RECOVERY CHAPTER 2: EUROPE FROM OBSCURITY TO ECONOMIC

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CHAPTER 2:

EUROPE FROM OBSCURITY TO

ECONOMIC

RECOVERY

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LIGHT IN THE DARK AGES

• The Dark Ages (6^th to 9^th centuries) was the period after the collapse of the Roman Empire

• Cities abandoned, roads deteriorated, money scarce, income fell, political and social unrest

• But not as dark as we used to think, although we lack written documents

• Byzantine Empire replaced Rome in the East, eventually fell to Muslim rule, together with North Africa and Spain

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GAINS FROM DIVISION OF LABOUR

• Pre-industrial economies relied on thin basis of knowledge and capital

• How could there be growth in income per head?

• Adam Smith (1723-90) argued that there were gains from

– Specialization, i.e. division of labour – Learning by doing

– Trade based on regional differences in resources and climate

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DIVISION OF LABOUR

• An isolated village would have to perform all economic activities itself  lack of specialization

• As ‘extent of the market’ increases, people can specialize and trade among themselves

• Gives rise to ‘economies of practice’

• More is produced if e.g. weavers specialize in cloth production and farmers specialize in food production

• Basis of exchange is differences in opportunity costs

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GAINS FROM DIVISION OF LABOUR

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DIVISION OF LABOUR CONSTRAINED BY INSUFFICIENT DEMAND

• Adam Smith argued that division of labour was

constrained by the ‘extent of the market’, i.e. aggregate demand

• Only when aggregate demand is sufficient can full specialization be achieved

• Aggregate demand increases due to population growth, extending borders, improving infrastructure, order

• When the Roman Empire collapse aggregate demand fell

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DIVISION OF LABOUR AND TECHNOLOGICAL CHANGE

• ‘Economies of practice’ will allow an economy to grow, but will settle at a certain level of efficiency once gains from specialization are exhausted

• But efficiency can continue growing if there is also learning by doing giving increased technological knowledge

• Through repetition people discover ways to produce things, and this knowledge can be transferred

• But falls in demand can also reverse this

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VIRTUOUS AND VICIOUS PROCESSES IN

TECHNOLOGICAL PROGRESS/REGRESS

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THE ECONOMIC RENAISSANCE OF THE 9

^TH

TO 15

^TH

CENTURIES

• Slow transition to a modern economy

• But Europe lagged behind China, Byzantine Empire, Muslim world

• Money supply erratic

• Markets imperfect: information flowed slowly

• Took first half of second millennium for Europe to catch up

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MEASURING INCOME PER HEAD OVER TIME

• Income per head can be expressed as constant prices or multiples of subsistence income (SI)

• In constant 1990 prices subsistence income defined as 355 $PPP (1990)

• Estimates of pre-industrial maximum incomes range between ca. 800$PPP and 2000$PPP

• Income fell after the collapse of the Roman Empire, but Byzantium probably had around 80% of Roman income

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PER CAPITA INCOME COMPARED

• Rome: Estimates range from 2 to 4 SI or 813 $PPP to 1742 $PPP (too optimistic?)

• Byzantium: 700 $PPP in year 1000

• England: 550 $PPP (1044); 1134 $PPP (1500); 1540

$PPP (1700)

• Holland: 1320 $PPP (1500); 2130 $PPP (1700)

• Italy: 1644 $PPP (1500); 1398 $PPP (1700)

• Denmark: 1767 $PPP (1850); 23,010 $PPP (2000)

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POPULATION

• 6^th to 8^th centuries saw population decline in former Roman Empire

• Epidemics and invasions from the north

• Movements of people carried diseases

• ‘Extent of the market’ declined

• Then from 9^th century until the Black Death in the 14^th century population expanded, from around 20 million to 60 million

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THE RESTORATION OF A MONETARY SYSTEM

• Monetary system disintegrated following the collapse of the Roman Empire, limiting trade

• Carolingian Empire from the 8^th to the 9^th century

introduced monetary system based on silver (12/20/1)

• Gold coins from the 13^th century, expansion of mints

– Money broking became a specialized occupation

• Token coins (fiat money) limited

• Bills of exchange developed for long distance trade

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TRANSPORT AND TRADE ROUTES

• Roman Empire left an extensive road network

– Mostly used for valuable goods such as slaves

• Bulk transport usually by coast and rivers

– Shipping technology improved

– N.B. economies of scale in shipbuilding

• Major roads toll free, bridges usually not

• Trade from the merchant and financial centres in

northern Italy carried by river, then coast to northern

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SHIPBUILDING EXPLOITS SCALE EFFECTS

• Maritime trade from second millennium between the Mediterranean and Atlantic coast of Europe and the Baltic relied on larger ships (from ca. 50 t to 500 t)

• Shipbuilding is a clear case of economies of scale:

– A container of 4m times 4m times 4m has a volume of 64 cubic metres (total surface of 96 square metres)

– With 8m times 8m times 8m the volume will be 512 cubic metres (total surface of 384 square metres)

– Fourfold increase of building material (surface)  eightfold increase in volume

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MERCHANT COMMUNICATIONS IN THE

EARLY CENTURIES OF REVIVAL

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URBANIZATION

• Ratio of non-food producers to total population is a guide to per capita income

• If non-food producers increasing, means that demand for non-necessities increasing

– Income elasticity of demand for food lower than for non-food items: Engel’s law

• De-urbanization after collapse of Roman Empire, recovery from eighth century, growth of ‘emporia’

• Allowed for specialization

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INCREASING DIVISION OF LABOUR AS

MEASURED BY NO. OF OCCUPATIONS

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URBAN POPULATION AS A PERCENTAGE OF

TOTAL POPULATION

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PRODUCTION AND TECHNOLOGY

• Evidence from the Greenland ice cap reveals that metal production increased again by the 9^th century

• Expansion initially based on Roman technology, forgotten but rediscovered or transmitted from the Muslim world

• Advancement of technology piecemeal but with impressive effects

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NORTHERN HEMISPHERE LEAD

EMISSIONS IN GREENLAND ICE CAP

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NEW TECHNOLOGIES

• From Asia and Arab civilizations: paper and cotton

• New harness design and iron increased plough efficiency

• As population pressure increased in the 12^th and 13^th centuries, crop rotation introduced

• Water mills (especially from 9^th century) offered economies of scale

– But also gave owners market power

• All based on trial and error, learning by doing

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SHARPLY FALLING UNIT COSTS IN NEW TECHNOLOGIES

• Low aggregate demand (low population density)

technologies typically had low fixed but high variable (labour) costs

• High aggregate demand (high population density)

permitted technologies with high fixed costs and low variable costs

• Average costs fell sharply with high fixed cost technologies as output increased

• Example: from hand mill to water mill

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NEW TECHNOLOGY: HIGH FIXED, LOW

VARIABLE COSTS

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THE MILL WAS THE FIRST GENERAL PURPOSE TECHNOLOGY

• Mostly water but also wind-powered

• Used for example to

– Pump water from mines

– Drive hammers for crushing iron ore – Grinding grain

• Large fixed investment costs, so only cost effective after a certain minimum level of production attained

• So spread with expansion of population and demand

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SUMMARY

• What was behind the economic decline and reversal of Europe?

• Aggregate demand mattered, relied on social order

• Technological progress was slow but persistent

• Institutions developed to allow long distance trade

• Increasing consumption of non-agrarian goods  bare subsistence economy left behind

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SUGGESTIONS FOR FURTHER READING

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SUGGESTIONS FOR FURTHER READING

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