ILRLE 3440 Study Guide - Midterm Guide: R. H. Tawney, Malthusian Trap, Douglass North
18 May 2018
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ECON 3300 Midterm Study Guide!
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Pre-Industrial Societies
When per capita income is above subsistence (point A) people start have more children and population •
increases, but the average person becomes poorer, going to point B, the technological ceiling!
Now society is at the subsistence level, disaster happens (plague of 1358), population decreases, average wealth •
increases, restarting the cycle!
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Q: How was the technological ceiling lifted (in certain regions)?!
A scientific revolution!•
people became confident in their belief that nature could be understood, !◦
#controlled and manipulated for their advantage!
Psychology of growth!•
a system that justified the rational pursuit of gain!◦
Economic institutions conductive to growth!•
The set of fundamental political, social and legal rules that govern !◦
#economic activity!
!
In pre-industrial societies there was the Medieval Ethic (Richard Henry Tawney)!
all aspects of life were the subject of religion and economic interests were subordinate to the idea of salvation !•
accumulating wealth was the sin of avarice !•
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St Thomas Aquinas (1225-1274) - most developed thinker of the Medieval Schoolmen!
Men could only do what kept them in the rank God placed them in (preserve the existing fabric of society)!•
Theory of the Just Price!•
The just price = value = cost of production!◦
Selling a commodity for more is avarice; buying a commodity for less than was sinful!◦
If the buyer valued the commodity more than the seller, the buyer should pay the seller extra out of honour!◦
All interest was sinful!•
Money existed only as a means of exchange and the use of money to make money was immoral!•
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Intensive growth - refers to a situation where output grows much faster than the population grows (y/p grows
rapidly); not necessarily because the population is growing slowly. This also happened in the 14th century with the
great plague when output remained constant but the population plummeted by 25% to 30%!
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Extensive growth - refers to a situation where output goes up but population grows at the same rate (y/p remains
constant)!
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Max Weber (1864-1920) argues that a new Protestant Ethic and Calvinism led to a psychology of growth
Calvinist theologians taught that only those who were$predestined to be saved would be saved!•
Since it was impossible to know who was predestined, the notion developed that it might be possible to discern •
that a person was$elect by observing their way of life. Hard work and frugality were thought to be two important
consequences of being one of the elect. Protestants were thus attracted to these qualities and strived to attain
these attributes!
◦ “Capitalst Spirit” !
#◦ God liked people who were hardworking, frugal and honest!
#◦ Investment became an issue of piety!
#◦ Wealth became a symbol of spiritual virtue, a suggestion that you are a good person!
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Douglass North (1993)!
A prerequisite for economic growth is the establishment of efficient economic institutions •
Countries that did not experience growth had inefficient economic institutions, where the main method of •
increasing one’s wealth was rent-seeking, taking a larger share of the pie instead of increasing the size of the pie!
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Q: What makes an economic institution efficient?!
If they incentivise individual to undertake economic activities that benefit society as a whole!•
costs < private rate of return = social rate of return !•
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North contends that those countries that developed efficient economic institutions in the 16th and 17th centuries
escaped the Malthusian trap and continued to grow while other countries stagnated!
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David Landes (1924-2013) listed these as prerequisites for a government that encourages economic growth !
Private property rights!1.
Personal liberty - occupation, spending, religion !2.
Rights of contract !3.
Stable government, a government of laws and not men!4.
Honest governments, governments that minimise rent-seeking!5.
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The Concept of Manufacturing in Pre Industrial Europe!
Around 1500, most production was done in urban workshops by craft guilds, with were formed by highly trained •
people making specific commodities !
Guilds regulated supply, labour and quantity of goods!◦
They often depended on grants of$letter patents$by a$monarch$or other authority to enforce the flow of trade ◦
to their self-employed members, and to retain ownership of tools and the supply of materials.!
Next came the putting-out system or proto-industrialisation!•
An intermediate stage between the urban guilds and factories!◦
Merchants bypassed the urban guilds by taking raw wool to workers in neighbouring villages!◦
The yarn is then taken to others who will weave it into woollen cloth, which is then taken to another place to ◦
be dyed and prepared for sale!
This was far cheaper than urban labour and it also provided labour in the rural areas who owned the means ◦
of production!
Because of seasonality in grain production, there are times of year when labour was not demanded, ◦
meaning that those in rural areas were desperate for work and extra income !
But there were two problems!◦
There are quality control issues because merchants can’t watch the workers work (or force them to a.
work) !
It became too popular, because as prices dropped demand increased, so merchants had to travel b.
further out to hire spinners and weavers!
Merchants put up with these problems because of the gains from avoiding the urban guilds!◦
This system evaporated with the arrival of factories !◦
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Bad Laws!
Usury Laws!•
Laws setting maximum rate of interest lenders can charge!◦
Set at 5% in Britain, but does not apply to government lending.!◦
During French wars interest rate on government bonds exceeded 5%. People preferred to lend to the ◦
government over private sector especially at higher interest rates.!
Deflects more money from private industry!‣
After 1815, market interest rate is below 5% so law is non-binding. Usury Laws are repealed in 1854.!◦
Bubble Act (1720) •
Outlawed corporations (joint stock companies) unless they were approved by Parliament!◦
Done because of the South Sea bubble in which the South Sea Corporation’s stock crashed and members ◦
of Parliament lost money. Many members of Parliament thought corporations were ponzi schemes.!
Impedes large scale enterprise and limits economy to partnerships and some corporations approved by ◦
Parliament.!
Bubble Act is repealed in 1825, but there are no freely formed corporations until 1856.!◦
Government eventually realizes that large quantities of money are needed to continue industrialization.'◦
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Three Tier Banking System!
Bank of England - corporation - issues bank notes!•
Private London Banks - partnerships - do not issue bank notes!•
Country Banks - partnerships - issue bank notes!•
People in the country need cash for businesses and to pay wages!◦
Country Banks deal with Private London Banks. All money passes through London. This system help to get •
money to where it is needed.!
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Document Summary
When per capita income is above subsistence (point a) people start have more children and population increases, but the average person becomes poorer, going to point b, the technological ceiling. Now society is at the subsistence level, disaster happens (plague of 1358), population decreases, average wealth increases, restarting the cycle. A scienti c revolution people became con dent in their belief that nature could be understood, controlled and manipulated for their advantage. Psychology of growth a system that justi ed the rational pursuit of gain. The set of fundamental political, social and legal rules that govern economic activity. In pre-industrial societies there was the medieval ethic (richard henry tawney) all aspects of life were the subject of religion and economic interests were subordinate to the idea of salvation accumulating wealth was the sin of avarice. St thomas aquinas (1225-1274) - most developed thinker of the medieval schoolmen.
