The Science of Everything Podcast - Episode 104: The History of the World Economy and Growth

Episode Date: April 13, 2020

In the second part of our series on economic growth and development, I provide a brief history of the world economy, beginning with the key features of premodern economies and the Malthusian trap. I then outline critical developments and points of debate in subsequent economic history, including the Great Divergence, the First and Second Industrial Revolutions, the Great Depression and era of central planning, the Bretton Woods era and the gold standard, and the modern period of neoliberalism and globalisation. Recommended pre-listening is Episode 103: Economic Growth and Development Part I. If you enjoyed the podcast please consider supporting the show by making a paypal donation or becoming a patreon supporter. https://www.patreon.com/jamesfodor https://www.paypal.me/ScienceofEverything  

you're listening to The Science of Everything podcast, episode 104, Economic Growth and Development Part 2, the history of the world economy. So in this episode, we're continuing on from obviously the previous episode, which was an introduction to poverty and growth, and here I'm going to deliver a concise history of the world economy. So this is a bit more of a history lesson than I think we've ever had on the Science of Everything before, but it's necessary to really understand a lot of the things that I'm going to subsequently talk about,

to have the kind of background to what's happened. So this is kind of focusing on the when and the where aspect of economic growth, looking at which places have grown and which haven't. It's useful to bear in mind the categorization of high, middle, and low-income countries that I mentioned in the previous episode when thinking about this, because this is sort of an attempt to explain when this divergence happened and where it happened and not exactly why, but maybe hinting at some of the reasons why, and then we'll talk about more of the why later.

want to emphasize that in this series of episodes, I'm primarily interested in explaining differences in contemporary growth rates, particularly since the Second World War. I'm less interested in the historical questions as to say why the Industrial Revolution occurred in Britain, for example. I will talk about that a bit in this episode, but it's a little bit different from trying to address the questions to differences in contemporary growth rates as opposed to growth rates 200 years ago, which you need to sort of think about some different questions in. So that being said, I do think it's important to have this background, and so in this episode I'm going to talk about pre-modern economies and how they differed from modern economies in many important ways.

I'm then going to talk about the Great Divergence, first and second industrial revolutions, the Great Depression and the period of central planning, the Breton Woods era from the end of World War II to the 70s, and then the modern period of neoliberalism and globalization. Recommended pre-listing is previous episode 101, Economic Growth and Development Part 1, an introduction to poverty and growth. Important to listen to that because I will be linking directly to it. So let's jump straight in and start talking about pre-modern economies. One of the greatest defining features of pre-modern economies

is that they were dominated by agriculture. The value of a economy in basically all pre-modern economies was mostly determined by how much arable land there was and how intensively it was worked, how productive the land was. So throughout most of human history, Egypt has been one of the richest parts of the world. I wouldn't necessarily say richest country, because often it's not been independent, but richest regions in the world because of its extremely productive Nile Delta region. I think that's only ceased to be true really in the mid-19th century.

It began to really be overtaken by parts of Europe. Maybe it was a little earlier than that. But this has been a theme throughout really all of history. Most rulers and other people treated the land as the prime source of value, and actually merchants were often not seen as providing any value at all, which misunderstood the gains from trade, but that wasn't understood until much later on. Also, there was very little of a market in agricultural produce,

so most trade that did occur was for luxury goods. So if you hear about the Silk Road, for example, linking China and the Middle Eastern Europe, the trade was in silks and much later sort of porcelain and other things. Spices are also a common thing that's traded, things that are fairly light and that are used for luxuries, basically for two reasons. First, transportation was very expensive in the pre-modern world, and therefore the only people who could afford to pay for the high costs of transportation were rich people. And the second reason is

kind of related to the first, but the only things you could afford to buy, for most, in most cases, were things that were fairly valuable compared to their weight. So gold was also traded long distances, I mean, it's heavy, but it's also very valuable. There were, in some cases, long-distance trade in things like wheat or wood or other bulk goods. A classic example of this is the purchase of grain and transportation from Egypt to Rome and other major cities throughout the Mediterranean and the Roman Empire. But generally, most people in the ancient world worked in agriculture, and those who did live in cities, who were relatively few, were divided into two categories. there were your vagrants, beggars, robbers, and criminals. And then there were people who actually worked for a living,

so servants, soldiers, and diggers, runners, sweepers, shopkeepers, and other unskilled labors. Workers who sold their labor to a productive enterprise, what we would regard as a business, were actually pretty rare, because there were very few businesses or productive enterprises that were great in size than a single household. So very often trade and industry was conducted on a household level.

There were exceptions to this, but they were quite few and far between, and most of the exceptions were run by basically the government in places like China or Rome or later on in Europe. It's also important to understand that selling your labour for money was considered to be extremely demeaning, so in some sense it was actually considered, well, it's hard to say how much this applied in practice, but it was in some sense at least more noble, in many cases to be a peasant working the land, although that was a demeaning position, but it's kind of even more demeaning to have to sell your labour,

to someone else. I think that this was because land was seen as the source of basically all wealth, and therefore having land granted you wealth and status. And the only people who had to sell the labour are people who didn't have land either to get other people to work or even to work themselves, and therefore they were seen as sort of the lowest in society. Most countries saw merchants and traders as very low status. This was especially true in China, and through. And through, a lot of medieval Europe. Less true in the Arab world, although part of the reason for that is Muhammad was a trader himself. But still, that stigma has been pretty widespread in a lot of world areas. It was thought that they didn't add any value, as I said, they just moved goods from one

place for another. And there are still people today who think that, but that is a misconception. And look at the episode on the gains from trade that I did, if you don't understand why that's the case. So many people, as I said, in pre-industrial, pre-modernly economies worked on the land. Land was not treated as a marketable good. It was treated as something that was owned by you or your family, and that's not something you could generally make a personal decision about, especially for peasants. Often they didn't even own their own land. They worked as perhaps a sharecropper, which means that they get some of the crop and the Lord get some of the crop, or they worked on their Lord's land and they had to pay a tax, sometimes in kind, sometimes in money. The elite saw their land as a source of noble status and political power, and so they didn't usually sell it as a kind of money,

thing. I mean, they did sometimes have to sell their land, but it wasn't treated as like a stock in the stock market that you would just sort of trade to make money the way we do today. It wasn't seen that way. So apart from agriculture, there was also very limited government, and this is also something that's hard for us to understand. Pre-industrial states were very weak, in most cases. There are some exceptions. But one of the reasons for this was just the difficulty in collecting taxation revenues. They were chronically short of skilled personnel, because so few people were educated, and resources were also needed for supplying the military, which is mostly what pre-industrial states focused on, defending their borders, and keeping control and keeping the

governors in check through the military. So after paying those expenses, often very little was left for any other sort of institutional setup, and the expertise was often lacking for that as well. They also just generally lacked the resources for regular population accounts and land surveys that were needed to update tax assessments, and so it was even more difficult to levy property. taxes. So pre-industrial political systems often had rulers that had arbitrary powers, so they could, in theory, do whatever they wanted, but in practice, they were often very limited in what they could do. Again, there are acceptance to this. Some rulers managed to acquire a lot more power than others, but it was often based on their own personal intelligence, capabilities, personality, and personal

