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Economic History

• Real World Economies
• how and why have they changed over time?
• compiling a record of past events and circumstances
• Can this record be objectively true?
• Or can it  be only a subjective interpretation of what "may" have happened?

Obviously such a study must rely on a record of past events and circumstances.  

Compiling this record requires research to determine, as best we can, the relevant "facts". 

This means finding and studying documents and any other relevant evidence and creating a report of some kind describing some aspect of economic experience in the past. 

(You will get some hands-on experience with this by carrying out the research assignment which is part of this course.) 

Can such record  be interpreted as objective truth?  

Some historians have thought it could be -- that the work of historians could yield up truths like those discovered by scientists working in fields such as chemistry and biology. 

Today this belief in an "objective historical truth" is unfashionable.  

Contemporary thought is more influenced by the view that historical knowledge is "subjective" and depends on the point of view of the author...but the issue is far from dead.  
 

Economic Theory

• Systems of ideas explaining how economies work in the real world
• "Good" theory and "Bad" theory
• Accumulated validated truths explaining universal phenomena?
• Changing explanations of a changing world?

Economic theory explains the working of a simplified, abstract representation of the real world, and the conclusions drawn from this analysis are then applied to the real world (very carefully!). 

"Good" theory fairly consistently explains why real-world events happened the way they did in the past…and may even permit prediction of how they will happen in the future.  

"Bad" theory doesn't…and must be altered or abandoned when the explanation it offers proves inconsistent with the evidence.  

Just as there is a big question about history as "fact", so there is a similar problem with economic theory…can it be universally valid, or does it's validity change over time?  

We won't answer either question in this course…but you should keep both in mind as we work our way through it. 

Interaction of Theory and History

• modification of theory in response to historical experience
• the use of theory to devise policies which try to alter the course of historical experience
• subjectivist versus absolutist perspectives on economic theory

A potential synergy between economic theory and economic history.  

Theory can help us understand history and history can help to validate or suggest the need to modify or correct theory.  

BUT,  theory is often used to design policies, the purpose of which is to change the course of history. 

Example: the history of many economies since World War II has probably been affected (for better or worse) by the use of Keynesian demand management policies.  

If we then used Keynesian economic theory to study post-World War II history.... do you see what kind of a dilemma we may find ourselves in? 
 

 Long Term Economics

• poverty and affluence
• why are per capita incomes so different in different countries?
• why have per capita incomes risen over time in some countries much more than in others?
• Adam Smith 1723-90.

Or, more in keeping with the spirit of English "liberalism" which Smith helped found, "why are individuals in some countries rich and those living in other countries poor"?  

"Growth" and "Development"

• Economic growth
• increasing total output
• increasing output per capita
• Measured by total GDP
• the "productive capacity" of the economy
• Economic development
• structural change in production
• e.g. the shift from dependence on food and raw material production to manufacturing

Economic growth cant be measured by changes in the size of a country’s real GDP  
Economic development can be demonstrated  by a relative shift in production from, say, primary food and other raw material production to manufactured goods. 

The term "development economics" has come to be associated with the particular study of newly-developing economies, especially  those of Africa or south-east Asia in the post-World War II period 

The term "economic history" is now more usually used in connection with the study of longer-established economies, such as those of Western Europe and North America. 
  

Alternative Approaches

• Narrowly-focussed formal models of growth and development
• Classical, Keynesian, Neo-Classical
• Broader approaches
• Marxian, Dependency, Stages
• Specialized approaches
• surplus labour
• export-led

Instead, a number of different approaches have been used and more than one is in use today. (The main ones listed above are described briefly in the printed Guide.) 

NOTE: There is a branch of the discipline of economics known as "the history of economic thought" which studies how the theories developed to explain economic life have themselves changed over time. Do not make the common mistake of confusing the history of economic thought with economic history...the former deals with the way economic theory has changed, the latter with the way  real-world economies have changed. 

Take a moment to be sure you can distinguish between the two. Can you give an example of something we have discussed to this point which belongs to the history of economic thought? An example of something relating to economic history? 
 

Classical Theory

• Fixed supply of land
• Variable supply of labour (+ capital)
• Diminishing returns
• Limits to population
• Average income tends toward subsistence level
• The "dismal science"

The first modern theory of economic growth and development  is usually taken to be  the "classical" theory produced by followers of Adam Smith in the first decades of the 19th Century in Britain 

- David Ricardo 
- the Rev. Thomas Malthus 
- James Mill .  

Their basic model implied that:  

-expanding output required  the application of larger quantities of a variable input, labour, to a fixed input, land.  

