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OSU / Economics / ECON 5130 / What are the necessary pre-conditions for growth and development?

What are the necessary pre-conditions for growth and development?

What are the necessary pre-conditions for growth and development?


School: Ohio State University
Department: Economics
Course: Economic History of Western Europe
Professor: Ethan doetsch
Term: Fall 2017
Tags: Economics, malthusian, neoclassical, history, europe, birthrates, deathrates, glorious, revolution, living, standards, study, guide, exam1, and 5130
Cost: 50
Name: 5130 Study Guide, exam 1, Economic History of Western Europe
Description: Study guide for the 1st exam covers malthusian model, neoclassical model, the shifts of the curves birth rate/death rates, subsistence level, poverty glorious revolution, transportation revolution and what this means for economic growth Europe living standards before/after revolutions
Uploaded: 09/25/2017
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5130 Economic History of Western Europe Study Guide

What are the necessary pre-conditions for growth and development?

-What can economic history teach us about why some  countries rich and other countries poor? 

Economic history can show us how institutions,  property rights and how money/income per capita affected countries and their standards of living.  

Economic theory

• Domar’s trilemma

o Free land

o Free labor

o Aristocracy  

o Can’t have all three at the same time  because of competition

We use history to understand economics

• Data

o Test theory

▪ Theory open for revision

how does the malthusian model differ from the neoclassical model?

We also discuss several other topics like What are flood basalts?

o Duhem Quine

o Empirical orientation  

▪ Do the facts fit?

o Use history to understand context

▪ Economics is not a natural science

▪ Laws of economics ???? socially,  We also discuss several other topics like towson university core classes

historically contingent

Comin et. Al  

• Finds that there is a strong link between tech  level in the past and tech level today for  countries (positively correlated)

• Evidence for technology persistence We also discuss several other topics like lef umd

• High tech in the past means high tech in the  future  

-What is the role of technology in economic growth  and development? Is modern technology necessary  and/or sufficient for high labor productivity?

What forces explain cross-country variation in living standards today?

In a Malthusian world, technology change does nothing  for long run economic growth.  

Birth rates and death rates are what determined  living standards and they always went back to  subsistence.  

Until the industrial/glorious revolution there was no  long run growth or increases in GDP per capita

Long-run is full of discontinuity, context is always  changing, be weary of predictions

Mechanisms for persistence of high technology: • Complimentary technology Don't forget about the age old question of exeo 5ch

• Recombination of old technology to make new  technology  

• Feedback from technology to science

• Feedback from technology to lower access costs  for knowledge

• Spillover technology from one sector to another • Economies of scale

• Economies of scope

• Learn by doing

In modern terms, technology is a complement to  workers, in some circumstances technology can replace  workers, but overall technology is a complement to  workers because workers can be much more productive  and provide more output with technology

So technology is highly related to productivity. Think of a farmer for example, without a tractor a  farmer can only get so much done by hand, but with a  tractor, the farmer can be 10x more productive

Countries that are more technologically developed,  are better off economically  

-What forces explain cross-country variation in  living standards today? What is the role of  “history” in shaping these forces? We also discuss several other topics like bcbp rpi

Growth theory can explain these variations:  investments in human capital (knowledge),and  innovation contribute to growth significantly

A lot of forces explain cross-country variation in  living standards today

Institutions, property rights, government (policies),  productivity (GDP), education and technology  We learn from history and use the history to shape  our world today  

Adam Smith says good liberal government is what makes  countries rich  

Good government provides defense, rule of law and  provide public goods  

History takes data and makes sense of it and explains  why certain things are a certain way

History is how people are able to take data from  Europe and all around the world and explain why some  countries are rich and some are poor

-Have the pre-conditions for growth and development  changed over time, i.e. is what matters for modern  growth different than what matters for early-modern  growth?  We also discuss several other topics like chem1001 study guide

What matters for modern growth is somewhat different  than what mattered for early-modern growth. Property rights are necessary for modern growth and  were necessary for early-modern growth

But for modern growth technology change and  innovation, influences modern growth a lot And for  early-modern growth (before 1800), technology change  didn’t do anything for growth.

