Theories on the Growth of the Western World and “The Great Divergence”I. J. U. Nef—Characterizes the 16th Century as a 1st industrial revolution, shifting from agricultural to manufacturing output.A. New industries1. Paper mills2. Gunpowder mills3. Cannon foundries4. Iron and Copper5. Sugar refineriesB. New Techniques1. Mining2. Pumping water out of mines.C. New Technology—Conversion of woodto coal as basic source of fuel.II. North and Thomas Theory of GrowthA. Economies of Scale1. Possible with rising populations andimprovements in transportation.Lower transportation costs increases region of feasible trade2. In particular with respect to manufacturing and specialized agriculture. Large scale operations that you can sell to large and growing markets.B. Transaction costs1. Externalitiesa. Pirates----central govt. provide protection against pirates and bandits, in order to protect tax revenue. Trade risk lowered.b. Innovation –Dimond’s theory. Rise of institution to complement trade, exchange of ideas as well as goods.2.Increased flow of economic infoa. Trade networks(Hansa & Champaign Fairs)b. Institutions for risk sharing--development of cargo insurance.B. Factors which disrupted status quo and favored the formation of new institutions.1. Long-run changes in relative product and factor prices. Initially in manorial system land abundant, labor scares. Starts to break down when labor is abundant and land scares. Rise of markets and trade. Moving from shared inputs to fixed wages and rent.2. Changes in the size of the market.A. Increases in population.B. Lower shipping costs, trade groes exponentially3. Changes in the decision rule of government. Moving from decentralized lords to centralized authorities(kings), some of whom enforced property rights to stimulate growth, tax revenues.E. The case of England1. The rising value of land relative to labor forced the breakdown of the manorial system, especially after labor once again became valuable. Former lords could not reimpose system as it was a labor sellers market.2. Rising land values led to the enclosure movement and trueprivate property rights. Enclosure came as a way to deal with common resource problem in sheep grazing. This in turn eliminated the common resource problems and moved towards moreefficient use land.3. Differential population pressures and thus differential factor endowments stimulated trade. Sparsely populated highlands greatfor sheep grazing, more urbanized areas right for industrialization.E. Increased trade flows gave rise to new institutions such as merchant-trade groups and resident factors to increase information exchange, deposit banking,insurance, etc.1. Inflationary pressures of colonization as well as more product differentiation continued tospurn trade.2. Rise of great commercial centers: Cadiz, Lisbon, Bordeaux, Antwerp,Amsterdam, Bristol, and London manifestation of these processes.3. Eventually under the centralized authority of the Elizabethan crown came the granting of monopoly privileges (for good and ill). Monopolies can encourage inventive activity, but monopolies granted as political favors just increased prices, made for deadweight loss.F. Prerequisites for “escape of the Malthusian trap.” --Specialization and trade.III. Kenneth Pomeranz’ response in The Great Divergence (The Case of China).A. Chinese conditions for modernization were generally as favorable as those inWestern Europe, sometimes even moreso.1. In many ways China had been more advanced than Medieval Europe during the Song Dynasty (960-1126)a. advances in ceramics and printingb. water-powered spinning machinesfor hemp and ramie (both coarse fibers)--widely used---Not so in Europe until 1700 c. peak of iron-making in terms ofiron per capita, Much higher than Europe for several centuries, but there would be aretrogression.d. widespread consumption gainsconsumption of luxury goods (tea and black pepper)—Fast food shops cites—“Sumptary laws”: Laws restricting the consumption of luxury goods (evidence of widespread consumption). e. shift of workforce out of farming and primary activities into manufacturing and serviceoccupationsf. cottage industries-- farmers increased time spent in manufacturing and selling goods during agricultural slack season (similar to changes in Europe 5 centuries later).g. favorable institutions. 1. (Chinese) Property rights in land. 2. Moved from labor conscriptions to taxes in kind (rice) or cash. 3. Markets for land and labor more mobile factors of production. 4. Song dynasty established and maintained a tax system based on fixed shares,not just confiscating any and all extra output during shortfalls, problem during later days of Roman and many other pre-modern governments, by extracting more from the population. 5. State invested in improving canaland river navigation in order to improve tax collections, but fostered commerce in the process. 6. Govt fostered innovation and diffusion of technology.2. Yuan Dynasty (1260-1368) Mongols from the steppes invaded and overthrew the Song Dynasty. But, they basically adopted the civilization of their conquered hosts w/o changing dramatically their institutions. a. Marco Polo’s writings during this era describe China as the most developed economy in the world at that time.b. “Treasure ships” the best in theworld. Several times larger than Columbus’ ships.3. Ming Dynasty (1368-1644). succeeded by the Qing Dynasty that ruled into the 19th century. Basic structure remained the same throughout.4. Halt of technological development during the Ming-Qing perioda. per capita production of iron fell substantiallyb. water-powered machinery was abandonedc. clock technology completely lost (Chinese were amazed byclocks brought by Europeans inthe 16th century). d. Very bureaucratic regime-- peasants liable for 30 days service, would be kept at work for years.e. Government stopped subsidizing shipping. Had impressive fleet of “Treasure ships” prior to 1430s. Increasingly harsh restrictions on shipping. By 1500 they imposed the death penalty on building a multimasted ship. In 1551 it became a crime to go to sea on one.e. Successful colonization of Asia abandoned. f. Even with this regression, China still was at least as advanced in many ways as Europe in the centuries before the Industrial Revolution.- Agricultural techniques compared favorably with European farming despite livestock shortage.- Standard