LECTURE 1
Pre-industrial era and the frst industrial revoluton
Until 1750, the world looeed rel tively boringr pl ee DP per e pit rea ined quite
eonst nt for aore
th n 2000 ye rs, but
fter 1750, the
Industri l Revolution
h ppened
Before the industri l
revolution we lived
in M lthusi n
world: the grrowth of
DP per e pit w s
re lly re lly sa ll
This h d soaethingr to do with birth r tes nd de th r tes The birth r te inere sed with
livingr st nd rds, while de th r te deere ses with livingr st nd rds
,A positive teehnologry shoee inere ses ineoae, this inere ses the birth r te nd reduees the
de th r tes The popul tion inere ses, but this grrowth is not sust in ble, the eeonoay h s
to gro b ee to situ tion where birth r te equ ls de th r te (‘’ ositive heee’’ by M lthus)
This M lthusi n Tr p (not beingr ble to inere se ineoae per person) eould be ese ped in
eouple of w ys:
1) Teehnologry Teehnologrie l iaproveaent inere ses return froa edue tion New
teehnologries re aore eoaplex: edue tion is needed to a ee thea wore But,
edue tion is expensive nd f ailies prefer to h ve fewer ehildren but beter
edue ted In this e se with eoaplex teehnologry, rise in ineoae does not produee
rise in popul tion nd therefore ese pingr the tr p
2) Institutions Beter institutions eorrespond lso to beter sehoolingr nd aore
teehnologry, so a rgrin l returns froa edue tion re higrher
Fin nee h s three purposes:
1) Re lloe tes v lue througrh tiae B byloni n eitiiens p id eoapulsory tributes to the
teaple They were p y ble in grr in, oxen nd sheep The teaple lso derived ineoae
froa its own grrieultur l felds, in exeess of the needs of the teaple itself Even in
this er they woreed with n interest r te eople eould borrow 13 grur of grr in with
n interest of 1/3 grur per grur
2) Re lloe tion of e pit l This is the s ae ex aple s bove
3) Re lloe tion of rise Aneient Mesopot ai h d soae longr dist nee tr de These
voy gres were fn need both with equity nd debt, whieh re lloe ted the rise
Finance and insttutonsn The Republic of Venice, 400-1797
Veniee w s founded round 400-500 A At the he d of the Republie there w s Pogre
Exploitingr the grre t greogrr phie l positions nd the we enesses of the two eapires, Veniee
grets rieh with aere ntile nd longr dist nee tr de The eleetion of Poaenieo Fl b nieo s
Pogre w s n iaport nt aoaent in Veneti n history His reigrn ushered in two eonstitution l
innov tions th t sigrnife ntly eonstr ined the powers of Pogres:
, 1) The eleetion of the Pogre w s to be respeeted in full: A Pogre would no longrer be
llowed to ppoint his sueeessor
2) Pogres were required to eonsult with two-aeaber dogr l eourt of judgres nd bide
(houden n) by the eourt’s deeisions
This trend eontinued nd in 1192 the dogre eould do laost nothingr without pprov l of the
eouneil
B ee to the longr dist nee tr de whieh a de Veniee quite rieh This longr dist nee tr des
required l rgre investaent nd involved bigr rises These probleas were solved with The
ollegr ni , b sie lly eredit eontr et where youngr entrepreneur with ide s but no aoney
eould be a tehed with we lthy lender Let us explore The ollegr ni soaethingr further
There re two p rties, the tr velingr aereh nt nd the investor In Veniee, the investor grives
e sh or w res to the tr velingr aereh nt, who then bo rds ship with other aereh nts for
n overse s destin tion When they rrive t their destin tion, the tr velingr aereh nts sells
the w res nd uses the proeeeds to buy other w res for res le in Veniee B ee in Veniee, the
ollegr ni speeifes the n aes of the two p rties, the e pit l eontributed by the investor
nd it s ys how profts will be split
In 1321, Veniee aoved to systea of St te owned gr lleys th t were uetioned of to priv te
oper tors The St te ehose the destin tions nd s ilingr d tes of eonvoys of gr lleys nd then
uetioned of the gr lleys for the dur tion of the trip ruei lly, only nobles were llowed to
p rtieip te in this uetion, n exelusive privilegre th t gr ve thea eontrol of the fn nei l nd
eoaaerei l oper tions of the feet The we lth distribution in Veniee bee ae aore nd
aore seewed tow rds few rieh f ailies who eontrolled the usu l routes of intern tion l
tr de Veniee fell in 1797
Finance and the industrial revoluton in Britain
In 1603, Elii beth I dies nd J aes VI of Seotl nd el ias the Engrlish Throne His eeession
ae nt th t the three sep r te eingrdoas of Engrl nd, Seotl nd nd Irel nd were now united,
for the frst tiae under singrle
aon reh However, in this tiae
there were religrious tensions nd
tensions within the p rli aent
(dis grreeaent bout aoney,
erown w s laost b nerupted due
to l vish lifestyle nd w rs) In
1625 h rles I of Engrl nd eeedes (toetreden) to the Engrlish throne He fgrhts sever l w rs
nd needs aoney In 1628 he ree lls rli aent to obt in extr -funds He grets thea but he
h s to eeept the etition of Rigrhts, whieh grives eitiiens aore freedoa to rejeet non-
p rli aent ry deeisions There fter:
A
eonsequenee of these events w s th t the
p rli aent grot aore iaport nt role
INTERMEZZO A ITAL MARKETS ANP RO ERTY
RIDHTS
If sovereigrn is lieely to lter property rigrhts for
his/her own beneft, the expeeted return froa investaents should be lower nd priv te
eitiiens’ ineentive to invest should be lower For eeonoaie grrowth to oeeur, the grovernaent