What matters for modern growth today is technology,  human capital, institutions, property rights etc.  

-How does the Malthusian model differ from the  Neoclassical model? 

Malthusian model:

• Demographic forces determine long-run economic  growth

• Technology does nothing for long-run growth  • If tech curve shifts out, GDP per capita/living  standards increase in the short run, but since  living standards increase, birth rates will  ultimately increase and then living standards  will ultimately fall back to subsistence • Poverty is the natural order

• Can never have prosperity in the long-run  • An increase in prosperity ???? increases amount of  people and then prosperity falls because of  diminishing marginal productivity  

• “positive” checks on population

• War, disease, famine were preventative checks • Before industrial revolution, Malthusian model  holds true


• Y = income (GDP)

• X = Land

• L =Labor

• r = rent  

• w = wage

Y = rX + wL


• Diminishing marginal productivity

• Cobb-douglas specification

• Constant returns to scale

• Perfectly competitive markets

Under neoclassical model, TFP (total factor  productivity) and land-labor ratio determine living  standards

Increasing number of workers decreases living  standards because of diminishing marginal  productivity of each worker – average income per  worker falls

If I grow TFP:

Spend productivity on—

1) Y ???? better living standard/ income per worker 2) More people (L/X population density)

3) Or some constant / spend productivity on both 1  and 2 but there’s a trade-off

Neo-classical model takeaways:

• Government, institutions, education, and  technology all affect Y positively  

• TFP also has a positive relationship with Y

-Be able to make predictions with the Malthusian  model using graphs. 

-Compare and contrast early-modern (before 1800)  living standards within Europe. 

Before 1800:

• Living standards were low

• Demographic forces determined living standards  (Income per capita) and living standards low • Technology did nothing for economic growth in  the long-run  

• Poverty was the natural calling

• Everyone was poor and would result to the  subsistence level eventually  

• Long-run economic growth was nearly impossible

After 1800:

• After Industrial revolution we get tech change,  and increased living standards even though birth  rates increase

• We get long-run economic growth and development • Malthusian model was wrong

• Living standards increase dramatically  

-Compare and contrast early-modern living standards  between Europe and Asia. 

Living standards Europe:

• Poverty was natural order

• Standard of living was low

• Subsistence would always result

• Real wages didn’t reflect labor productivity  • Institutional constraints

• Up until about 1688 (glorious revolution) living  standards were low and Europe was stuck in the  Malthusian trap

Living standards Asia:

• Declining dramatically, mainly due to the trade  changing patterns brought about by Europe and  Dutch

• Living standards also declined because of  climate change

-Based on your reading of the economic history  literature, if you were a policy advisor to a  developing country, what policies would you suggest  to encourage economic development and growth? 

The policies I would suggest would be: secure  property rights, I would also advise competitive  markets, and I would also implement policies that  promoted technological change and innovation

-What are the necessary pre-conditions for growth and  development? Are any of these sufficient conditions  for growth and development? 

Property rights are necessary for growth and  development  

Clark argues that pre-modern political regimes are  necessary for growth

Epstein says they’re not

-What are the roles of the following in explaining  the “reversal of fortune” in early-modern Europe: 

o Population Dynamics (Malthusian Trap) 

• Malthusian trap is when a population gets roped into  this trap where everyone stays at a subsistence level  regardless of tech change and increases in living  standards  

• We go back to this idea that poverty is the natural  order, there’s no way out  

• The change was for the worse ???? more people, less land  available ???? lowered living standards

Population (X/L)

(X/L) increases ???? Y increases

(X/L) decreases ???? Y decreases

(X/L) increases ???? (w/r) increases  

Land labor ratio is central to the hypothesis & scarcity of  workers

o Enclosure 

Create private property  

Medieval period: Agriculture

• Commons: place where a piece of land where  peasants, serfs, had rights to the land  

(grazing, gathering and gleening)

• Very disorganized

• Overlapping jurisdictions

• Tragedy of the commons

• Highly inefficient

Reversal of fortune: the commons made living  standards worse ???? free rider problem