relationships, and not something that was institutionalized very well. I think probably the Roman Empire and many of the Chinese dynasties institutionalized governance much more to a much higher extent than most other pre-industrial states until the early modern period in Europe, when modern state systems began to develop. But even those were very small and limited in power compared to any modern state anyway, even the most kind of libertarian paradise, has way more state intervention and control than any country was, any state was able to do in the pre-modern period, just because they lacked the ability. They lacked the technology, they liked the education, they lack the resources. to exert power over wide areas and over wide groups of people. So often many elites use private protection networks because the state wasn't able to do this systematically or in a regular way. They hoarded gold, tried to accumulate privileges and other things

before things went bad. There was a war or the rural favor ran out because things weren't regular and institutional. They were based on just personal relationships and favors and ad hoc decrees and things like this. So obviously this doesn't make for a very good investment environment, and that's one of the reasons it's thought why pre-industrial economies generally didn't grow very much, if at all. Pre-industrial governments sort of sat like a capstan on top of society. They were generally exploitative,

so we like to think of modern governments as contributing value and providing services and protection and law and order and other things. Pre-industrial governments did this to some extent. Some, I mean, it varied a fair bit. Again, governments like in Rome and China, I think did this to a much greater extent than many other states, which were basically just essentially protection rackets, which is basically that we come in with our military, we don't destroy you, we take the tributes that you pay, and then maybe there's a governor here

who sends out a few decrees every now and then and make sure the tribute keeps coming in, but we basically don't really do anything else, and you just keep doing your own stuff. You know, more powerful states would build some roads, and then they might try to introduce a legal code and other things, but it varied a lot depending on how much power the particular government had. So at the low end would be something,

like many of the nomadic confederations, like the Turks, for example, when they came in and swept through the Middle East prior to the Crusades. That was a very weak state. The Persians would be sort of in between, and most of his scat would be like Romans and Chinese, as I mentioned. So it's important to understand the variation, but also that none of them were really very productive.

Mostly it was about extracting resources that the elites used to fund their lifestyles, and also maintaining military power and preventing either external threats or internal threats. from toppling them. So pre-industrial states were much better at stopping things from happening than allowing or facilitating new things to happen. And so we're generally very conservative in this sense, not a lot of innovation in the pre-industrial world. Transportation costs were extremely high, which I've already mentioned, especially over land. Anything that went over land traveled slowly and expensively. As an example, it was more expensive in the third century Rome,

which was a time of, well, at least earlier in the third century, a time of peace and prosperity, on it got a bit hairier, but it was more expensive to transport grain 50 miles overland than to ship the same amount of grain 1,250 miles from Alexandria to roam by sea, because water's easier to move through than pushing a cart with a very low efficiency axle along a dirt road. Well, actually, the Romans had quite good roads compared to most places, but even then it was still extremely expensive. As a result, most people were very poor, they lived in very local worlds, they didn't hear that much about the outside world, and we're not much affected by national governments or empires, except for during wartime or when the taxman came,

or sometimes if there were decrees that might affect them. The level of urbanization and specialization in the economy was very limited. It was more sophisticated in some societies than others. So in some societies, virtually everyone, but maybe 2% of the population at the very top, were peasants. I think this would have described, say, medieval Russia to a reasonably good extent, although you did have the clergy there. More commonly, there might have been about 10% of people who didn't work in agriculture. So these would be people who lived in the towns and the cities, including the day laborers,

but also a small group of merchants and some other people who might be educated. So in medieval Europe, it was thought that about 15% of the population were working outside of agriculture, rising to about 20% by 1,500, the end of the Middle Ages. That's quite high by historical standards, but still you've got 85% to 80% of the population working basically as peasant-level. laborers living in what's called subsistence agriculture, which means you just produce enough food to feed yourself and your family with a little bit of an excess, part of which is paid in tax to your landlord, and then part of it you might sell at local markets to earn a bit of money to buy things, to buy basic utensils or clothing. You'd make a lot of your own clothing, but you

might buy some or rare luxuries if times were good. So you could buy some things, generally, from travelling markets that went around from village to village. Generally, the things you could buy were only things that were relatively cheap to transport. And there wasn't any concept of mass-produced consumer goods that we have today. Obviously, they didn't have plastic, but even things made of wood or metal, everything was handmade. There was nothing was mass-produced or very little. Some exceptions for some states that had better organized militaries, like the Roman Empire. But for the most part, everything was handmade on a local small scale, which meant that there was very little ability to have specialisation and advantages of economies of scale and use of machinery,

on because you need expertise and you need capacity for that. And this just wasn't possible. There was no real concept of labor being a commodity that you could buy and sell. And so no true labor markets, which also makes it very hard to run large-scale enterprises or factories or anything like that. Because if you don't have enough people in your family, well, you're limited by the number of people in your family. And the lack of a true labor market also limits the capability to expand there.

So it's a sort of a vicious circle because there's no labour market, you can't expand your enterprise, and because people can't expand their enterprises, goods are very expensive, and because goods are very expensive, people are still very poor. Because people are very poor, most people need to stay on the land, and you don't have the ability to develop education and another means of oversight and organizational capabilities that would be necessary to have a proper functioning labor market, and so it's sort of a self-pertuating cycle. surplus agricultural production was mostly passed into the hands of the ruling elite.

There was a very little investment by the ruling elite in most cases. It was pretty much all spent on consumption, so building lavish palaces or fortresses in some cases, depending on the level of security, and expensive food, clothing, or someone travels and go on hunts or visit relatives in different places. The idea of investment was pretty much absent because the only thing you could really invest into was land, And as I mentioned, land wasn't really considered to be a commodity that you'd buy and sell. Again, people did buy and sell land, but in terms of the amounts and the way it was done, it was often very difficult, particularly because most land had all these different obligations associated with it,

especially in medieval world of modern Europe, but it was the case in many other places in the world as well that have certain tax obligations, and you'd have particular rights that are given town or village had with respect to this particular river that, you know, river that they have the mill here, and they're able to use power generated by that, or, you know, someone, else has the rights to collect wood from this forest and so on. So all of these were sort of wound up with land rights, and it was very difficult to have these sorts of simple transactions of land. Large cities were rare, so there were some, mostly the capitals of large empires. So Huangzhou in China in the 13th century was the only one that got much above one million, might have got up

to two million. And then of course Rome, Constantinople, Baghdad, Peking, capitals of the big world empires got above a million, and most other cities, maybe a few hundred thousand in some of the smaller states are empires, but below those, it was very rare for cities to get more than, you know, 10,000. Rome probably achieved one of the higher levels of urbanization outside of Roman Constantinople. There were quite a few regional centers that had, I think a couple of them had hundreds of thousands, like Alexandria, for example, in Antioch, others had tens of thousands, which was quite a lot for the ancient world. But in the ancient world, cities, weren't really a side of production that we think of them today and urbanization, that they

were really parasitic on the surrounding countryside. They didn't really produce anything that was a value to the peasants. Mostly the people who there were working for the government, well, they either weren't working at all, or they worked for what we would call the government, or like the elites in some direct or indirect way, providing goods and services that are essentially just a value to them. Or just general activity like selling food or something like that that is of use to the city itself, but they didn't really export anything to the countryside. So there wasn't this positive interaction between the cities producing things that are valued to the countryside and then helping the countryside to get richer, which then

can sell more food to the cities and improve living stands there. This didn't really exist in the pre-modern world. So when I talk about the pre-modern world, I'm talking basically about the world prior to 1800, which is approximately when the Industrial Revolution got going in Britain. Some of these aspects of pre-modern economies began to subside in part, of Europe in the early modern period. The early modern period being from approximately 1,500-ish to about 1,800-ish. And I'll talk more about that in detail just in a moment. But before we get into the history, I need to introduce this idea called the Malthusian trap, because it's an absolutely

central concept in kind of world economic history. So it's named after Thomas Malfus, who was an 18th century British economist, and he suggested that, although you could have technological advances that could increase society's supply of food, you couldn't sustainably increase the standard of living, because basically what would happen, according to his theory, is that if you've got more food and more abundant resources, this would enable people to have larger families, more children to survive into adulthood,

which would increase the population, which would eventually lead to diminishing returns, so each additional labour brings less of an additional output on the farm or wherever else, and therefore leading to a reduction in the per capita supply of resources back down to its original level. So his idea was that whenever you have a technological development, you get a short-term boost in per capita income, but that leads to population growth, which pushes the per capita income back down to the existing level.

