is limited by the extent of the market

• For ‘extent of the market’ read aggregate income or demand.

• Imagine a product which requires 12 separate operations each taking one month.

• Demand at one unit per year will not permit DofL.

• Demand at 12 units will permit each of 12 workers to specialize in one separate operation.

• Economies of repetition and practice will increase labour productivity of all.

Adam Smith:DofL is limited by the extent of the market

• For ‘extent of the market’ read aggregate income or demand.

• Imagine a product which requires 12 separate operations each taking one month.

• Demand at one unit per year will not permit DofL.

• Demand at 12 units will permit each of 12 workers to specialize in one separate operation.

• Economies of repetition and practice will increase labour productivity of all.

Consumption possibilities increase with specialization

Division of labour changes opportunity costs of producers

• Figure 2.1 tells a story of full specialization: you either produce cloth or food.

• Reason is that you get better at what you specialize in the more specialized you get.

• The consumption possibility frontier (the straight line) is outside the production possibility frontier (the convex curve).

• What would happen if the production possibility frontier was concave?

Division of labour is good for labour productivity and technological progress

K’

K

A

B

C

D

Output per Worker

Division of Labourdl B, Cdl A, D

y A

y B

y D

y C

Elements of the Figure

• The shift from K to a superior level of technology K’ has to do with the fact that a higher level of DofL stimulates learning by doing, that is, new knowledge improves technology.

• The upward slope of K has to do with the fact that higher division of labour means a larger gains from economies of repetition (practice).

Decline and revival

• At C we are in Roman Era, year 100 CE.• Political disintegration and population

decline brings us to D.• Lower level of DofL cannot sustain

technological knowledge level at K’.• Shift to A at K• The 9th to14th century revival brings us

from A over B to C, the decline is reversed.

Urban growth is an indicator of economic progress

• A rise in the ratio of urban to total population tells you

• that the non-food producing labour force is increasing proportionally, fewer farmers feed more people.

• that division of labour is rising,• and that market exchange is more regular.• Welfare ranking of regions can be made

on the basis of urbanization.

Trading networks in the early centuries of revival.

Urbanization ratios increase,

Long run trends in production

• On the basis of lead emissions found in the ice cap an approximation of manufacturing, non farm, output can be derived:

• Rise from early Civilizations until end of the Roman Era.

• Decline until 9th century,• and revival in production and increase

since then

Metal production fluctuates a lot over time.

When did Europe forge ahead?

• The economic renaissance from the 9th century brought Europe at par with other leading civilizations around the 14th to 15th century.

• The most advanced areas in Europe then took the lead and paved the way for industrialization.

• By the 16th century real wages were higher in the leading European economies relative to the most advanced Asian civilizations.

• More about this in Lecture 4.

Conclusion

• Europe’s recovery was based on a combination of

• population growth which stimulated division of labour

• exchange which was made possible by a restoration of order and which lead to regional specialization

• slow technological progress stimulated by learning by doing