• Enclosure movement takes commons & turns it into  private property  

• Increased agriculture productivity

o Trade/Empire  

English take over global trade

Trade ???? economic growth

Trade necessary for urbanization  

Reversal of fortune: Development of trade allowed for  growth through urbanization  

o Representative Government 

Prevents political power abuse

Reversal of fortune: Check power of government ???? pro-growth institutions & policies which may enhance  growth in the long-run

Checks power ???? pro-growth institutions/policies ???? econ. Growth increased

o Technology 

17th scientific revolution/ enlightenment ???? industrial revolution ???? take off

Reversal of fortune: with technology change and  development, leads to higher standards of living and  economic growth and leads to industrial revolution

o Literacy  

Reversal of fortune: Skills and talents in workers  increased productivity ???? economic growth

Literacy is scarce

Skills are important for economy  

What does all of this imply about the “Great  Divergence”? 

All of the above is going to help push through pre modern constraints restrained by a malthusian world


Everyone is poor until 1800 ???? some countries take  off economically

Political changes, technology, human capital etc. all  lead to economic growth ???? divergence

-What is the relationship between political freedom  and early-modern growth? 

Political & economic freedoms ???? PROSPERITY “English liberties”

-How is omitted variable bias a problem in  interpreting simple regression results and in  inferring causality? Be able to critique regression  results. 

Leaving out an omitted variable can change the  results dramatically. The effects of a variable could

be underestimated/overestimated when another variable  is being omitted from the problem.

Example: crime rates are higher with higher ice cream  sales

Omitted variable: weather/ temperature ???? warmer  temperature is probably what is driving higher crime  rates


-What was the significance of the Glorious Revolution  for the English economy? 

The glorious revolution propelled the English economy  into economic development and economic growth And an increase in living standards

For English property rights? 

After glorious revolution, property rights were more  secure than ever have been before

For the English political system?  

The glorious revolution kept the crown in check Made the crown keep its word and keep promises  Predictability of government increased

For the English state?  

More vetos over policy/actions  

Increased power/control of wealth holders over state For the English financial system? 

Government now on a sound fiscal basis  

Parliament: central role in fiscal policy ???? new  taxes, audit crown funds

-Compare and contrast the views of the following  authors on their interpretations of the impact of the  Glorious Revolution: North and Weingast (1989), Clark  (1996), Epstein (2000), Bogart (2011), Cox (2011). 


• Instability & autocratic ???? Rates of return on  private capital

• Winners of revolution are ultimately going to  turn and change the way things are

• Crown will need to be held accountable and needs  to keep their promises. The institutional  changes will alter the incentives of the  government in favor of the winners of the  revolution

• By holding crown financially responsible, risk  will decrease, and security of private rights  will increase

• Willingness in lenders increased dramatically  and this must show the government’s  

responsibility and commitment to its agreements • Monarchies: higher risk default, higher interest  rates

• Republics: lower risk default, lower interest  rates

Europe’s financial success is what guided their  warfare success

Basically, N&W argue that, by holding the crown  accountable of their debt contracts, ultimately led  to increases in mutually financial (loans) benefits  that benefited all parties. (crown, parliament)


• Private capital markets

• Did the Glorious Revolution actually change  anything for private investors?

• Says you’d expect a structural break for private  investors ???? but we don’t see it in the data • For economic growth, are property rights  sufficient enough? ???? No

Clark used data from charities and the data doesn’t  seem to fit what N&W are saying

Clark argues that nothing is changing in private  returns  

Pre-modern political regime matters  


• Says pre-modern growth was so patchy because of  a lack of republican and parliamentary

institutions in which autocratic rule was  restrained by  

No empirical evidence that pre-modern political  regime matters


• Land improvement rights

o Markets

o Regulatory authority (i.e. crown/parliament) o 1690+ regulatory parliament

o decreased power of the crown

o Fewer purges after 1688

o Fewer post hoc revisions of rights


• Argues that increasing the crown’s  

accountability and credibility didn’t increase  financial trade (except in warfare)

• Crown can constantly default and find new  loaners  

• Ministerial responsibility was an important and  key innovation ???? resolved royal moral hazard • England then became more successful in war  because the holders in equity shares of the  business of war had large stakes in the outcome

-Are property rights necessary for economic growth?  Are property rights sufficient for economic growth? 

