Summary Schwartz - States versus Markets

Introduction
Modern states and markets intertwined
 states shape market outcomes
 markets create state revenue  states vs. markets

2 trends:
1) Globalization: greater movement of people, capital and firms in a global market.

2) Upswings and downswing linked to the emergence of leading sectors
 creative destruction (Schumpeter)

SAMENVATTING BOEK

Chapter 1: The Rise of the Modern State
Rise of modern state: money necessary for bureaucratic apparatus (+ monopoly of violence)
 states force economies in global market (more taxation possibilities)

Agriculture: sets limits on the forms of state organization; limited surplus available for
extraction.
 20 km radius micro-economies; low division of labour/productivity/trade

Three ways to increase radius:
1) Water / wind power  mills (easier transportation)
 nobles
2) Water transport
 kings (connecting microeconomies into one bureaucratic state)
3) Money (goods with high value-weight ratio)
 merchants

State-building:
1) Lawyers: definition of property rights and political obligations
2) Guns: monopolies of violence
3) Money: bureaucracy of revenue extraction
4) God: national myths to unite the population

Mercantilism: externally oriented policy by which states tried to create inflows of bullion
(specie or metallic money).
 bullion best way for kings to monetize power (bypass nobility)
 trade as a way to decrease power of nobility (through competition/linkages)

China & India vs. Europe:
In China (kings) and India (merchants) one single group was dominant, whereas in Europe
the kings, merchants and nobles struggled continuously, pressuring them to develop better

,forms of organized violence. In the end, this was the cause of the European victory over the
East.

Bullion problems: 1) Microeconomies; 2) Backwardness  trade deficits
 Overseas conquest and trade monopolies (incl. taxes)

Indian Ocean trade:
1) Portugal – organized violence
2) Netherlands – monopoly of luxury goods
3) England – bulk commodity trade

Chapter 2: States, Markets and the Origins of International Inequality
Inequality between regions/nations:
1) Neoclassical economics (NCE):
- economic growth in one place does not cause poverty elsewhere (system level)
- international markets/trade affect all economies in the same way
- success/failure is due to local institutions (unit-level)
- property rights  innovation
- there is only relative inequality; no relations between countries

2) World systems theory (WST) / dependency theory:
- economic growth can only occur due to exploitation of other regions (system level)
- international markets/trade sort areas into core, semiperiphery and periphery
- local institutions matter very little (unit-level)

Core: creation of high-value added goods; cheap imports from periphery
Periphery: creation of low-value added goods; expensive imports; little opportunity for
economic development.
Semiperiphery: trades low- and high-value goods to core and periphery. Exploited by core;
exploits periphery.

3) Intermediate position:
- global markets create a hierarchy with different income levels (system-level)
- local institutions determine which possible outcome emerges
 through Ricardian/Kaldorian strategies
- there is relational inequality, but countries can move up/down ladder

Von Thünen model: explains concentric agricultural (core-periphery) circles.
- lower transport costs nearer to town  higher landowner rents
 high-value production to pay higher rents (higher productivity  wages)
 more substitution of capital nearer town

Not necessarily underdevelopment:
1) Lower food prices in periphery due to lower transport costs (higher real income)

, 2) Depends on land/labour ratios
3)  Capital may substitute for labour, increasing productivity (Australia)

Source of underdevelopment: coerced peasants entering markets (irrational)
 not market forces per se (WST), but institutions entering the market

Krugman model: explains concentric industrial (core-periphery) circles.
- lower transportation costs  manufacturing agglomerates
 economies of scale, higher productivity in town-region
 relatively lower demand (+ productivity) in other industrial regions  lower wages

Product cycle model: new industries emerge in areas with high income/wage/skills areas.
 core manufacturing agglomerates produce high-value, high-wage products

Ricardian strategy: export-oriented strategy where a country exports the goods with a
comparative advantage (mainly low-value/agricultural).
 falling food prices (lower terms of trade)
 no increasing returns to scale

Ricardian collective action problems:
1 - social overhead capital (infrastructure)
2 - capital for producers
3 - creation of labor supply

Long-term Ricardian success:  higher value
1) Find new agricultural/mineral exports
2) Link other industries to export sector; use export growth  Kaldorian strategy

Kaldorian strategy: invest in sector through Verdoorn (learning) effects, lowering production
costs.
 funded by Ricardian exports
 manufacturing best sector  increasing returns to scale

Kaldorian collective action problems: collective action problems concerning, the growth of
productivity; as industrial products are not competitive on world markets per se, like
Ricardian products.

Problems of growth strategies:
1) Low production in periphery  limiting opportunities for collective action investment
2) Less military power than developed countries
3) Low state autonomy due to concentrated landownership (labour coercion)

Chapter 3: Economic and Hegemonic Cycles