And so in the long run, living standards could never go up, at least for the majority of the population. Now, this does seem to basically bear out what happened prior to at least the early modern period. So there's been a lot of ways of looking at this, looking at aggregate data like per capita incomes, or looking at lifespans and nutrition between different countries in different periods. And basically, these types of data all seem to support the basic idea of Malthus' model that, at times when areas were richer, they'd lower populations. And at times when their population increase, their per capita incomes went down. Two striking examples of this are in Europe after the Black Death in the mid-14th century. Populations went way down, per capita incomes went way up.

And you see substantial improvements in the well-being of peasants and laborers in many. European countries. A striking example in the opposite direction is of China in the 18th century. At the start of the 18th century, China was one of the richest countries in the world. It was probably a little bit poorer than the UK and some of the most advanced parts of Europe, but it wasn't too far behind. We'll talk more about the dispute in a bit. But over the course of the 18th century, its population increased by something like three times, a massive increase in population. And there was no corresponding, even a remotely corresponding increase in technological capability. There was adoption of improved crops from the new world, which helped to fuel that

population increased by allowing more productive agriculture. But in general, there was not nearly a corresponding improvement in the levels of productivity elsewhere. And so the per capita income of the country just went way down over the course of the 18th century, and basically never recovered until really after the Chinese revolution, like 150 years later. Neo-Malthusian is a term that's used to describe those who think that we might see this again, So the human overpopulation might lead to resource depletion and environmental degradation as such that we have a collapse of living standards and a return to pre-modern levels of living standards or productivity. I won't talk too much more about that. I don't consider that to be very likely.

The sort of mainstream view in economics is that the Malthusian scenario was broken as a result of the Industrial Revolution, if not a little before then, but certainly by the Industrial Revolution, when we had this virtuous cycle of people moving out of agriculture into the cities and contributing to productivity growth that enabled the entire economy to become more and more efficient at a sufficiently rapid rate to offset the diminishing returns from population growth. There's another thing that then happens

which Malthus wouldn't really have known about, but once countries reach a certain level of development, the birth rates begins to decline, and so you actually don't just get ever-increasing population growth. And that's called the demographic transition. I don't want to get into the details of that because it's a little bit of a sidetrack, but I just wanted to mention the idea of a Malthusian trap.

So the Malthusian trap is used to explain why it took so long for anywhere in the world to industrialize and really escape from the pre-modern situation of poverty and low efficiency. Okay, and so this process of escaping from that is called The Great Divergence. It's taken from Kenneth Pomerance's 2000 book of the same title. He's emphasizing the process by which the West overcame pre-modern growth constraints like Malthusian trap and moved into the 19th century as the most powerful and wealthy region of the world. Now we don't know very much about the economic performance of premonent societies. The data we have is scanty.

It wasn't something that people at the time thought was especially important, and things that they thought were important, and not exactly the things that we think are important, like tracking urban wages over time, for example. But we do have data that survived, and people have been able to put together estimates of GDP per capita of different regions of the world going back many centuries. So they must be used with a few grains of salt,

because they are estimates based on scanty evidence, but pre-modern economies were quite simple compared to many modern economies. And so if you can make decent estimates of agriculture, of, say, clothing manufacturer, of metallurgy, of transportation and trade, and a few other key things, you've kind of got most of the economy there. And so at least there's not a lot of complexity to it in that sense. Now, if we look at this information, we can look at the trajectory of the Great Divertend. So when did Europe kind of get ahead of China?

We know clearly that when reliable data begins to come in around the late 19th century, that Europe was far ahead of China. We know that there was a very clear divergence by that point, and pretty much everyone agrees that it starts at least with the Industrial Revolution in the UK, which, you know, say circa 1800 as an approximate date. But there's a difference in opinion between some people, which is sometimes called the California School. This includes Kenneth Pomerant, so I just mentioned,

and another author called Gregory Clark. they think that there was very little, if any, difference in the level of economic development, so think GDP per capita, between Western Europe and China until the late 18th century, so just before the lead-ups to the Industrial Revolution. Now, the alternative school, mostly associated with the work of Angus Madison, who I'm a big fan of, by the way, holds that there was a consistent and steady, if slow economic growth in Europe from the high Middle Ages up through the early mon period and with Europe overtaking China around the 15th century.

So the two schools of full, basically one says there was no growth prior to about 1800, and then Europe just shot ahead of China. That's the California school. The other school says, no, there was slow and steady growth in Europe, and they overtook China about 1,500, approximately, let's say, about 300 years before the California school says that they did. So this is a very big difference, actually. It might seem like a minor point, but it's very important because it affects how you think

about the process of economic development and how, growth occurs and how it occurs or doesn't occur in different countries over time. If you think there was no growth in the pre-industrial revolution period, then it becomes even more puzzling as to how all of a sudden growth just started in the UK in the late 18th century. I mean, what change that went from no growth to all of a sudden fairly rapid growth? On the other hand, if you think that there was slow steady growth before that, it becomes more a question of acceleration than sort of just taking off from nothing. Now, my view is that I'm pretty heavily in the Madison camp.

That is, I think that there was slow and steady growth in Europe, really from about the year 1,000 or slightly there afterwards, right through till the late 18th century just before the Industrial Revolution, which then growth did accelerate. So there's still something to explain there, but it wasn't a case in which there was no growth. That's what happened in sort of Western Europe. By contrast, in China, what appears to have happened

is that although there was relatively small fluctuations up and down, as dynasties rose and fell, and things went bad when the Mongols invaded, for example, but by and large it was fairly static. At a relatively high level for pre-industrial economies, but there was no real overall growth between about 1,000 and, say, 1700. Until, as I mentioned before, there was a catastrophic collapse of per capita GDP associated with massive population growth in the 18th century. How is it there this big difference between schools of thought,

and why is it that I side with the Madison view rather than the California view? The big reason is because I think the California view takes a too narrow approach. So they rely mostly on real wage data, which is based on what laborers earned in key cities in Europe compared to key cities in China. Now, the real wage data supports their view more, that is, that there was really no growth over the period until about 1800. But I don't think that this is the best measure because very few people in pre-modern economies, as I mentioned before, were laborers. like that. Most people were still peasants, even in the richer areas where the proportion of people on the land was lower, it was still a large majority. And therefore, what was happening to agriculture was a lot more important than what was happening to labourers. Even many people

who were outside agriculture weren't labourers either. They were part of the elite, or they had some sort of government role, or they were traded. So just focusing on, I think, real wages is a too narrow approach, whereas GDP per capita, which is more what Madison uses and what I use, is a more holistic view. The data quality is not as good, because it sort of, of uses real wages but then also incorporates other measures of agricultural productivity and other things as well, which we don't know as accurately. So you can make the argument that it's a bit sketchier, but overall, I still think that it's a much better overall measure. There are some other big problems with saying that Europe was at the same level as China until the late 18th century,