Property rights necessary for economic growth? –YES Property rights sufficient for economic growth? –NO

-What is the relationship between the state, property  rights, and economic growth/prosperity? 

Property rights are needed for economic growth and  prosperity ???? secured property rights ???? people feel

more secure in protecting their land and being  productive on it  

Political institutions and policies probably (most  likely) needed for economic growth and prosperity

Need a constrained state that is strong in governing  the economy in order for economic growth

-Are representative political institutions necessary  for economic growth? 

Political stability and institutions may be needed  for economic growth

Is political freedom necessary for economic growth?  

Clark: pre-modern political regime matters for  economic growth

Epstein: pre-modern political regime does not matter  for economic growth

-What is jurisdictional fragmentation? Why did it  hinder economic growth? 

Jurisdictional fragmentation- Fragmenting official  power

The conflicts between district residents and feudal  government resulted in determining and affecting how  public open spaces are used and managed

District residents vs. feudal government and the  desire for autonomy or home rule

Jurisdictional fragmentation & hindrance on economic  growth:

• Increases cost of providing public goods • Increases costs of fiscal extraction  

• Results in prisoner’s Dilemma & coordination  problems

-How did the pre-modern state differ from the modern  state?

Pre-modern state:

• lacks full soveirgnty

• No monopoly power

• No property rights  

• No public goods

• No fiscal extraction powers

• No universal rights/ liberty freedom  Pre-modern liberties/freedoms

• Socially specific

• Inequality & status

• Contingent transferrable

• Aristocrats / nobles have different rules  applied to them than commoners

Under Epstein:


• Absolutist state

Modern liberties:

• Choice, will ???? action

• Social mobility

• Freedom of religion, speech

• Fundamental equality before the law

• Universal

• Being alive gives you all these freedoms • Modern liberties are anachronistic  

Modern states are associated with property rights,  technology advancement and freedoms and rights and  also public goods

-What was the transportation revolution?  Late 17th – early 19th centuries ???? world where  commodities are being traded (coal, grain, pottery  etc.)

Increases in innovation ???? improved technological  change in transportation & increased transportation  investment

Ocean shipping

Steam railroads, railways

How did it affect economic development? 

Helped increase economic development  

• Ocean shipping

o Better organization of docks/boats

o Better ships, navigation, improved harbors o Clearing rivers improvement

• Construction of turnpikes

• Steam railroad: best way to transport things,  way more efficient and very cheap

All of the above made the economy way more productive  and efficient, allowing for more output

Transportation revolution improved social welfare  dramatically  

Transportation revolution led to the industrial  revolution

How was it related to changes in political regime? 

Transportation revolution improved people’s lives by  giving them better output and making output more  efficient, it increases standard of living by  increasing GDP per capita

Much like political regimes do

-What was the Ancien Régime? 

Everyone was subject to the king along with being a  subject to a member of a province and estate under a  political and social system

Existed before French revolution

How did its institutions inhibit economic growth and  development? 

No property rights, wealth could be exploited from King at  any given time

No political freedoms, and no institutions benefiting non royals

-Is a minimal and constrained state necessary for  economic growth? 

Economies that are governed by states that are strong  and constrained are able to avoid disastrous economic  policies and are able to overcome and solve distorted  incentives  

The constrained states of western Europe is what  saved it from fiscal/economic/political traps  

Adam smith argues that a good liberal (free markets,  free people) government is what makes countries rich  Good liberal government provides defense, rule of law  and public goods

Is a minimal and constrained state sufficient for  economic growth? 

Sufficient constrained and minimal states are sufficient  for economic growth

Markets that are well functioning are required to reach  allocative efficiency, but they also require property  rights and well enforced government institutions Markets are able to provide the conditions necessary for  sustained economic growth

Strong constrained states are associated with sustainable  economic growth

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