Lecture 2
NOW THAT YOU HAVE DEVELOPED
LET ME DEVELOP
Theory and practise
• Competition and free trade. Theory prescribes
that every partner gains.
• True from a static point of view
• Hamilton’s policies in the newly-born U.S.
• Germany to the fore: wheat from the Eastern
provinces (Prussia and Pomerania) in
exchange for British machines?
• Frederic List and protected development.
The importance of a unified market
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The Zollverein
Given a large domestic market, develop it!!
Tariffs to allow for a catching up process.
Protecting infant industries to allow
industrialisation to hatch and plant its roots.
• Protection to reach up to the technological
frontier.
Germany: a new paradigm
• The state does intervene.
• Industrialisation and effective demand
• From a world of peasantry to a world of
factories.
• Development means industry and industry
means technological progress.
• Whence the involved capabilities?
The second industrial revolution
• The development of the heavy industry:
machine making industries, iron and steel,
transport industries.
• The development of vocational schools,
technical schools, universities and
polytechnics.
• The link between the above and the factories.
• Science and technology take the front seat
The rise of the new industries
• Household names: Alfred Krupp, Johan Friedrich
Thyssen, Jacob Meyer in steel-making; Gottlieb
Daimler, Karol Benz in the early auto industry;
Baron Von Siemens in the early electrical industry
• The foundation of some of the well known firms:
Badische Anilin und Soda Fabrik (BASF);
Allgemeine Electricitats Gesellschaft (AEG);
Hanoversche Machinen Hanomag, (Man), etc.
• Germany is well placed to take advantage of the
XIX century great scientific break-through
The new sectors
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Chemistry.
Electricity
Automobiles
Precision machining
Innovations in the steel-making industry
The pride was in iron and steel artefacts: steel
structures as forms of art: be them useful or
not.
...useful: Paddington Street Station
...not useful: La Tour Eiffel
Policies and politics
• Policies and State intervention: from industry
to finance
• The so-called ‘omnibus’ model of banking
• Short-term liabilities and long-term assets:
more, shares of capital sometimes the
majority stock.
• The implicit guarantee offered by the State: it
stood ready to bail out banks should the
necessity arise.
A major figure: Bismark
The relevance...
• Easy long-term credit extended to politically
sensitive sectors.
• Industry-finance overlapping
• Favouring strategic sectors: the arms race.
• Germany on the technological frontier: sound
quality, high specialisation, highly competitive.
• Withstanding the crisis
• Is credit important in the process of
development?
Competitiveness and productivity
• Competitiveness depends on productivity
• But more important than its level, it is its
growth rate that matters.
• The question: why is a country productive?
• It depends on what and how it produces and
how ‘costly’.
• The latter point is can be summed up by the
ratio of the average wage rate over labour
productivity.
Is the level of the wage rate
important?
• It is sometimes held that development
requires a low level of the wage rate.
• Labour rich countries should concentrate in
producing labour intensive products paying a
low wage rate. Right?
• Historical experience tells otherwise!!
• German development was hallmarked by
sectors that can be defined as capital intensive
• Wages were, comparatively speaking, low.
Other experiences
• The U.S. experience was characterised by high
protection and, initially, by traditional
products.
• Wages, on the contrary, were comparatively
higher than in Europe. It was a labour scarce
country.
• The key is productivity and its growth. Wages
can be high but if productivity is high labour
costs can be low.
Some key points
• Germany’s was a fast catching up process
• Initially, it was a matter of transfer of
technology
• Rapid growth of productivity
• Static comparative advantage vs. Dynamic
comparative advantage
• Protection, high tariffs.
• Tariff protection to be relaxed if trade is
amongst countries with the same degree of
development
A quick glance at the U.S. experience
• It was clear from the outset that the role of the
colonies was to supply raw materials.
• From the British point of view American
colonies were to be predominantly agricultural
and support British industrialisation.
• Independence meant protection through high
tariffs of the small industries, mainly textiles
and other current implements, mainly in the
New England area.
....continued
• Effective demand was generated by the
increase in the size of the market
• A decentralised process with little State
intervention: the westward shifting frontier.
• High wages and high productivity: scale
economies more than economies of scope.
• After the Civil War, protection was enhanced
to support the growth of the new industries.
Towards the end of the century
• New protagonists appeared on the international
scene
• Not just Germany but also France
• The worry that the fast pace of industrialisation,
iron and steel, would run short of raw materials.
• The thirst and quest for an Empire: the great
African scramble. Grabbing land, almost for the
sake of it.
• The first economic crisis: the 1873-1890 cycle
The rise of a new theoretical
economic mainstream
•From a ‘Production Theory’ to an
‘Exchange Theory’.
•Value is sought in trading not in
production
• The labour theory of value is abandoned
• The rise of marginalism.
• The production function.
• The concept of equilibrium.
The new century
• By 1914, the U. S. is the first industrial country
in the world.
• A shaky power balance
• A globalised financial world led by Great
Britain.
• Great Britain finds a new way to colonise the
world: British financial capital in Latin America