shekispeaks

Personal blog of Abhishek Kona

Book notes: Global Economic History: A Very Short Introduction

What the book deals with?

Research on China, India, and the Middle East has emphasized the inherent dynamism of the world’s great civilizations, so today we must ask why economic growth took off in Europe rather than Asia or Africa.

The American policies for economic development:

Western Europe and the USA made economic development a priority and tried to achieve it with a standard set of four policies: creation of a unified national market by eliminating internal tariffs and building transportation infrastructure; the erection of an external tariff to protect their industries from British competition; the chartering of banks to stabilize the currency and finance industrial investment; and the establishment of mass education to upgrade the labour force. These policies were successful in Western Europe and North America, and the countries in these regions joined Britain to form today’s club of rich nations. Some Latin American countries adopted these policies incompletely and without great success.

The Big Push strategy for growth

The countries that have closed the gap with the West in the 20th century have done so with a Big Push that has used planning and investment coordination to jump ahead.

The income gaps have expanded with only a few exceptions. The countries that were richest in 1820 have grown the most.

Japan was the greatest success of the 20th century, for it was indubitably a poor country in 1820 and yet managed to close the income gap with the West.

The great divergence—or how the west grew at a faster clip

1750, most of the world’s manufacturing took place in China (33% of the world total) and the Indian subcontinent (25%). Production per person was lower in Asia than in the richer countries of Western Europe, but the differentials were comparatively small. By 1913, the world had been transformed. The Chinese and Indian shares of world manufacturing had dropped to 4% and 1% respectively. The UK, the USA, and Europe accounted for three-quarters of the total. Manufacturing output per head in the UK was 38 times that in China and 58 times that in India. Not only had British output grown enormously, but manufacturing had declined absolutely in China and India as their textile and metallurgical industries were driven out of business by mechanized producers in the West. In the 19th century, Asia was transformed from the world’s manufacturing centre into classic underdeveloped countries specialized in the production and export of agricultural commodities. 2.

High wages are big reason for industrialization

Finally, and most paradoxically, bare-bones subsistence removes the economic motivation for a country to develop economically. The need for more output from a day’s work is great, but labour is so cheap that businesses have no incentive to invent or adopt machinery to raise productivity. Bare-bones subsistence is a poverty trap. The Industrial Revolution was the result of high wages – and not just their cause.

Britain’s high-wage, cheap-energy economy made it profitable for British firms to invent and use the breakthrough technologies of the Industrial Revolution.

Protestant work ethic theory is no longer tenable

Max Weber, for instance, contended that Protestantism made northern Europeans more rational and hard-working than anyone else. Weber’s theory looked plausible in 1905 when Protestant Britain was richer than Catholic Italy. Today, however, the reverse is true, and Weber’s theory is no longer tenable.

Silver caused Spain to become uncompetitve

Spain was particularly unlucky. In the 16th century, it looked like the most successful imperialist, for Latin America yielded so much silver. Silver imports, however, led to much greater inflation in Spain than elsewhere. As a result, Spanish agriculture and manufacturing became uncompetitive. The constancy in the share of the urban population in Spain masks great changes – the populations of old industrial cities collapsed while Madrid expanded on the basis of American loot.

UK had a high tax economy with larger government spending

In the event, the English state collected about twice as much per person as the French state and spent a larger fraction of the national income.

UK was quite authoritarian

Growth was also promoted by Parliament’s power to take people’s property against their wishes. This was not possible in France. Indeed, one could argue that France suffered because property was too secure: profitable irrigation projects were not undertaken in Provence because France had no counterpart to the private acts of the British Parliament that overrode property owners opposed to the enclosure of their land or the construction of canals or turnpikes across it. What the Glorious Revolution

Why was the revolution British?

The crux in explaining why the Industrial Revolution was invented in Britain is, therefore, explaining why British inventors spent so much time and money doing R&D (Research and Development, that is, Edison’s ‘perspiration’) to operationalize what were often banal ideas. The key is that the machines they invented increased the use of capital to save labour. Consequently, they were profitable to use where labour was expensive and capital was cheap, that is, in England. Nowhere else were the machines profitable. That is why the Industrial Revolution was British.

Rate of return on capital on industries was higher in Britain.

In the 1780s, the rate of return to building an Arkwright mill was 40% in England, 9% in France, and less than 1% in India. With investors expecting a 15% return on fixed capital, it is no surprise that about 150 Arkwright mills were erected in Britain in the 1780s, 4 in France, and none in India. Relative profitability was similar with the spinning jenny, as was the result – 20,000 jennies were installed in England on the eve of the French Revolution, 900 in France, and none in India. There was no point in spending much time or money to invent mechanical spinning in France or India since it was not profitable to use it there.

Cheap energy was key.

The purpose of the Newcomen engine was to drain mines, and Britain had many more mines than any other country due to the large coal industry. In addition, the early steam engines burned vast quantities of coal, so they were cost-effective only where energy was cheap.

Steam was General Purpose technolgy

Steam power is an example of a general-purpose technology (GPT), that is a technology that can be applied to a variety of uses. Other GPTs include electricity and computers. It takes decades to develop the potential of GPTs, so their contribution to economic growth takes place long after their invention. That was certainly true for steam.

The reason that the Industrial Revolution happened in Europe does not, therefore, lie in institutional or cultural differences but rather in the continent’s accessible coal reserves and gains from globalization.

Latin America

The Pampas could produce beef and wheat at least as well as Pennsylvania, but Argentina was too far from Europe for that to be feasible in the colonial period. All that Argentina could muster was a small export trade in hides. Chile was even more remote.

USA

America invents replaceable parts

American government arsenals in Springfield and Harper’s Ferry in the 1820s fabricated interchangeable parts for muskets. American firearms exhibited in the Crystal Palace Exhibition of 1851 so impressed the British that they sent a delegation to study the ‘American system’.

Africa

The low population density and high transportation costs limited the possibilities for specialized manufacturers supporting large markets.

African states lacked the legal and cultural institutions that advanced agricultural societies used to organize private property such as surveying, arithmetic, geometry, and writing.

Japan invents just in time production

They save on capital requirements by

Rather than producing components for inventories that required capital to finance, Japanese businesses produced components only as they were needed. ‘Just in time’ production is a technique that has proved to be so productive that it is now used in settings where capital is cheap as well as where it is dear.

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