though, because we have measures of literacy, urbanisation, and the rate of technological developments and discoveries in Europe compared to China, at least for the few centuries before 1800, so sort of 16th, 17th, 18th centuries. And all of these indicate that Europe was well ahead in in terms of urbanisation, in terms of literacy rates. Those were high in Europe and increasing, and substantially ahead of China. There was also an elimination of plagues and famine in early modern Europe. In most countries, the last big plagues and famines that they had were in the 17th century, early 18th century in some cases. This didn't happen in China. There were massive plagues and famines around, particularly the 19th century. So there's a whole host of these other things that are not

consistent with the view that they were at roughly the same level. to me it's just quite implausible to say on the basis of all of these other measurements that they were at the same level, especially when you look at them the real GDP data on top of that. However, there's a final piece of evidence, which to me is actually the single most compelling, and is that what Gregory Clark in particular does when he makes his argument that, look, there was like no changes in real wages for hundreds of years in the UK he focuses on. He wants to say there was very little change in real wages until, you know, the late 18th century, when the Industrial Revolution gets going.

But what he does is he uses data that starts around the year 1300, or just slightly before then. I think it's 1280, the one that I saw. different data sets start at slightly different periods. But the exact year is not important. What's important is that what you see in these data is that basically there's a big increase near the start and then it's high for a time and then it declines quite a bit and then sort of flattens out and then increases a little bit and then sort of takes off and increases very rapidly, which is the Industrial Revolution.

So he wants to say that because there was sort of some up and down in between, that basically you can draw a straight line across the first part of the graph like, horizontal line. My problem with that is that it is historically anachronistic to start an analysis of an economic development at around the year 1300, because what happened around that time is in the early decades of the 14th century, there was a very large famine that affected, I don't know exactly how much of Europe, but definitely it affected England and France, and I think it affected most of Europe, which resulted in very large numbers of deaths. And then only a couple of decades after that, there was the Black Death, which killed at least a third of the population in most

of Europe, some places even more. And population levels in most areas of Europe didn't recover to the levels that they had experienced around 1,300 until roughly 1,50 or 1,600. So that is about 250 to 300 years later. Now, we know from Malthus that we expect in pre-modern economies that when the population is high, GDP per capita is going to be low, but then if something kills off a a lot of the population, like war or famine, then because basically what you do is you give up the least productive land, then the land that's left is more productive, and so there's more to go around for everyone. And so you have higher levels of per capita income. So what he's doing essentially is when he shows this graph and there's a big increase near the start, that's due to

the famine and then the black death. And you don't really get down to the similar population levels at the very start until about 300 years afterwards. And so I think that it's really misleading to only look at this period here when we know that there's a big factor that's skewing the data. What we really want to know is what's happening underlying that, the technological and institutional developments that are causing underlying economic change. On top of that, we're going to have this big effect due to the black death and famine, but we're kind of more interested in what's happening underneath that. And so what I think is more useful is to try to extend the data set backwards

to around the year 1000, or roughly the start of what's called the High Middle Ages, when sort of modern nation states like Britain, France, and Germany kind of took shape loosely, or the Holy Roman Empire in Germany. But I don't want to get into that. But the point is that this is a convenient cut-off point where there's important changes in state stability and so on. And although we have very poor data for these years, but the limited data we do have does seem to indicate that Europe was much poorer in the year 1,000 than it was in the year, roughly 1,300. So there was substantially economic growth over this period of the high Middle Ages, 1,000 to 1,300. And this is also supported by sort of qualitative narrative evidence, which seems to indicate a lot of development in cities, cathedrals, state capacity.

and actually a fair bit of technological development during this medieval period. Not in every country in Western Europe, but particularly in Britain, France, parts of Germany, and Spain as well. And so overall, if you draw a line between the year 1000 and the year 1800, in terms of the GDP per capita in Western Europe, what you see is basically a sort of a straight line of very slow but regular growth. Now, there is this sort of upward peak

which corresponds to the centuries around the Black Death when the population went down. And so it looks like there's sort of a peak and then a dip. But really what's happening is that there's this artificial bump due to basically a large portion of the population dying, and then over the coming centuries returns to kind of more of a baseline level. But at least to my eye, it's quite clear that there's sort of an underlying trend there of very slow but regular growth, onto which you have superimposed the effects of the plague. So anyway, the point that I'm making with that, hopefully it was kind of clear,

is that if you just look at the start of this period, it looks at the start of this period, looks like it kind of just goes up and down and doesn't really go anywhere. But you shouldn't start at the point where we know that there's this big deviation due to the plague. You should start it at a point that's more reasonable comparison. And when you do, I think you do clearly see that there was slow and steady growth over this period. So that combined with the other evidence that I mentioned, using GDP instead of her wages and then considering urbanization literacy and so forth, I think it's very clear that Europe was growing slowly over this period and did exceed China sometime around the year, approximately 1,500.

So this might seem like a bit of OTO's history, but I do think it is important to understand the trajectory of this. So in the Middle Ages, Europe was fairly poor compared to much of the rest of the world, but it began growing, and for whatever reason, I won't speculate on the exact reasons, it's not really well understood, were able to continue very slow by modern standards,

but steady growth until the late 18th century when the Industrial Revolution developed in Britain. And the level of growth we're talking about is very slow. So we're looking at a growth from maybe about $750, 2011 US per capita, which is extremely poor. That's about as poor as the poorest countries are today in the world. Up to maybe about 1,200 GDP per capita, which is about as poor as the slightly less poor countries in the world today. But for pre-modern countries, that's actually quite a big difference. That's the difference between a poor country and a wealthy country.

So that might not sound like a big difference, but I think it matters in terms of understanding the dynamics. that you don't just go from being like the poorest of the poor to an industrial revolution, but it seems like there was a slow and steady progress of gradual development, becoming more commercialized and developed and so on. And we'll now turn our attention to this, which is the first industrial revolution. So this was a period of transition, which occurred in Britain, basically England and parts of Scotland, in which there was a development of manufacturing processes. It began in Europe and then shifted to the United States and then spread elsewhere throughout the world,

exactly when it began is a bit controversial. 1760 is a common date. 1780 is also a common date. More recent work tends to use either 1800 or 1815 or 1820 as years, not as exactly start years, but when like the takeoff is really visible, because this was just 1815 or 1820s just after the Napoleonic Wars. Regardless of exactly when you started, the transition involves moving from hand production on a small scale

to using machineries and new chemical manufacturing and iron production processes and also increasing use of steam power and water power and a rise of a mechanized factory system. There are many elements to the Industrial Revolution. Most people know about steam power. That's probably the single best known one. So steam agents had existed for a very long time. The very earliest uses of them were basically to pump water out of mines because mines tend to fill up with water if you dig them too deep and you need to get that water out. Air pumps can only pump, I think, down to 10 meters or something because of the limits of atmospheric pressure. so you need steam engines to pump the water out of mines.

