Economic History Flashcards

Flashcards for reviewing key concepts in Economic History.

Transition of Medieval Trade to Trade Capitalism

After the collapse of the Western Roman Empire, trade in Europe drastically reduced and remained stagnant, with notable exceptions in the trading Italian and northern European republics. Montesquieu proposed that the geography of these republics forced them to base their economy on trade rather than agriculture, enhancing specialization, particularly in manufacturing production.

New Trading Routes: Atlantic Trade and Industrial Revolution

Northern European republics and parliamentary monarchies replaced the Mediterranean and Silk Route trade with Atlantic trade, importing cheap commodities and exporting first-manufactured products with highly skilled labor. After the Industrial Revolution, this shifted to capital-intensive manufactured goods. The advantageous position of England and the Netherlands incentivized them to expand these trading routes to the East, to India, Asia, and the Pacific.

The Emergence of Trading Republics

Trading republics emerged in both Southern and Northern Europe due to geographical conditions where agriculture was insufficient for the support of the people, leading them to turn to trade. These republics, often situated on the coast or near rivers, favored commerce, and their laws encouraged the safety and prosperity of trade.

The Role of Trade in Economic Growth

Sustained trade, driven by favorable geographical conditions, reinforced the Smithian Growth Mechanism of specialization. Early economists suggested that maintaining a hegemonic trade position required a positive exchange balance, aligning with the mercantilist view of international trade and relations. This facilitated growth among the countries involved in trade, a process later described by David Ricardo as Comparative Advantage, though it also created dependency.

Technological Innovation, Inflation, and Expansion

Advancements in maritime technology enabled long-distance sea voyages, with Portugal and Spain expanding to Asia and the Americas. They established administrative empires that exploited indigenous populations by extracting commodities such as silver and gold. The massive influx of precious metals sparked a price revolution, decreasing interest rates and boosting capital investment.

Colonial Expansion of England and the Netherlands

England and the Netherlands expanded later, establishing colonies in Asia and North America. Due to the lack of a significant indigenous population in North America, England promoted institutions to encourage settlement and production efforts. Cromwell accelerated British colonial expansion and implemented the Navigation Acts, excluding the Netherlands from trading with English colonies.

Colonial Expansion and Companies

The colonial expansion of Northern Europe was driven by private investment and imperialism, leading to the establishment of private companies like the English East India Company (1600) and its Dutch counterpart. These companies maintained armed forces and military strength at their trading posts in foreign territories.

Hern´an Cort´es vs EIC

Hern´an Cort´es led a personal conquest for Spain, while the East India Company (EIC) was a commercial enterprise backed by private investors. Cort´es focused on territorial conquest with personal risk, while the EIC was based on trade with risk distributed among shareholders, enabling systematic growth and long-term stability in Asia and the Indian Ocean.

Reverse of Fortune: English vs Spain Colonies

By the 19th century, England's colonies, particularly in North America, experienced prosperity and industrialization, while Spanish America faced a decline in wealth. Acemoglu attributes this shift to the different institutional trajectories shaped by the tropical climate of Spanish America and the extractive institutions imposed on rich empires.

Evolution of Financial Institutions and Banking

Banks first emerged in Italy and later reborn in the trading republics of Venice and Florence as commercial banks, acting as intermediaries between borrowers and lenders. As trade expanded in northern Europe, banking evolved into investment banking, which became crucial in the industrialization of continental Europe.

Evolution of Banking in the Netherlands and Germany

The late medieval period focused on commercial banking, while the 18th and 19th centuries saw the rise of investment banking, driven by industrialization. Commercial banks supported local trade, while investment banks played a major role in financing industrial growth and mobilizing capital for large projects.

Asian Empires and Capitalism

During the medieval period, Song Dynasty China and other Asian empires such as the Ottomans, Russians, and Indian states, surpassed medieval Europe in economic prosperity. This disparity fueled European trade ambitions and later led to colonization through the East India Companies, causing once-prosperous Asian empires to transition from relative wealth to economic underdevelopment under colonial rule.

Case of Study: Desindustrialization of India

Before British rule, India was a major producer of textiles, exporting high-quality textiles to England. However, after the Industrial Revolution in England and the onset of colonial rule, India’s textile sector declined, with skilled workers shifting from production to cultivating cotton for export to England.

Comparative Advantage: The Fall of Asian Empires

International trade operates under the principle of comparative advantage. However, if there are significant structural differences in the productive systems or barriers to trade, this could result in an underdevelopment trajectory for countries that remain non-industrialized, raising questions about the role of colonial rule or protectionism in shaping global trade dynamics.

