Lecture 1. Long Term Structures of the European Economy
Why is Europe Rich?
An economic historian would argue:
- Economist say that Europe is rich because of institutions
- Most Europeans are middle class now, but not before 1950
- Lot of poverty in Europe before 20th century
- Difference East and West, and within societies
- Europe was rich before it had colonies. Colonialism added to the wealth, but wasn't a
prime mover
Common misconceptions:
- Europe is rich because it has a weird set of institutions
- This is natural to assume today, because most Europeans are ‘middle class’; but
this was emphatically not the case before 1950
- Your Dutch grandmother probably had an icebox growing up, and
generation(s) before that might have gone to school barefoot.
- Most people in Europe (especially Eastern and Southern Europe), have
spent most of the 19th century and 20th century being very poor and
uneducated and exploited; not much better off than anyone else in the
world
- Most Europeans, even in the wealthiest countries, were extremely poor before
1950, and were very much ‘victims’ of an exploitative economic system
- Europe is ‘rich’ because of colonialism (or slavery), in which European masters exploited
the rest of the world and stole their wealth
- Actually, the rich parts of Europe were far wealthier than the rest of the world,
before and after colonialism (this is how they got colonies)
- Colonialism, in which Europe really controlled the landmass of Africa and much
of Asia, only lasted from about 1870 until 1950. And by 1940 the net drain on
empire was far worse than the gains; Europe was actually going broke by
keeping colonies
- Most of Europe did not participate in colonialism, but were victims and/or minor
players
- Also, most of Latin America was independent from about 1820, long before any
major exploitation of resources could be undertaken except for a few cases, so
do we really call this colonialism
- > Colonialism might have hindered growth because it limited growth from
happening because of a freeze on free trade.
- Against these popular ideas of what ‘Europe’ is and why it is rich; a trained economist
will add the following argument:
- Europe is rich because it has a weird set of institutions which in some cases,
created wealth, over a period of many centuries.
- Includes democracy, capitalism, competition (between empires/states)
- Competition amongst European states ensured that countries with the most
efficient wealth-creating institutions got richer, and therefore had larger armies,
and won more wars.
, - Regardless of cause, it is an undeniable fact that Europe was the epicentre of
the Industrial Revolution.
> The Industrial Revolution generated a lot of wealth for Europe
- The Industrial Revolution is the main reason why Europe broke out of traditional limits
on wealth (example: a peasant society)
- Every country which industrializes, experiences massive GDP growth (it gets a
lot richer, on the order of 100 times richer)
- Colonization was a mere blip in this process (1870-1950),
- The mercantilist mentalities created by colonialism probably hindered growth for
the colonizers, as well as the colonized (because it fosters monopolies and
autarky)
> Image (diagram): Great Britain became wealthy first as it went through the Revolution first.
Since 1950 most of the world which has developed has jumped up in terms of their wealth
(20/30 times wealthier). This is what made the middle class possible.
- The Industrial Revolution brought wealth to Europe, but it did not automatically make
every European ‘rich’
- In fact, it probably depressed living conditions for the majority of Europeans, so
that by 1900 most of them were miserable
- (Even if their wages were technically higher than they had been working on a
farm, cost of living went up and security and rural safety nets disappeared)
- The situation was fraught, and many reformers believed that the factory system itself
was to blame: a key belief of early Socialism and its variant Marxism
- European living standards went down. This started movements. If they unite,
and fight against the owners that make them work extremely hard, they can
create better conditions. This was quite successful, as they got better work
conditions. People started to get into the ideas of Socialism and Marxism.
- Example: Communism (or Fascism/The Nazis) is fundamentally about economics,
not about politics.
- The twentieth century can be read as one long, often convulsively violent, conversation
as to what is the best way to create the most prosperity for the largest number of
people in an industrializing world.
- In Europe, the possible answers to these questions have been dramatically acted out.