And mines were some of the few really industrial processes or enterprises that existed in the pre-modern world because you needed a lot of workers for them. There were a few others, like shipbuilding would be another one, but there weren't very many. However, over the course of the 18th century improved steam engines allowed for more efficient pumps, and then the further developments of adapting stationary steam engines,

which basically produced an up-and-down motion to rotary motion, allow them to be used for industrial purposes, in particular for the manufacturer of textiles. Textile manufacturing was one of the most significantly mechanized. I think it seems a little bit quaint to our ears today to hear about the importance of making textiles, because clothing is such a small part of the modern economy. It's sort of like making clothes, who really cares about that. But textiles was one of the big manufacturing industries of the time. I mean, they didn't have any modern electronics or plastics or even much metallurgy.

There was some, but not nearly as much as we have today. And textiles were one of the few sort of big manufacturing sectors. And it was one of the first places in which mechanized approaches and the use of steam or water power were applied, which could increase the output per worker by a factor of like 500. The power loom increased the output of a loom worker by about 40. The cotton gin improves the productivity of removing seed from cotton by a factor about 50. There's also large gains in productivity in spinning and weaving of wool and linen.

Not as great as cotton, though. that was the big thing. It should also be noted that the increased demand for cotton, which resulted from this improved production technologies, led to increased profitability of the transatlantic slave trade because a lot of this cotton came from plantations in the southern US and also other parts of the Americas. Another important aspect of the Industrial Revolution were railways.

Originally, what we would call a locomotive or sort of the ancestors of them were pulled by draft animals like horses. But this was then developed into using steam engines after the introduction of railways following the rainhill trials in 1829, which was sort of the first successful demonstration of what we'd recognize as a modern steam-powered railway locomotive. The first railway was opened between Liverpool and Manchester in 1830 and the construction of major railways between other cities in the UK began and then it spread there to other parts of Europe in the 1840s and then the US and other parts of the world later on in the century.

Line making was also revolutionized during the Industrial Revolution. There was a substitution of coke for charcoal, which was much more efficient, and allowed for larger blast furnaces, which promoted economies of scale, and allowed for more effective production of metal artifacts useful in machinery. Steam engine was also used to pump water from mines, which I mentioned, which increased the productivity of iron mines. Machine tools were also developed, so this is basically machines for making other machines or making items. And this allowed for the first really standardization and mechanization

of the industrial process, moving from individuals or small craft workshops making things to things being made in what's recognizably a factory by workers paid to do that specific job, using specific tools developed for the process. It's somewhat surprising to me that no one really had this idea before in history. Obviously, if you didn't have the steam engine, you couldn't have a steam-powered factory, but a factory doesn't require steam power. That's just one of the ways of increasing worker productivity. The idea of standardization of parts and of low-skilled labor doing specific jobs and having a more efficient production through division of labor doesn't really seem to have been used much at all, other than through a few niche applications like

shipbuilding and mining that I mentioned before, and maybe some manufacturing of artillery and other things. But I don't really know why that was the case, although from some of the reasons we mentioned before, it does seem that there was just a lack of a market for those sorts of things because most people were so poor, and the people who did have money didn't want mass-made industrial items. They wanted, you know, hand-made luxury things. But I don't know whether that fully answers the question, but it seems to be part of it. And in a rate, so this all came about during the late 18th to early 19th century in the UK,

spreading then first to Belgium and then a bit after that to France in sort of the 1830s, and then afterwards to the US and other parts of Europe. So by the late 19th century, the Industrial Revolution had at least began in most parts of the world that we think of today as developed. It was just starting in Japan around the 1870s as they opened up following the major restoration. It hadn't quite started in Russia yet by 1870. It's hard of sort of got going the 80s, 1890s. But most parts of sort of Western and Central Europe had at least started to industrialize or at least just started to industrialize by 1870. Another important thing that happened around 1870 is that Italy and Germany and Germany,

Germany Unified, which opened up larger markets for goods, because previously there was much small states that had various trade barriers and different currencies and things that made it more complicated. Reduced the scale that you could sell your goods at, which significantly limited the returns to adopting large-scale manufacturing. Another important thing that happened is the US had gone from a small agricultural state to, well, 1870 it was still mostly agricultural, but it was beginning to industrialize and it was much larger in terms of the area and population than was before. So the point is, by this point, we had more larger and more industrialized countries. And there emerged a period which is now called the Second Industrial Revolution,

which is often dated from 1870 to 1914. I prefer to date it to 1918 because I actually think the First World War is in some sense a culmination of the Second Industrial Revolution. So this was a bit different to the First Industrial Revolution in that it wasn't just centered in Britain. It was focused in kind of three areas. Britain, Germany and the United States were kind of the leaders, but there was also important activity in France, the low countries, Russia, Italy and Japan were also developing and industrialising during this period. The German Empire, as I mentioned, became a state in around 1870, came to rival Britain as Europe's primary industrial nation. Germany industrialized later, and it modeled its

factories on those in Britain, so it was able to make more efficient use of its capital, use just the modern techniques, larger scale factories, and so forth. It also invested very heavily in research, especially in chemistry, motors and electricity, which it became a world leader in, and still was at the time of the two World Wars, by the way. So whilst the first industrial revolution was focused mostly on textiles, railways, steam power, and ironworking, the second industrial revolution was focused more on chemistry, electricity, and telecommunications. So it was in this period that the steam turbine was developed to produce electricity from steam,

and these were the first way to provide cheap and plentiful electricity, and it was also a period in which the telephone was patented in 1870s. Telegraph was a little bit before this period. The Atlantic Telegraph cable was laid in the 1860s, so just before this period, but sort of similar. Automotive industry also developed during this period, so the first practical pneumatic tire, 1887, first automobile, 1886. Henry Ford made his first car in 1896,

founded the Ford Motor Company in 2003. So you see all of this stuff happening around a similar time frame. The Harbour Botch process was an artificial nitrogen fixation, process, which was developed in the first decade of the 20th century, paved the way for modern industrial agriculture by providing an artificial way of basically adding nitrogen back to the soil, which had been a major limiting factor on the growth of plants. This period also saw the consolidation of the gold standard throughout the world. So originally, prior to the late 19th century, basically different countries had their own ad hoc currencies, often multiple currencies, in fact.

basically there would be different banks that would have a bank note that was just a promise that if you took it to this particular bank, then they would give you that much money in gold, or sometimes silver, or some other currency, but usually in gold. But then what most countries did sort of starting in the UK and then other countries sort of followed suit is that they kind of nationalized their currency, so there was one national currency instead of a bunch of these independent banks having their own basically currencies. Then later in the 19th century, they came to be 100% backed by gold. so you could go to a bank and ask to convert the 10-pound note that you had for 10 pounds worth of gold,

and there was a fixed price that gold exchanged for. I'll explain more of this a bit later when we talk about the gold standard, but this was implemented first in the late 19th century, and most countries adopted this. The advantage of this system is that allowed free international flow of capital whilst allowing for stable exchange rates. So it was very easy for people to invest in different countries because there were common exchange rates, basically, between countries that didn't change very readily.

no strong restrictions on flow of capital. So there was a huge outflow of investment from Europe to the Americas and Africa, India, Australia, and New Zealand, many other places. The gold standard ended in the First World War, basically because all of the countries wanted to print more money to fund their war efforts, and they didn't have enough gold to be able to sustain that. Now, following the disasters of the First World War, which involved, as I said, the end of the gold stands, but also the liquidation of a lot of overseas investments from Europe to other parts of the world to again pay for the war efforts. Many countries gradually returned to the gold standard.