Second Industrial Revolution

The initial hardships of the First Industrial Revolution—particularly in terms of employment and living conditions for the working class—were mitigated by two key factors: political compensation mechanisms and the demographic transition. As a result, economic growth driven by continuous productivity gains and capital accumulation also contributed to an increase in workers’ human capital, enabling them to earn higher wages and work fewer hours.

Colonialism and the Global Trade System

In pursuit of higher profits and greater geopolitical influence, industrial powers launched a scramble for colonial control over less-developed regions. These regions came to occupy a dual role within the international trade system: suppliers of cheap raw materials and consumers of manufactured goods.

Second Industrialization (c. 1870–1914)

Centered in Western Europe, the United States, and Japan, this period saw rapid technological progress and deeper global economic integration. New energy sources: electricity, petroleum, and chemical processes replaced steam and coal as dominant forces.

Inclusive Institutions and the Role of Parliamentarism

Both parliamentarism and centralized state structures played a crucial role in the development and enforcement of inclusive political and economic institutions. The ruling elite recognized the hardships faced by the working class and was willing to approve compensatory measures.

End of the Malthusian Trap and the Great Escape

Pre-industrial societies were characterized by a Malthusian regime. This dynamic began to shift with the onset of the Industrial Revolution. Economist Angus Deaton famously described this transformation as the “Great Escape”—the process by which Western societies freed themselves from poverty, premature death, and preventable diseases.

Decline in Mortality during industrialization

While medical progress has undoubtedly played a crucial role in extending life expectancy, the initial and most significant improvements came from advances in public sanitation—particularly the treatment and supply of clean water.

Case of Study: John Snow

Physician John Snow challenged the Miasma theory during the 1854 cholera outbreak in Soho. By mapping the cases, Snow identified a cluster around a public water pump on Broad Street. He demonstrated that cholera was waterborne, not airborne.

Decline in Fertility

The decline in fertility during the demographic transition can be explained by several interconnected factors: Improved child survival, Higher cost of raising children, Female education and labor participation, Access to contraception, and Changing cultural and social norms.

Early-comers to Industrialization and Sectoral Specialization

Belgium: focused on coal, iron, and textiles. France: specialized in textiles, luxury goods, and metallurgy. Germany: strong in steel, chemicals, and electrical engineering. United States: led in railroads, oil, steel, and mass production. Japan: focused on textiles, shipbuilding, and later steel. Russia: railways, coal, and steel, but uneven development.

Limits of Comparative Advantage in the Long Run

While it is true that both countries may benefit from trade in the short term, long-term outcomes can be more complex. Continued specialization in low-value agrarian goods contributed to economic stagnation and underdevelopment.

Protectionism and the Cost of Industrialization

To safeguard their emerging industries, they implemented protectionist measures—most notably tariffs—as a defensive strategy against international competition. Consumers bore the cost of industrialization by paying higher prices for goods that would have been cheaper on the international market.

Colonial Constraints and the Case of China

Imperial China, with its long-standing and conservative traditions, was initially resistant to international trade and sought to restrict commerce with Western powers—particularly Britain. In response, Britain launched what became known as the Opium Wars, aiming to force China to open its markets.

Industrial Structural Changes

The First Industrial Revolution was driven primarily by the textile industry. The Second Industrial Revolution had a different protagonist: the automobile. In particular, the United States flourished under this new industrial paradigm.

Durable vs. Non-durable Goods

Durable goods: Long-lasting items (e.g., cars, appliances). Capital-intensive, longer production cycles. Sensitive to economic cycles. Innovation-driven, longer product lifespan. Non-durable goods: Quickly consumed items (e.g., food, clothing). Labor-intensive, simpler production. Stable demand, essential use. Focus on cost, branding, and distribution.

Financial Fragility in the Era of Durable Goods

The rise of durable goods production significantly expanded the role of the financial system, driven by the demands of both firms and households. This dependence on finance introduced structural vulnerabilities linked to the business cycle. These weaknesses became especially visible during the Great Depression.

Transformation of Factories in the Age of Durables

The production of durable goods, being more complex and energy-intensive, required significant changes in factory organization. American factories evolved toward a new model powered by electricity and driven by the logic of continuous production. Engineers began innovating ways to move components efficiently through each stage of production, giving rise to the assembly line.

Case of Study: Ford’s Assembly Line

Ford’s factories revolutionized industrial production by introducing the moving assembly line, first implemented at the Highland Park plant in 1913. This system dramatically increased efficiency and lowered costs.

