Lecture 2: Pre-Modern Economics

Question 1

Why stagnation?

Answer 1

Malthusian trap

Question 2

Escape from the Malthusian Trap?

Answer 2

Smithian Growth and Technological Progress

Question 3

Modern Economic Growth happens via?

Answer 3

It happens via continuous Technical Progress and/or K accumulation

Question 4

What is the message of Thomas R. Malthus? (1766-1834)

Answer 4

In the long run, humankind is bound to starve

Question 5

Malthusian model (I):
Production technology
Draw the diminishing return scheme

Answer 5

• Humans need to produce food in order to
survive
• Food is produced using land and labour
• Land is in fixed supply
• The more labour you add to a given hectare, the more output you will get…
• …but at a decreasing rate!
• Remember: Diminishing returns to labour

Question 6

Malthusian Model (II):
Demographic Dynamics

Answer 6

• Fertility (f): A concept related to the intensity at which new people born.
𝐶𝑟𝑢𝑑𝑒 𝐵𝑖𝑟𝑡h 𝑅𝑎𝑡𝑒 𝐶𝐵𝑅 = 𝐴𝑛𝑛𝑢𝑎𝑙 𝑛𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑙𝑖𝑣𝑒 𝑏𝑖𝑟𝑡h𝑠 1000 𝑖𝑛h𝑎𝑏𝑖𝑡𝑎𝑛𝑡𝑠
• Mortality (m): a concept related to the intensity at which living people die.
𝐶𝑟𝑢𝑑𝑒 𝐷𝑒𝑎𝑡h 𝑅𝑎𝑡𝑒 𝐶𝐵𝑅 = 𝐴𝑛𝑛𝑢𝑎𝑙 𝑛𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑑𝑒𝑎𝑡h𝑠 1000 𝑖𝑛h𝑎𝑏𝑖𝑡𝑎𝑛𝑡𝑠
• Population dynamics is given by the sign of f-m
– If CBR>CDR, population grows
– If CBR=CDR, population remains constant
– If CBR

Question 7

Fertility and mortality are driven by income. How?

Answer 7

Two forces:
– “Preventive Checks” : every deliberate reduction of fertility. Chastity and celibate, abortions, infanticide, contraception, etc. As income falls, these forces increasingly reduce birth rates.
– “Positive Checks”: wars, plagues, famines, etc. All forces that actively kill people. As income falls, these forces increasingly deteriorates the living standard of population, increasing deaths rates.

Question 8

What are the two assumptions and implication about demographic dynamics?

Answer 8

Assumption 1: Fertility is an increasing function of income.

Assumption 2: Mortality is a decreasing function of income.

Implication: more affluent societies are able to have more children and to die less than poorer ones.

With only one of these assumptions happening, we have a Malthusian world.

Question 9

How we do explain growing

population

Answer 9

• Shifts in the income-population schedule

• Two (potentially related) forces:
• (I) One-time technological progress
• (II) Smithian growth

• An additional force may increase income: permanent reduction in fertility at all levels of income (but foregoing population growth)
– “European Marriage Pattern”

Question 10

What happens with one-time

technological progress?

Answer 10

• Allows feeding additional population…
• …but no escape from the “Trap”
• In the long run, more people means diminishing returns to labour and falling income.
• The only outcome of one-time technological progress is that more people (PN*) will be sustained by a given piece of land (always with incomes at subsistence).
• But TFP is a fully exogenous force…

Question 11

What is the “nature” of the Wealth of Nations?

Answer 11

Adam Smith’s answer: output per worker

Question 12

What are the “causes” of the Wealth of Nations?

Answer 12

• Adam Smith’s answer: division of labour (specialization and exchange, in modern parlance) – and the policies favouring it
• By specializing in separate tasks, economic units become more efficient in production
• The principle applies to families, firms and countries

Question 13

Smithian growth: how it works

Answer 13

• Gains from specialization (and subsequent trade) stem from:
– Economies of practice: by focusing on a given production process, workers gain “dexterity” in such a task.
– Learning by doing: By focusing on a given production process, it may be easier to figure out new ways to improve it (innovations).
– Reducing continuous changes of tasks saves time, resulting in economies of scale (but actually all 3 entail these).

• Exchange between producers will increase the quantities available to all

Question 14

Limits to Smithian growth

Answer 14

• Main problem: you need to sell all those pins!
• Specialization may make you more productive, but it is pointless without a market large enough allowing to sell the additional production
• Division of labour is constrained by market size (insufficient demand)
• It makes sense to specialise in some tasks only if there is enough aggregate demand
• Example: Isolated family in the mountains.
• Everybody needs working in agriculture.
• Moreover, the family needs some time devoted to weaving and producing clothes along with agricultural implements.
• No room for full-time employment in pin production, even if that would increase average output per worker in the family.
• If the family is joined by other few families to form a small village, it will make sense for one of them to become a full-time specialist producing metallic objects (a smith), which can be used for agriculture, as furniture, in house building, etc.
• If population grows to form a small town, there will be a market large enough for several smiths, each specializing in different objects (weapons, ploughs, etc). Eventually, pins.

Question 15

What constraints market size?

Answer 15

• 1) Aggregate Demand (the product of):
– Population: small isolated societies are also technologically backward and generally poor
– Incomes

• 2) Transaction costs:
– Technological: transport costs (animals and ships).
– Institutional: search costs, taxes, prohibitions, uncertainty, lack of law and order, etc.

• Money, roads, legal order, markets and fairs reduce transaction costs

Question 16

Smithian growth: implications?

Answer 16

• Specialisation allows achieving economies of
scale and higher output per worker

• Each unit producing large quantities of just one good (instead of all units producing a little of everything) becomes more productive

• But the scale of production is constrained by market size…
• …which therefore constrains as well specialization levels…
• …and output per worker with them.