However, when Britain attempted to do this in the late 1920s, they did so at pre-war gold prices. This was a huge mistake, because it meant basically that all of the prices in the UK were too high. They needed to lower the prices in order for the money supply that they had to be sufficient. Now, I need to do an episode discussing this in more detail to explain how this debt deflation and monetary policy kind of works,

But the basic idea is any amount of money can be sufficient for any economy as long as the prices are set right. It doesn't matter if it costs $1 or $1,000 to buy a loaf of bread. As long as wages are set right and the prices of everything else is set right, it can work. The idea there is it just doesn't matter how many zeros is on the end of your currency. That's not important. But you do need to have prices at the right level for the amount of money you've got in circulation. What the government did in late 1920s Britain is that it said we're going to go back to the pre-war gold standard because we want to be just as powerful and strong

or whatever else as we were before the war, and we don't want to admit that we're not quite as powerful as we used to be. The problem with that is that remember, because of the gold standard, a set price of gold, with a set amount of gold that you have, implies a certain money supply, because I've got to have enough gold to cover the amount of money that everyone has. So the pre-war gold price was one ounce of gold was worth 4.25 pounds.

So that means, for example, a British sovereign coin that had a face value of one pound, contained about one quarter of an ounce of gold, which was worth exactly one pound. So for however much gold the UK government had, that only supported basically four times that amount of money in terms of circulating in the economy. You couldn't print more money than that because you didn't have enough gold to support that. I mean, of course you could just lower the value of gold so that the same amount of gold at a lower value supports a larger currency.

So for example, if one ounce of gold is now worth five pounds, Effectively that means that the price of gold, well, it's gone up in pounds, but you can look of it as sort of a lower conversion of pounds to gold. So you can devalue the currency, essentially, but they didn't want to do that. They wanted to go back to the pre-war conversion rate. So to do that means that they constrained their money supply in order to support that. That would be okay if the price level was okay for that amount of money, but it wasn't. The price level was too high because they'd been inflation during the war. So the prices have got to come down, and that leads to deflation, which led to problems with people repaying debts and led to slow down

of economic activity, and it just hurt them really throughout the late 20s into the 30s and sort of led into the Great Depression for them. An overvalued pound also made British exports more expensive, so it reduced demand for British products and therefore hurt British industry. At any rate, there were bigger problems afoot because the Great Depression started as a result of a major falling stock prices in September 1929, which then led to further stock market crashes. The big crash occurring in October 29 of 1929. This initial stock market decline then led to companies going bankrupt or calling in loans and things like that, which led to more people going bankrupt, which led to more people calling in loans. And then because so many people are going bankrupt,

people trying to spend less and save more money, which means they're not spending as much, which means the companies don't earn as much income, which means they can't pay their debts. And so no one's got any income, no one can pay their debts, more people go bankrupt, and there's a vicious cycle that people, because firms are going bankrupt, people become unemployed, and the economy enters a depression. Worldwide, between 29 and 32, the worldwide gross domestic product fell by about 15%, which is a massive decline. An ordinary recession might reduce national GDP by a few percent, but 15 percent across the whole world is enormous. By comparison, worldwide GDP only fell by about 1% during the 2008-2009 Great Recession.

And the effect of unemployment was catastrophic. So 25% peak unemployment in Germany and the USA, about 15% in the UK, 10% in many other European countries, as well as other countries like South Africa and Australia are strongly affected. Triggered widespread social and political upheaval, led to the downfall of many democratic governments, most famously including Germany, which fell to the Nazi Party, largely because of the dissatisfaction due to the economic dislocation. Now, the Serbian Union during this period was the world's sole communist state,

and it had very little international trade and no real domestic functioning price system, so it wasn't really tied to the rest of the world and was barely affected at all by the Great Depression. And this dramatically increased the prestige, of central planning, which was the economic system than it followed. It had adopted that in the late 1920s during the drive to industrialization and collectivization under Stalin. So that's why I call this period from 29 to World War II, the period of the Great Depression and Central Planning, because it was a period in which the sort of free market capitalism seemed to have failed,

and people looked to the Soviet Union as an alternate model, because they were not really strongly affected. The system used in the Soviet Union of central planning was called a method of material balances. And this was basically a method that was just kind of made up as it went along to try to just muddle through fulfilling this almost impossible challenge of trying to plan such a complicated economy for such a large country as the Soviet Union was. The basic idea was using input and output balances in natural units instead of using monetary accounting. So in capitalist countries, everything is denominated in dollars or whatever currency is used. But that wasn't done in the Soviet Union. They did have currency.

but it wasn't really that important. What was important is the physical units of production and inputs and outputs. The problem with that, of course, is that you can't compare apples and oranges, and so they had to figure out a way of doing that. Basically, what they had to do, the central planners had to take a survey of all the inputs that they had available, raw materials and amount of steel and grain and railway locomotives and everything else that they had, and then work out whatever I was going to produce in that year and try to balance them because what you produce had to be what you used,

you know, supply and demand have to balance. and because they didn't have the price system to do that automatically, which happens in a capitalist country, they had to do this via iterative approximations. It's a marvel that it worked at all, really, because it's such a complicated method. They never really got it to work properly. It just kind of worked well enough to get by. Basically what they did is you start with the previous plan and then you make tweaks to it. The problem with that, of course, is that over time, things change more and more in the economy. You know, there are new inventions, new processes that developed, consumer needs change, the global price of things changing.

So over time, you want to change more and more. But the system was naturally conservative because it's like, well, this is the way we did it. And if we try to have to redo everything, then it's going to be ridiculously complicated. Individual firms in capitalist economies can be like this as well. The difference there is that if a firm continues to not innovate and not update its processes long enough,

it'll eventually go out of business because someone else will innovate. But you don't have that pressure in a planned economy because the state enterprise is owned by the state. there's no profit or loss motive. Very rarely would anything be shut down. Maybe if it did really barely, a manager might be fired, but the system worked kind of not very well at first, but it worked increasingly poorly as a survey union went on.

But I'll talk a bit more about that in the next period. But however, it appeared to work fairly well during this early period, largely because the rest of the world was doing even worse, at least during the Great Depression period, and also because the survey union was starting from such a low base, that was so very poor that even a kind of... poor system still looked like it was resulting in large improvements. And there was also just a lot of propaganda about how good it was that the West saw that was not really, that exaggerated

the reality and also kind of neglected the huge human suffering that was associated with forced industrialisation. But anyway, it is important to understand how different the Soviet system was to that used in capitalist countries. This system was originated in the Soviet Union and there was expanded to the Soviet satellites after World War II in Eastern Europe. It was adopted by China and used under Mao and by some other communist countries in Africa and Asia as well. Following World War II, we move into what's called the Bretton Woods era. The Bretton Woods conference was held in July of 1944. It's a very important event that most people don't know anything about. This was basically the conference in which people decided what the world economy was going to look

like. And it set up what are now called the Bretton Woods institutions, particularly the IMF and the World Bank. Technically it was the International Bank for Reconstruction Development. Today, that's part of the World Bank. So I'm just going to call the World Bank. The purpose of the World Bank basically is to make loans to help. Well, at the time, it was rebuild Europe from the war, but then later the focus shifted to helping mostly countries in Africa and Asia develop after decolonization, providing loans to them to help them develop their economies. The International Monetary Fund kind of similar, a bit different. Its focus was to help countries that experienced financial or currency crisis, so that needed loans to help maintain their currency to fix