Rise of Corporate Bureaucracy

As industrial production shifted toward more complex and capital-intensive sectors—especially in the realm of durable goods—firms themselves underwent a profound structural transformation. These firms became not just national economic players, but global industrial powers—capable of shaping markets, labor relations, and even government policy across borders.

Classical Model

The early 20th century was marked by the Second Industrial Revolution, led primarily by the United States. In this context, independent nations adopted a national plan of industrialization known as the “Classical Model,” which combined the creation of a strong domestic market, protectionist policies, and mass public education.

Economic transformation: The outbreak of a global conflict

The outbreak of a global conflict and an attrition war forced belligerent countries to transform their industrial production to manufacture all the necessary goods for the war. In particular, the United States emerged as the primary provider of financial resources

Post-Conflict Economic Growth and Crisis

By the end of the conflict, and fueled by the growth of international financial markets, economic growth was bolstered in both early and late industrializing nations. By the end of the 1920s, the accumulation of debt and misguided monetary policies culminated in a major crisis.

Napoleonic Reforms and the Transformation of Europe

At the beginning of the 19th century, the French Revolution and the subsequent Napoleonic Wars compelled continental European countries to reform their institutions, often towards more inclusive models

US Industrial Policies and List’s Model of Economic Development

After the onset of the First Industrial Revolution, the United States implemented a series of policies aimed at jump-starting industrial growth. The economist Friedrich List summarized the model as follows: Infant Industry Protection, National Context, Role of the State.

Unified Growth Theory

In his Unified Growth Theory, Oded Galor provides a comprehensive framework that explains the transition from centuries of economic stagnation to modern sustained growth. Three Phases of Economic Development: Malthusian Era, Demographic Transition, Modern Growth.

Sollow Model and Capital Acumullation

The Solow golden rule identifies the steady-state level of capital per worker that maximizes consumption per worker in the long run. There are three possible cases: 1 MPK higher than Depreciation, 2 MPK lower than Depreciation, 3 MPK equal than Depreciation.

Unification of Germany (Early 19th century)

After the Treaty of Vienna in the early 19th century, the constellation of 38 German states consolidated to form the Zollverein—a tariff union that eliminated tariffs between German states and established a unified tariff for third countries.

Russian Empire (Late 19th)

Recognizing this disadvantage, Russian leaders initiated reforms to modernize the state. Alexander II abolished serfdom, and the reformist state adopted a classical approach to spur industrial development. Initially, a national railroad system was built to connect Russian cities, creating a unified national market.

Japan (Meiji Restoration)

Among Asian nations, Japan stands out as the only country that successfully caught up with Western powers in the 20th century. This achievement was driven by the sweeping reforms initiated during the Meiji Restoration, when the emperor reasserted central authority over the feudal daimyo of the Tokugawa era.

WWI: The Political Aftermath

The Russian Revolution and the entry of the United States into the conflict signaled a turning point in the war. Germany found itself fighting alone against the major Allied powers, a situation that led to its surrender in 1918 and a weakened political position.

The Monetary System during the Golden Age of Capitalism

The twin shocks of the Great Depression and World War II finally shattered the Gold Standard for good. To replace gold’s strict discipline, they devised a dollar-based system in which the U.S. dollar would be pegged to gold at a fixed rate

Economy and politics After WWI Conflict

Demobilization and Industrial Shift: Military industries were repurposed to produce consumer goods and infrastructure, stimulating domestic demand. Structural Adjustments: Legal, regulatory, and educational reforms modernized economies.

The Monetary System in the 19th Century and WW1

Economists often frame the rise of formal monetary arrangements as a response to merchants’ need for greater trading efficiencyUnder this regime, each currency was legally convertible at a fixed rate into a specified weight of gold

What happened with the monetary system between the wars?

World War I profoundly weakened many pillars of the international economic order. Faced with soaring wartime expenditures virtually every belligerent nation abandoned gold convertibility in order to finance public investment by expanding the money supply.

Gold vs Silver

Silver has historically been far more widely used for everyday coinage than gold. Its relative abundance, ease of minting, and suitable value density made silver the workhorse of most monetary systems.

Arbitrage principle

Whenever two currencies circulate at an enforced legal ratio but differ in real worth—one “good” (undervalued) and one “bad” (overvalued)—rational actors hoard or export the good money and spend only the bad.

Rise of banks

From their origins in Roman Italy and the late Medieval city-states, banks began by safeguarding merchants’ specie. As deposits swelled, these early banks realized they could issue more notes than the metal they held, lending the surplus to finance trade and investment.