- The main possible answers have been:
- Capitalism, Communism, Fascism, or Socialism
, - You are taught that these ‘isms’ were political movements. In this class we suggest that
the major focus of these ideologies is economics.
- We call these things ideologies, because they have components of economics,
politics, social structures, and histories.
- Who won? The contest against Fascism was decided by World War II
- The West was winning economically (not necessarily politically)
- The West adopted the American socialist model and created a stronger safety
net than the Americans themselves during the New Deal.
- Socialism won! Welfare state capitalism is what won the contest in the end. That
created high living standards.
- The challenge of Communism took longer to defeat; this lasted for most of the Cold
War, though by the 1980s, pretty much everyone realized that the tremendous success
of hybrid Socialist-Capitalism after 1950 had laid the question to rest once and for all
- (Now, China and Russia are attempting to revive the dictator-directed capitalism
model tried by Fascism in WWII. This has been the greatest challenge to
Parliamentary Socialist-Capitalism, and sadly it seems like this challenge will
continue for the foreseeable future as a new Cold War.)
- Since 1950 the success of Hybrid Socialist-Capitalism has been so overwhelming, that
most people in the West have focused on a narrower debate:
- How much socialism? And how much unfettered capitalism?
- Policy hinges on “How much control over markets should we take”? “How much
should wealth be distributed” and “should we combat inflation” (now known as
Monetarism), “or unemployment” (now known as Keynesianism)?
- The Welfare State flipped the lower and middle classes in Europe, and made pretty
much everyone ‘rich’ by historical standards
- After the fall of Communism, and the implementation of Western-Style hybrid
economies, living standards in Eastern Europe also rose dramatically, until they are
approaching those of the West
> Statistics: All traditional societies have these statistics. Upper class is always 5%. Middle class
can live quite well. Lower class lives in poor living conditions. In 1990, the middle class flipped
and had a much higher percentage than in 1910. The lower class has also reduced
tremendously in these 80 years. This is due to the redistribution of wealth in European society.
- Also, a new debate is:
- Who should be allowed to participate in European ‘wealth’?
- Many European voters (the ones that university students and faculty tend to look down
on) feel that they have made a good thing, paid for it with blood and toil, and now the
European elites (both right and left) are encouraging migrants to come streaming in
, - Difference left and right, and in between
- The left does this from compassion (‘All should share’)
- The right tacitly does this because:
- This lowers wages (good for the rich)
- Also creates a larger consumer base, example; more essentials are sold (good
for the rich)
- But dilutes benefits (bad for the middle and lower classes)
- How much economic redistribution of wealth is there going to be?
- The economy needs to be continuously tweaked/changed in order to keep it going.
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Evolution of Capitalism
- Where was the epicenter of modern Capitalism?
- Republican Italy (Venice, Florence, Genoa)
- Republican Holland (first “national” republic)
- Republican UK (after 1688 a constitutional monarchy)
- Republican US
- Protestant countries in General (democratic)
- Historically, absolute monarchies and dictatorships are worse for
business than democracies. They tend to stifle innovation, decrease trust
and therefore increase risk, causing higher interest rates; cause
increased corruption, increase transaction costs, lead to less ambitious
and informed people, and suppress education
- This is why Holland could defeat Spain
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- Where did modern Capitalism evolve?
- Renaissance Italy. Learned how to do things like stocks, public debts, loans, etc.
The Italians created the financial asset. They invented modern finance, and
modern democracy.
- Then the Dutch took some of these ideas. The Dutch created modern capitalism
because they had autocratic kings.
- Britain created a Central Bank and adopted Dutch institutions. They used these
institutions to create great power and wealth.
- Until WW1, Britain was the most powerful and richest country in the world. But
the US took over the capitalist institutions and took over this position.
Varieties of Capitalism
- Modern ‘Socialist-Capitalism’ can have different flavors
- Hall and Soskice:
- Argue that in c20th, British and German capitalism have taken different paths:
- Corporate (where businesses are run in tandem with social interests of
the government, banks, and unions)
