Lecture 3: The early history of globalization,
1500 to 1800 AD
1

To paraphrase Marx and Engels paraphrasing
Adam Smith, the two critical events of the modern world were:
“the discovery of America, [and] the rounding of the Cape [of Good Hope]” in 1492 and 1488, respectively.
The early history of globalization

An overly Eurocentric view of the world?
A China-centered trading system instead?
Regardless, 1500 marks a key date in history.
Our questions for the week:
1.) Why does 1500 matter?
2.) Did globalization begin in 1500?
The early history of globalization

But first, key historical developments of this period…
With the “discovery” of the Americas comes the extension of European empire in the Western hemisphere.
With the rounding of the Cape comes the encroachment of European interests in the
Eastern hemisphere.
The early history of globalization

Circa 1700:
Empire in the West

The extension of formal empire a much more prominent feature in the Western hemisphere.
The roles of differential demography & disease.
In the West, Europeans encountered:
1.) relatively small settled native populations
(with notable exceptions)
Empire in the West

Early Spanish attempts to harness New World resources and the encomienda.
In “exchange” for churches and Spanish, natives provide tribute (goods or labor) to titleholders.
Built on pre-existing tribute systems, e.g. the
Incan Empire and the mita.
Empire in the West

Empire in the West
8

African slaves had been in the Americas from
1510, but numbers limited until the late 1500s.
Existing system of forced labor imposed on the natives proves insufficient in light of above.
At the same time, demand for tropical products rises in Europe.
Empire in the West

Europe was also reaping the benefits of immense mineral wealth from the Americas.
Flow of bullion amounts to 100,000 tonnes from
1500 to 1800 (of which 60% remains in Europe).
Effects:
1.) increases European money supplies by 40%;
“The Price Revolution”
Empire in the West

Both of these flows are parts of what is known as the “Columbian/Magellan Exchange”.
Simply the transmission of plants, animals, diseases, goods, and people between the two hemispheres.
Plants
Animals
Diseases
Empire in the West

At the same time, we see the encroachment of
Europeans in the rest of the Eastern Hemisphere.
But territorial holdings limited to “factories”.
The roles of:
1.) large settled populations (with a few notable exceptions)
Encroachment in the East

However, much of the trade in the Indian Rim seized by Europeans (same crews & merchants, just different bosses).
The roles of:
1.) Open conflict among Europeans and native principalities and one another.
Encroachment in the East

One of the most important developments was the establishment of chartered trading companies.
Granted trading monopoly between home country and designated areas.
Over time waged their own wars and held overseas territory; “states within states”.
Encroachment in the East

The Vereenigde Oostindische Compagnie (VOC) established in 1602.
Significant for partial shares, limited liability, and perpetual lifetime→ first multinational corporation.
Joined by English East India Company, French
East India Company…
Encroachment in the East

These developments have led some to date the period as the beginning of globalization.
In particular, world systems theorists.
Globalization is the linking of (what-wouldbecome-the-industrial) core with the periphery in commercial interaction.
When did globalization begin?

In this view, the existence of a (relative) global trade boom implies globalization.
But when do economists date globalization?
Of course, all depends on definitions…
In O’Rourke and Williamson (2002), “When Did
Globalization Begin?”, their criteria is that of
When did globalization begin?

When did globalization begin?
MM=home import demand
(home D minus home S; p)
SS=foreign export supply
(foreign S minus foreign D; p*) t=trade costs

Trade increases with a decline in t.
In this case, prices are converging.
When did globalization begin?

Trade increases with a move in MM.
But here prices do not converge.
When did globalization begin?

The problem is movements in:
1.) MM could be caused by population growth, a shift in income distribution (in particular, one favoring the rich)…
2.) SS could be caused by settlement of new lands, capital accumulation, technological change…
When did globalization begin?

An example of price convergence:
When did globalization begin?

An example of price convergence:
When did globalization begin?

For O’Rourke and Williamson, no evidence of price convergence between Europe and the rest of the world up to 1800.
Therefore, no evidence of globalization.
Runs counter to Flynn and Giráldez…
But what is the basis of O’Rourke and
Williamson’s claims?
When did globalization begin?

When did globalization begin?

When did globalization begin?

Possible explanations for this lack of commodity price convergence are:
1.) Necessary trading markups due to (very) high variable capital and labor costs of the trade;
2.) Insecurity of routes and risk of expropriation due to endemic piracy and prolific wars;
When did globalization begin?

Implies not only big profits but also trade did not fundamentally alter patterns of production.
Same set of goods produced before and after the introduction of trade with the rest of the world.
So trading partners experienced limited efficiency gains in production as relative prices changed by only a few percent.
When did globalization begin?

When did globalization begin?

Also, commodity price evidence considered is for non-competing goods: because of geography,
Europe could not produce them.
Because of this, these were high value goods consumed only by high income consumers.
But what of the vast majority of goods produced/ consumed by the vast majority of the population?
When did globalization begin?

O’Rourke and Williamson again argue no.
The basis for their claim is English data from
1565 to 1936 on the:
1.) ratio of agricultural land to labor supply
(LANDLAB)
2.) ratio of agricultural to industrial prices
(PAPM)
When did globalization begin?

Assume a two sector economy: when a country is not globalized WR and PAPM should be determined domestically.
If LANDLAB increases, PAPM should decline and WR should increase.
But when a country is globalized its commodity prices (PAPM) should be set on world markets.
When did globalization begin?

When did globalization begin?

On the other hand, there is evidence of price convergence within Europe, dating from 1500.
Over time it came to include very low-value, high-bulk items—not just luxury goods.
By 1600s, distinct regional economies within
Europe along major waterways:
1.) the Rhine River
2.) the North and Baltic Seas
When did globalization begin?

When did globalization begin?

This trade allowed for specialization in and productivity gains from:
1.) agriculture;
2.) manufacturing;
3.) the processing of raw materials.
Significant in a world of purely Smithian growth: economic growth only through expansion of the
When did globalization begin?

There is also evidence of such intra-continental
(but more precisely, imperial) integration in:
1.) the early Ottoman empire (1453-1600);
2.) the Mughal empire (1526-1700);
3.) the Chinese empire under the Manchu/Qing dynasty (1644-1800).
When did globalization begin?

Recent research indicates that Chinese commodity markets in particular were at least as well integrated as those of Europe.
Likely then that most areas of the Old World were going through a period of economic expansion between 1500 and 1800.
But what explains divergence afterwards?
When did globalization begin?

Period from 1500 to 1800 witnessed the birth of a truly global system of trade; seen in the establishment of Manila in 1571.
In any case, developments in the early modern period critical in understanding the course of globalization in the coming centuries.
Conclusions