How the Gold Standard Worked

In its simplest form—without paper money, capital movements, or banks—the gold standard requires that all international payments be made in gold A country importing more than it exports (a trade deficit) must ship gold abroad to settle the difference

The Unique Role of a Global Central Bank under the Gold Standard

Within the international monetary system, a global central bank carries additional responsibilities beyond those of national central banks. The U.S. Federal Reserve—acting as the de facto global central bank—was expected to support other countries in maintaining their gold convertibility commitments.

Why was there Global Monetary Contraction?

While the role of the United States and the Federal Reserve was pivotal, the full scale of the Great Depression cannot be understood without recognizing the reality of a global monetary contraction: central banks adopted even stricter monetary policies than the U.S., deepening the global downturn.

Excessive interventions triggered the WWI global crisis

Governments in belligerent countries reallocated resources from consumer sectors to military production, resulting in shortages and significant inflationary pressures. the surge in government consumption also crowded out private investment.

Excessive debt

With the end of WWI and the rise of the United States as the dominant global economy, private debt was perceived as a sign of strong economic growth. However, the constraints of gold convertibility triggered a collapse in financial markets.

Crisis of Western Democracies

From an institutional perspective, while promoting growth and price stability, certain economic policies—such as gold convertibility—had significant social costs. The rise of corporatism in the form of Fascism in Germany and Italy posed a serious threat to Western democracies

WWII and the Golden Age of Economic Growth

Keynesianism emerged as a form of benign corporatism, helping to reassert liberal democracy following the defeat of fascism. Liberal and conservative parties, recognizing the dangers of mass radicalization, supported social reforms

The Great Depression

As we discussed in the session on the Gold Standard, the price-specie flow mechanism tends toward equilibrium through capital movements between trading countries. Also deflation directly impacts investment decisions, as many projects may become unprofitable due to rising real costs and declining expected revenues

Why the US FED failed

The U.S. Federal Reserve as Global Central Bank With the end of WWI and the rise of the United States as the dominant global economy, the newly established Federal Reserve (FED) began to assume the role of a global central bank.

Once power came in

Once in power, Hitler in Germany and Mussolini in Italy implemented a set of aggressive public policies aimed at addressing mass unemployment and economic stagnation. Central to their strategy was the stimulation of aggregate demand through large-scale public investment, particularly in military rearmament and infrastructure projects.

An Alternative : Keynes Theory

Keynes proposals represent a clear departure from the orthodoxies of the gold standard. They were designed to forge an explicit alliance between the bourgeoisie and the working class helping each other. He proposed: stimulating aggregate demand through monetary expansion, public spending, and job creation

The New Deal

As historian David M. Kennedy argues, the real legacy of the New Deal lies in its political transformation of the United States. It redefined the role of the federal government as a permanent actor in managing capitalism and mediating social conflict.

Shift toward welfare policies

By the end of World War II, economic orthodoxy was largely abandoned, giving way to the rise of the welfare state across industrial economies.As a result, inequality declined and industrial societies entered what is now referred to as the Golden Age of Capitalism

Postwar Boom

After World War II, and with the rise of democratic institutions and broad social consensus around redistribution. the state became an active participant in managing the economy. The economic orthodoxy of the gold standard was abandoned in favor of the Bretton Woods system

The failure of Keyness proposal

Keynesian welfare state, particularly its dependence on full employment, strong state intervention, and progressive taxation. In response to these challenges, governments initiate a shift toward neoliberal

Technological Challenges

Recent technological innovations—especially in automation and digitalization—have not delivered strong productivity gains, but have instead contributed to labor market polarization and the decline of the middle class in advanced economies.

Keyness Theory

Keynesian economics is grounded in the assumption that prices and wages are rigid in the short term. that the state should intervene during crises by absorbing the cost of idle labor through public spending and employment programs

The Global spread of Keyness Ideas:

there was growing consensus that state intervention and public expenditure were essential tools for managing demand-side crises.

Economic Hegemony

Following the defeat of Nazi Germany and the collapse of fascism as a viable alternative to liberal democracy, communism emerged as the principal ideological challenger to Western capitalism.

Oil Crisis

The governments responded with traditional Keynesian tools, such as expansionary fiscal and monetary policies, but these measures were increasingly anticipated by economic agents.

The neoliberal period.

advocating for reduced state intervention, tax cuts, and fiscal restraint during the administrations of Ronald Reagan. One of Friedman’s most influential assertions was that the only social responsibility of a company is to increase its profits by cutting costs (including in the labour market and the work conditions.