level or that had a run on their currency or something like that. So you can think of IMF as kind of like short-term loans for helping countries out of a difficult situation, whereas World Bank is more long-term development loans. And that's still essentially what they do today, although their activities have kind of merged a little bit. Also established was a new version of the gold standard. So this was a bit different to the old gold standard prior to World War I. In this case, it wasn't a direct tie to the gold standard from each currency saying, you know, this many marks is worth this number of ounces of gold or this many pounds is with this many ounces of gold. That was the old gold standard. The new gold standard says all of the participating countries, which is basically all the

developed countries in the world at that time, like Western Europe, Japan, the US, a couple of others. All of those countries fixed their currencies to the US dollar, and then the US dollar had a set price at which it was convertible into gold, at $35 per ounce of gold. And this currency peg was maintained using a combination of currency controls and monetary policy. Monetary policy means setting interest rates. Currency controls means who's able to buy and sell foreign currency. So this was relatively easy during the 50s and 60s in which inflation was fairly low and there weren't a lot of financial crises and other issues like that that would make it difficult. Some people think that this period of relative macroeconomic stability was

as a result of the gold standard. Other people aren't quite as convinced. I don't want to get into that here, but I just wanted to explain roughly how the system worked because the end of the gold standard is an important thing and marks the transition to the modern period of neoliberalism and globalization, which we'll get to in a moment. But the important is the important thing is the Bretton Woods system was different to the old system because it used the US dollar as basically the international currency because every participating nation had to keep reserves of the US dollar. Everyone was using the US dollar as reserves and for international transactions, and their currencies were pegged to the US dollar so that they couldn't change their value relative to the US dollar by more than a small amount,

and the US dollar then was pegged to gold. This was very valuable to the US because basically it increased the demand for their currency, which basically means that people were willing to accept US dollars in exchange for basically nothing in return. Obviously, a single person isn't just going to give you US dollars, but the point is the US was able to import more from overseas than it would have otherwise been able to, because a bunch of those import, the dollars that they're paying for their imports,

were never coming back and making claims on US goods because they were just held in reserves or used as international transaction between other countries. So basically this helped to increase US living standards relative to the west of the world. This is still the case today. The US is still a major reserve, the US dollar is still a major world reserve currency, but it was even more so then, because the Euro didn't exist. Chinese, UN wasn't significant, and it was basically the US dollar was the only gaming town. Plus, it was linked to the gold standard. So if you wanted to

buy gold, you generally had to go through US dollars. Remember that if you have a gold standard, you need to keep enough gold reserves to be able to satisfy people if they want to say, hey, I want to turn my currency into gold. That's the whole point of making it convertible. If you don't have enough of a reserve to do that, then people won't believe the convertability. Everyone will try to convert it once, and then immediately you'll just have to admit that it doesn't work. So you've got to maintain high enough levels of gold reserves. Now, the thing is that maintaining gold reserves is expensive, particularly increasing gold reserves, is even more expensive because you've got to buy gold from somewhere. And countries generally want to be able to print money to fund things that the government spends money on, in particular in the late 16.

to early 70s, the US government was spending a lot of money on social programs and a lot of money on the Vietnam War. And during this period, there was a gradual increase in sort of US spending and not an equivalent increase in taxation. So there was a lot of borrowing of money to offset that, and also some amount of printing of money as well, just making new money out of thin air. The problem with that is, of course, if you've got a fixed price of gold and a fixed amount of gold, you can't print too much more money because, again, people won't believe that the convertibility of gold, of dollars to gold is actually believable. And so that's essentially what happened. There was, increasingly people realized that, you know, we're increasing the money supply too much.

We don't have enough gold to support this. So they, Nixon formally ended the convertibility of the US dollar to gold in 1971. Basically, they didn't have the reserves to meet it. And so they're just like, well, we're not going to do this anymore. And then a couple of years after that, I think the Bretton Woods gold standard was formally abolished. And since then, most developed countries in the world have moved to floating exchange rates, which just means that you can buy or sell however much of a foreign currency for your currency that you like, the exchange rates go up and down with supply and demand, there's no convertibility into gold. That's just not relevant. And so today, all of these countries have what's called a fiat currency, which means basically that it's the

currency because it's the currency. There's no, it's not backed by anything like gold standard or land assets or anything else that it has been backed by in the past. All of these sort of of system, modern independent central banks, end of the gold standard fiat currency. These all kind of emerged around the 70s or maybe into the 80s with the independent central banks came a little bit later. This is all relatively recent having come as a result of the end of the Bretton Woods era, which is often marked as around 1973. This was also a period in which in the 1970s there were significant disruptions in the world supply of oil as a result of wars and political upheaval in the Middle East that I won't go into, but that also caused stagnation of economic growth in a lot of Western countries.

Another important thing that happened during the Bretton Wood Zero, though, stepping back a moment, is that industrialization really started to happen in countries outside of the traditional Western world, so outside of Western Europe and, you know, US, Canada, Australia, New Zealand, and also Japan. In particular, we had the industrialization of South Korea and Taiwan were early developers. Many countries in Latin America also began to industrialize, at least to an extent. Not a successful South Korea, but to some extent, and certain other places like Iran and Turkey also developed, began to develop as well. And so the world became less dominated just by the US and Europe, but more players, first Japan and then later on China, a little bit after this period, but there were more players who were becoming relevant in the world economy. Now, during this period, as these newly independent countries were being decolonized in Southeast Asia, Middle East, and Africa in particular, they looked to different models of development.

So some looked to the capitalist model offered by the West, and then others looked to the central planning offered as a template by the Soviet Union. Most didn't go to the full level of central planning that the Soviet Union did, partly because they just lacked the capacity to do so. But they at least sort of went partway there. They had a lot of central planning, a lot of restrictions, private investment. A good example of this is India, which had a system that's sometimes called the permit raj, basically because you had to have a permit for everything.

You had to have a permit to set up any sort of business to open factories, to engage in trade, to do imports and exports. The economy was very highly regulated. And perhaps not surprisingly, as a result, there wasn't a lot of dynamism or innovation because you weren't allowed to. Many countries in Latin America and in Africa

adopted some amount of these policies, not all of them. Some of them, like Indonesia, were more sort of free market oriented. Many of them had high levels of central planning. They restricted foreign investment, restricted private ownership and investment, especially in like big industries, steel and coal and oil and things like that, and broadly following along the model of the Soviet Union. And at first it seemed to work quite successfully in the 50s and 60s, there was quite a lot of growth, and 70s as well, I should say.

50s through the 1970s, there was quite a lot of growth in at least Latin America, Middle East and some Asian countries, not really in sub-Saharan Africa. But many other countries around the world did quite well during this period. And the world economy as well performed very well. Europe rebuilt itself and grew rapidly after the war. Japan did as well. Even the Soviet Union and countries in its sphere did quite well and experienced economic growth, catching up to some extent to the West.

So in retrospect, it's often seen as a kind of golden age of economic prosperity and stability. Now, I already mentioned that the end of this period of the golden age is partly marked by the end of the gold standard, which meant that countries mostly adopted, at least developed countries mostly adopted floating exchange rates, which led to more uncertainty and unpredictability in actual affairs. There was also the recessions and sluggish growth produced by the oil shocks at the 1970s that I also mentioned, and also many developing countries, especially in Latin America, experienced very severe crises, generally the early 1980s. There's a bunch of other things that happened around this time as well.

Growth in the centrally planned economies of Eastern Europe and the Soviet Union slowed down a lot in the sort of late 70s through the 1980s, whereas growth in China and also a bit later India and other countries like Vietnam began to grow, began to increase rapidly during this period. So the sort of 1970s through early 80s was a big time of transition. A lot of things changed in the world economy. And so it's this period that kind of marked the most. modern period of the world economy, which doesn't really have a name, as the Bretton Woods era does, but neoliberalism and globalization are sort of the two main trends here.