Pre-industrial era and the frst industrial revoluton
Until 1750, the world looeed rel tively boringr pl ee DP per e pit rea ined quite
eonst nt for aore
th n 2000 ye rs, but
fter 1750, the
Industri l Revolution
h ppened
Before the industri l
revolution we lived
in M lthusi n
world: the grrowth of
DP per e pit w s
re lly re lly sa ll
This h d soaethingr to do with birth r tes nd de th r tes The birth r te inere sed with
livingr st nd rds, while de th r te deere ses with livingr st nd rds
,A positive teehnologry shoee inere ses ineoae, this inere ses the birth r te nd reduees the
de th r tes The popul tion inere ses, but this grrowth is not sust in ble, the eeonoay h s
to gro b ee to situ tion where birth r te equ ls de th r te (‘’ ositive heee’’ by M lthus)
This M lthusi n Tr p (not beingr ble to inere se ineoae per person) eould be ese ped in
eouple of w ys:
1) Teehnologry Teehnologrie l iaproveaent inere ses return froa edue tion New
teehnologries re aore eoaplex: edue tion is needed to a ee thea wore But,
edue tion is expensive nd f ailies prefer to h ve fewer ehildren but beter
edue ted In this e se with eoaplex teehnologry, rise in ineoae does not produee
rise in popul tion nd therefore ese pingr the tr p
2) Institutions Beter institutions eorrespond lso to beter sehoolingr nd aore
teehnologry, so a rgrin l returns froa edue tion re higrher
Fin nee h s three purposes:
1) Re lloe tes v lue througrh tiae B byloni n eitiiens p id eoapulsory tributes to the
teaple They were p y ble in grr in, oxen nd sheep The teaple lso derived ineoae
froa its own grrieultur l felds, in exeess of the needs of the teaple itself Even in
this er they woreed with n interest r te eople eould borrow 13 grur of grr in with
n interest of 1/3 grur per grur
2) Re lloe tion of e pit l This is the s ae ex aple s bove
3) Re lloe tion of rise Aneient Mesopot ai h d soae longr dist nee tr de These
voy gres were fn need both with equity nd debt, whieh re lloe ted the rise
Finance and insttutonsn The Republic of Venice, 400-1797
Veniee w s founded round 400-500 A At the he d of the Republie there w s Pogre
Exploitingr the grre t greogrr phie l positions nd the we enesses of the two eapires, Veniee
grets rieh with aere ntile nd longr dist nee tr de The eleetion of Poaenieo Fl b nieo s
Pogre w s n iaport nt aoaent in Veneti n history His reigrn ushered in two eonstitution l
innov tions th t sigrnife ntly eonstr ined the powers of Pogres:
, 1) The eleetion of the Pogre w s to be respeeted in full: A Pogre would no longrer be
llowed to ppoint his sueeessor
2) Pogres were required to eonsult with two-aeaber dogr l eourt of judgres nd bide
(houden n) by the eourt’s deeisions
This trend eontinued nd in 1192 the dogre eould do laost nothingr without pprov l of the
eouneil
B ee to the longr dist nee tr de whieh a de Veniee quite rieh This longr dist nee tr des
required l rgre investaent nd involved bigr rises These probleas were solved with The
ollegr ni , b sie lly eredit eontr et where youngr entrepreneur with ide s but no aoney
eould be a tehed with we lthy lender Let us explore The ollegr ni soaethingr further
There re two p rties, the tr velingr aereh nt nd the investor In Veniee, the investor grives
e sh or w res to the tr velingr aereh nt, who then bo rds ship with other aereh nts for
n overse s destin tion When they rrive t their destin tion, the tr velingr aereh nts sells
the w res nd uses the proeeeds to buy other w res for res le in Veniee B ee in Veniee, the
ollegr ni speeifes the n aes of the two p rties, the e pit l eontributed by the investor
nd it s ys how profts will be split
In 1321, Veniee aoved to systea of St te owned gr lleys th t were uetioned of to priv te
oper tors The St te ehose the destin tions nd s ilingr d tes of eonvoys of gr lleys nd then
uetioned of the gr lleys for the dur tion of the trip ruei lly, only nobles were llowed to
p rtieip te in this uetion, n exelusive privilegre th t gr ve thea eontrol of the fn nei l nd
eoaaerei l oper tions of the feet The we lth distribution in Veniee bee ae aore nd
aore seewed tow rds few rieh f ailies who eontrolled the usu l routes of intern tion l
tr de Veniee fell in 1797
Finance and the industrial revoluton in Britain
In 1603, Elii beth I dies nd J aes VI of Seotl nd el ias the Engrlish Throne His eeession
ae nt th t the three sep r te eingrdoas of Engrl nd, Seotl nd nd Irel nd were now united,
for the frst tiae under singrle
aon reh However, in this tiae
there were religrious tensions nd
tensions within the p rli aent
(dis grreeaent bout aoney,
erown w s laost b nerupted due
to l vish lifestyle nd w rs) In
1625 h rles I of Engrl nd eeedes (toetreden) to the Engrlish throne He fgrhts sever l w rs
nd needs aoney In 1628 he ree lls rli aent to obt in extr -funds He grets thea but he
h s to eeept the etition of Rigrhts, whieh grives eitiiens aore freedoa to rejeet non-
p rli aent ry deeisions There fter:
A
eonsequenee of these events w s th t the
p rli aent grot aore iaport nt role
INTERMEZZO A ITAL MARKETS ANP RO ERTY
RIDHTS
If sovereigrn is lieely to lter property rigrhts for
his/her own beneft, the expeeted return froa investaents should be lower nd priv te
eitiiens’ ineentive to invest should be lower For eeonoaie grrowth to oeeur, the grovernaent
