Economic History U1
Economic History U1
Economic History U1
Economic history studies how different societies use their resources and tries to answer the question: Why
isn’t the whole world equally developed?
Great Divergence: over the past three centuries, the economic performance of Europe differs from
the rest of the world.
Business history: studies economic development though the business firm, the primary social
organization of capitalist system.
Some economic historians:
Douglass North: remarks institutional structures that account for the performance of an economic
system and how these institutions change over time.
Rondo Cameron: studies the reasons for the unequal levels of development in the world.
David Landes: tries to analyze the main reasons for economic advances and modernization.
Economic theorist has constructed a unified theory of economic growth; initially the dominant idea was to
increase the capital stock of an economy (especially in the manufacturing sector). Economist noticed that
machinery could increase productivity (adoption of the steam engine in 18 th century England). However,
the key factor was to increase the capital per worker (what provoked an increasing number of workers in
an economy).
Eventually, economists explained that technological advances are a result of education of the workforce
and scientific research.
By 1990 economic growth could be summarized in four rules:
1. Increase investment in manufacturing
2. Raise education level
3. Reduce birth rate
4. Increase exports
These four rules worked well for some countries, such as Asia tiger economies (oil shocks in the 70´s);
although in some other countries such as Russia, as excess following of the rules got to collapse.
As a consequence, economic theorists integrated institutional elements into economic models.
1400-1758
Bills of exchange become a standard method of payment in Europe
1492: Columbus arrives in America and money supply increases in Europe
Mercantilism policy
1689: Locke states that wealth is delivered from labour
1758: Hume states that public good should be paid for by governments
Macroeconomy
1841-1920
The theory of economic bubbles appears
J. Stuart Mill lays the foundations for liberal economics
Marx publishes Capital
Marginal utility term is coined
Schumpeter describes the vital role of innovation for industrial development
1930-1970
1929: Wall Street Crash marks the beginning of the Great Depression
1933: Keynes writes an open letter to Roosevelt with economic recommendations for the US
Roosevelt introduces the ‘’New Deal’’ plan for US economy
1944: Bretton Woods agreements are signed (post-war international financial regulations)
1950: Milton Friedman advocates a monetarist policy
1970-2008
US president Nixon breaks the link between US dollar and the price of gold
1973: Oil embargo provokes a worldwide economic crisis (OPEC)
2006: global warming is identified as a problem
2008 banking crisis causes a worldwide recession
Private property:
o Plato: rulers should hold property collectively for the common good
o Aristotle: ‘’property should be private’’ (when property is common, no one takes responsibility to
take care after it)
o Classical roman law (1-250 CE): states that the sum of rights and powers sb has over sth is called
‘’dominium’’.
Just prices
o Roman Courts: protect landowners from being forced to sell land below the just price (‘’at great
loss’’)
o Aquinas: the ‘’just price’’ is simply the price that freely the buyer accepts to pay
o Alfred Marshall (1890): the prices are automatically set by supply and demand
o Ludwig von Mises (1920): socialism cannot work bc prices are the only way to establish need.
Money
o Mesopotamia: shekel is used as a unit of currency (small percentages of gold or silver)
o Oldest known coins come from Greek islands
o 13th century: Marco Polo bring promissory notes from China to Europe (used by Italian bankers).
o 1696: The bank of Scotland issues bank notes for the first time
Inflation
o 1492: Columbus brings silver and gold to Spain, prices raise in Europe
o 1911: Fisher develops a mathematician formula to explain ‘’the quantity theory of money’’.
o 1936: Keynes states that ‘’velocity’’ of money in circulation is unstable
o 1956: Milton Friedman argues that a change in the amount of money can have an effect on
people’s incomes
Specialization in labour
o Plato: explains that a city emerges and grows by exploiting the gains made by dividing a labour
o David Ricardo: free trade and specialization in labour
o Karl Marx: states that the division of labour alienates workers, and this system will eventually be
replaced
o Ludgig von Mises: argues that work division brings huge benefits, including greater leisure time.
Enlightment
Beginning 18th century starts the Age of Enlightment which took a scientific approach to ‘’political
economy’’. Such an optimistic view was intrinsic to the spirit of the time and to the faith in the triumph of
Reason.
Economists tried to measure economic activity, describing only the working of the system (without moral
implications). Enlightened thinkers began to consider the possibility to improve society trough social and
economic reforms.
The term ‘’economics’’ is derived from the Greek and means ‘’household management’’. The first true
economists appear at the end of 18th century, when the study was known as ‘’political economy’’, emerged
from politics and considered a soft science.
The first lesson of economics is scarcity (there is never enough to satisfy those who want it).
Mercantilism
Began in the 16th century and continued until late 18th, with the rise od Dutch and English seaborne trade.
Mercantilists think that the state should behave like a merchant (grow business, acquire gold and interfere
in the economy).
Thomas Mun insisted that what is most important is how trade and payments finally balance out
Physiocrats
They wanted to understand the whole economy as a system, and these ideas lead to the modern
macroeconomics. They believed that nations gained economic wealth from nature, though the real
economy. The economy was naturally self-regulated; and favoured free trade, low taxes, secure property
rights and low government debt.
Quesnay’s economic table is considered the firs macroeconomic model.
Utilitarism
Claims that choices should be made in order to increase happiness for the greatest number of people.
Jeremy Bentham sets out this theory in the 19th century.
Italian economist Pareto disagreed, and his definition of social welfare has come to dominate modern
economics.
First economics
Modern economics emerge firstly from the publication in 1776 of The Wealth of Nations, by Adam Smith.
This coincided with the advent of the Industrial Revolution.
The book offers an explanation of the competitive market system, suggesting that the market is guided by
a ‘’invisible hand’’, where the actions of self-interested individuals will eventually balance out the
economy.
Free trade
Adam Smith state that what matters is the ‘’wealth of all nations’’, and this can only be acquired if trade
between nations is unrestricted.
In 1817, David Ricardo states that foreign trade can benefit all nations.
In the 70’s the US economist Milton Friedman insists that free trade helps countries development.
Public goods
o 500 BCE: indirect taxes are used in Athens to finance city festivals, temples…
o 1421: the first patent is granted to an Italian engineer
o 1752: Hume states that governments should provide citizens some public goods that are not
profitable for individuals or firms to produce.
o 1848: The Communist Manifesto advocates collective ownership of the means of production by the
workers.