So I should say what neoliberalism is. Neoliberalism is not really a well-defined concept, but it basically refers to a resurgence of old 19th century ideas associated with laissez-faire economic liberalism and free market capitalism. It constitutes a kind of a move away from the focus of Keynesian and central planning-based economics that dominated really in all countries, even the West, from 1945 to 1980. The extent of central planning was obviously a lot less in the West than it was in, you know, Russia or China because they didn't have centrally planned economies. They still had market-based economies.

But there was still a lot more government intervention and ownership of things like railways, airlines and regulation in these areas. Beginning in the 1970s, there was a change of focus on new ideas from economists like Friedrich Hayek, Milton Friedman, James Buchanan. And also, along with the ideas of politicians like Margaret Thatcher in the UK, Ronald Reagan in the US, as well as Alan Greenspan, and there were politicians in other countries as well that promoted similar ideas. So it's not like all state intervention went away in the Western world, but certain types of state intervention were reduced. So particularly airlines, railways, utilities, telecommunications, a lot of the things were privatized and or deregulated in many countries in the 80s and 90s. and there was a move away from focusing on the ideas of Keynes

towards focusing on monetary policy, which uses the central bank more. There was a dramatic increase in world trade throughout this period. So world trade peaked in the late 19th, early 20th century, just before World War I, during the first gold standard era, peaked at about nearly 15% of world GDP. Then it declined rapidly as a result of the First World War and then the Great Depression and then the Second World War down to below 5%. So that's a catastrophic reduction of a world.

about one to one-third of its existing level. It increased a bit, of course, after World War II. Nothing much can reduce trade more than World War, but it really stayed at fairly low levels of maybe 8, 9%, up through to 1971. So there was some recovery of trade after World War II, but the Bretton-Words era wasn't a period of substantial international trade. Certainly it was a lot less than the period of the second industrial revolution

from the 1880s through to World War I. It's only been since the 1970s and 1980s that World Trade has ballooned to what it is today about a quarter of World GDP, which is far higher than never was under the First Gold Standard System. So it's interesting to see that what we've seen during this period alongside the deregulation and privatization and other ideas in developed countries is a dramatic increase in world trade. That's coming about partly as a result of liberalization of tariffs, so reduction in tariffs in many countries. Also, as a result of the development of China and the increase in trade there, and between countries in the developing world as well.

This period also saw the collapse of communism in the Soviet Union, Eastern Europe, and everywhere else that it was influential pretty much, with a couple of exceptions like Cuba and North Korea, but all the communist nations, apart from those, either collapsed or significantly reformed as happened in Vietnam and China. So central planning was sort of considered to be kind of dead as a model. It was already kind of looking not as good as in the 1980s because it was clearly growing more slowly and people became more dissatisfied. But when it collapsed in the late 80s, early 90s, then it's really, since then, it hasn't, central planning has not been a live option. Many developing countries also moved away from central planning in the light of the collapse of the Soviet Union and the reforms in the developed world. So this involved some amount of deregulation, but more lowering tariffs, opening up to international investment, opening up to trade, some amount of, as I said, deregulation and privatization, although different countries pursued that to different amounts.

So all of that has characterized the period since, you know, roughly the mid to late 70s. Another important trend has been the rise of monetary and financial crises and also debt crises. It's slightly different, but they're often related to each other. So a debt crisis is a situation which a government loses the ability to pay its government debt. So there were a swath of these that occurred in the 1980s. in many developing countries that had borrowed large sums of money during the 1970s.

Basically what happened, this is obviously highly simplified, but it's important to understand, is that during the 1970s, the price of oil went way up due to a combination of factors largely political and economic that I won't get into. But because of that, the oil exporting countries, Iran, Iraq, Saudi Arabia and so forth, their governments and some private individuals there had lots more money. I mean, they were rich before, but now they're like super mega-rich. and because there weren't a lot of investment opportunities domestically

because their economies were so dependent on oil, they wanted to invest a lot of this overseas in Western banks and other institutions. So they put their money in Western banks, and the Western banks have got all this money and therefore have relatively low interest rates. They're like, well, what are we going to do with all of this capital or all this money that we've got? We've got to lend it out to someone because that's how we make our money, right?

And so they kind of went looking and it turned out that many countries in the developing world were looking for money to borrow during this period, especially in Latin America. Many countries, even in Eastern Europe, Romania borrowed a lot of money during this period as well, for example, and countries in Africa. But particularly in Latin America, a lot of these countries borrowed very large sums of money because interest rates were low. Growth had been good for decades. They thought growth would continue, and so they'd be able to repay these loans easily using continued growth. They thought that they'd be able to use these loans for investing in productive activities like infrastructure.

But as it turned out, during the early 1980s, first of all, interest rates around the world went way up as a result of monetary policy in the US and other countries to try to end the inflation that problems that they had. Also, the economic growth throughout the world slowed down, partly again because of the recessions in the US and Europe, and the returns to the loans that these countries had taken out just didn't materialize. A lot of the loans were wasted. They were invested in things that, you know, roads, sort of classic roads to nowhere, dams that were never finished or didn't produce much electricity or just funding subsidies for urban dwellers in countries, which was obviously good for the urban dwellers and good to

either keep the votes coming in if it was a democracy of sorts or to keep the military regime in power if it was a military regime, depending on the case. That was beneficial, but it doesn't help economic growth. It's basically just consumption. So for a whole bunch of reasons, many of these countries couldn't repay the loans that were now more expensive and that they didn't have the growth to pay for. And a large number of debt crises that occurred in the early 1980s, largely in Latin America, but in some other places as well. This required heaps of bailouts by the international institutions, especially the IMF, and then marked an end to the impressive growth performance of Latin America during the 50s, 60s and 70s, and notched in a period of reform in which they

basically dismantled the previous system of large amount of state intervention, or at least partly dismantled it, and moved towards freer, more market-based economies. And we'll talk about the effects of that a bit later on. So all of these factors about the deregulation, the collapse of socialism, globalization and debt crises have marked the period of neoliberalism and globalization. Since the 1980s, there have been a series of monetary or debt crisis that have occurred. There was a big Asian financial crisis in 1997, which was significant effect. There was a further debt and currency crisis in Mexico in 1994. There was a big one in Argentina, I think, in 2002 or 2003 or something.

And, of course, most recently, the global financial crisis. These sorts of crises didn't happen very much during the earlier period of Bretton Woods. Part of that seems to be just because there was much less trade and much less investment around the world. So it seems that there's perhaps a trade-off between financial and economic integration and having these periodic crises. We'll talk a little bit more later about why there might be that sort of trade-off. These issues will be discussed in more detail in future episodes. But for the moment that brings us to the end.

I won't talk about anything very recent in terms of economic policy. at least as much as we can, that sums up the history of the world economy. So hopefully you have some idea of where we've come from and how these things fit together. Particularly, the most important thing to remember is the difference between the Bretton Woods era, which is sort of 45 to 73, and then the neoliberalism globalization period after that,

because they mark sort of two different approaches to development. And part of the literatures that I'll be focusing on and the theories and things that we'll be discussing relate to those two different approaches, the more sort of central planning model and the more sort of free market liberalization model, and which is more effective and better for development overall. So that concludes this episode.

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