Lecture 6:
Trade & Growth in Early Modern Europe
ECON 451
Fall 2012
Professor David Jacks
1
Already have a handle on state of trading
relations in Europe circa 1000 to 1500 AD.
Slow, uncertain, low volumes, and high costs.
But that there was trade at all was an
achievement in itself…the FPOE.
Now we turn to trade in the context of early
modern Europe, i.e. from 1500 to 1800 AD.
Introduction
2
Marx and Engels: two critical events of the
modern world in 1488 and 1492.
Traditional starting point for definition of both
modernity and globalization.
A radical re-shifting in Europe’s economic
fortunes: from backwater to commercial hub.
Borne out by growing share of exports in world
Introduction
3
That trade lead growth suggests a question:
given a role for trade in spurring economic
growth, what were the precise mechanisms?
But must contend with causality…
Trade as a first mover?
Or trade as an
Introduction
4
It helps to distinguish between two types of
trade in this period: intra- versus intercontinental.
Primary evidence and secondary literature has
its focus on the latter.
But vast majority of trade was at the intracontinental
Two types of trade
5
Need to highlight two ways trade could affect
growth:
1.) direct effects; standard arguments related to
specialization
2.) indirect effects; relate to less obvious—but
perhaps more important changes in
institutions, organization, and technology.
Two effects of trade
6
For many economists, the most important
consequence of trade is the convergence of
relative prices.
Think of this in terms of the PPF graphs in
principle classes…
This rotation of relative price curves along with
Direct effects
7
Agriculture
Manufactures
Direct effects
8
Agriculture
Manufactures
Direct effects
9
Only when relative prices are converging will
the efficient level of specialization occur.
A potential increase in consumption and utility;
plus productivity gains as the division of labor
spreads.
In this context, it is only
Direct effects
10
Direct effects
11
Big profits in inter-continental trade, but it did
not fundamentally alter patterns of production in
the global economy.
Example of China & India and non-competing
goods; suggests these trading partners
experienced two phenomena:
Direct effects
12
On the other hand, there is evidence of price
convergence within Europe, dating from 1500.
What is more, this convergence came to include
very low-value, high-bulk items, especially
foodstuffs.
By 1600, distinct regional economies had
formed along
Direct effects
13
Coefficients of Variation of Prices across Northern Europe
0.35
0.30
0.25
0.20
0.15
0.10
0.05
Wheat
Direct effects
Rye
1750
1700
1650
1600
1550
1500
0.00
Benchmark
14
Direct effects
15
This trade allowed for productivity gains in:
1.) agriculture (the “mother trade”)
2.) the processing of raw materials
3.) manufacturing
Significant in a world of purely
Direct effects
16
But expansion of markets alone is not enough to
explain the rise of modern economic growth.
Productivity gains from specialization are
limited and tend to be “one-off” while growth
has been continuous (and consequently, large).
Yet maybe trade—in both its variants—plays a
decisive but indirect role in economic growth.
Indirect effects
17
1.) “Trade” as exploitation.
Much of what was called trade, especially
outside of the European core, was not conducted
on purely voluntary grounds.
Plantations, latifundia, slavery, and serfdom...
“Primitive accumulation” at work?
Indirect effects
18
2.) “Trade” as an aid to technological change:
Flow of new items, new people, new ideas…
heightened technological creativity?
Galileo; gunpowder, paper, and the compass;
probably true, but a little fuzzy.
Embodied technological change? Ongoing gains
Indirect effects
19
3.) Trade as an aid to organizational change:
The expansion of trade allows for economies of
scale in production, but this could just as well
happen in the transaction sector.
Creation and evolution of banks, clearinghouses,
organized financial and commodity exchanges.
Indirect effects
20
3.) Trade as an aid to institutional change:
Profits from trade accrue to merchants;
represents a change in the balance of power
within a society.
Merchants can demand less predatory actions by
the rulers, gain more.
Indirect effects
21