- but, invoking the principle of diminishing returns, while total output would increase,  additions to this total would decrease, resulting in a falling average (per worker) output in relation to the numbers of workers employed.  

- in the long-term, average output must fall until it reached a subsistence level (just enough to keep the work force from declining due to starvation)  

-hence, economics came to be known as "the dismal science". 
 

Marxian Analysis

• the class struggle
• labour theory of value
• surplus value
• exploitation
• immiseration of the proletariat
• inevitable collapse of capitalism
• the dictatorship of the proletariat
• communism and the end of history

A powerful analysis showing how modern capitalist economies had developed through a process driven by the class struggle out of earlier systems of social organization and how it was itself doomed by its own internal contradictions to disintegrate, giving way to an even higher form of organization, communism, in which the forces driving history would be extinguished, bringing into being a new social order in which scarcity, classes, and the conflicts they engendered would be absent.  

Marxian analysis came to dominate thinking about economic growth and development in much of the world during the period from the successful Russian Revolution of 1917 until the end of the cold war in the 1980s. 

Keynesian Models

• rising income --  saving -- investment
• capital accumulation -- increased potential capacity output
• but higher levels of aggregate demand are needed to "validate" this increase in capacity
• "razor edge" models
• policy implications
• investment and maintaining full employment are the keys to growth

But it influenced post-World War II thinking about economic growth and development.  

Models based on Keynesian concepts emphasized the importance of rates of real capital formation (investment), saving, and the relationship between the growth of the capital stock and output (the "capital/output ratio").  

(If you have no background in the basic economic theory involved here you are welcome to consult a companion course which is also available online HERE.)

In the 1950s and 1960s, this way of looking at growth and development influenced  policies aimed at stimulating development in third-world countries through foreign investment and measures designed to stimulate domestic saving and real capital formation.  

These long-term Keynesian-influenced development strategies implied substantial government management of economic life -- which in turn assumed a degree of political stability and accountability often lacking in many third-world settings.  

 The Neoclassical Synthesis 

• Y = f(L, K, A)
• real capital formation + exogenous technical change permits increasing productivity offsetting diminishing returns

Solow-type growth models showed how output could increase as a consequence of increases in the factor inputs labour (L) and capital (K) and improvements in the productivity of these factors attributable to technological change.  

The effect of technological change was to offset the effect of diminishing returns, making possible increases in average incomes over time, as had happend in the industrialized countries of the world.

But one of the weakness of this approach was its failure to explain the sources of such technological change. 
 

Special Case Theories

• Arthur Lewis-type two sector models for "third world" countries with supplies of "surplus labour".
• Export-led growth in "countries of recent settlement"
• Canada, Australia, Argentina…
• the Canadian "staples approach"

But attempts to use this approach as a guide to policy were disappointing in their outcomes. 

Profits generated in new domestic ventures were often used for private advantage  instead of being applied to the expansion of domestic productive capacity.  

Another special case concerns the experience of new "countries of recent settlement" such as Canada, Australia in which the production and export of certain "staple" commodities may have played a key role in the development process.  

(This approach will be discussed as part of a later lecture on Canadian economic development when we look at the so-called "staples thesis"). 
 
 

Broadening the Analysis

• experience with development aid programs since World War II
• inappropriate technology
• ineffective investment
• labour market failures
• importance of social, cultural and political infrastructure
• rethinking "development"

Perhaps the economic analysis was too narrow,  neglecting the political, social and cultural factors involved in the processes of economic change.  

Hence, efforts to develop a broader, more inclusive approach to economic development which looks beyond its economic causes. 
  

A Broader View of "Development"

• UN Human Development Project
• A composite index
• per capita income
• longevity
• education

• opportunity for the realization of the individual’s potential?
• leisure and other "quality of life" considerations

Since the 1960s the desirability of growth as an end in itself has been questioned.  

There has also been an attempt to better understand what "development" means.  

Example: The United Nations’ Office of Human Development has designed a composite index with which to monitor  "human development" around the world.  

Three components: 
- a measure of how long people can expect to live 
- a measure of their educational attainment 
- a measure of their real per capita income. 

We’ll  look at these measures again at the end of the course when we try to assess the results of the Canadian experience with development to date.
 

NEXT

• Understanding extensions to the subject matter of economics
• the theory of public choice
• the methods of economic analysis applied to understanding "non-market" political processes
• the problem of market failure
• the problem of regulatory failure
• implications for the study of economic history

One of these extensions may be particularly significant for the way we approach the subject matter of this course -- using economic theory to study the role of government in economic life.