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2018SpringUN3213Lecture12IndustrialRevolution.pdf

2018SpringUN3213Lecture12IndustrialRevolution.pdf -...

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Intermediate Macroeconomics Economics UN3213 Professor: Jón Steinsson Lecture 12 1
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Announcements Solutions to practice midterm will NOT be posted Readings: Today: Steinsson (2018) Tuesday: Jones chapter 5 Krugman (1994) Easterly 2
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What Happened in the 1640s? 3 20.0 30.0 40.0 50.0 60.0 70.0 80.0 90.0 0 2 4 6 8 10 12 14 16 18 20 Real Wages Population (millions) 1300 1450 1650 1730 1800 1860
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North and Weingast (1989) What was fundamental barrier to growth before Glorious Revolution according to North and Weingast? Despotism of sovereign Why does the sovereign behave this way? Despotism result of commitment problem Sovereign would like to promise to respect property rights of citizens. Why? Because this provides citizens with good incentives to invest and produce more (yielding higher taxes) Why is it hard to make such a promise credible? Once citizens have amassed wealth, sovereign has irresistible temptation to renege and confiscate wealth (especially in time of war) 4
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Commitment Problem Ex-ante : Sovereign wants to promise to respect property rights Ex-post : Sovereign wants to renege and expropriate Subjects understand this and therefore don’t believe initial promise I.e., promise is not credible Sovereign has a commitment problem 5
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Commitment Problems Commitment problems are very common Parent says to child: “If you don’t eat your vegetables, you won’t get ice cream.” Child may understand that this is not a credible threat Government says to banks: “If you get into trouble, we will not bail you out.” Banks may understand that this is not a credible threat 6
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Commitment Problem How is it possible to solve commitment problems? Reputation (when play is repeated) Commitment devices: Odysseus tied himself to the mast Burning bridges (boats) behind oneself (Cortez in Mexico) Enforceable contracts Constitutions 7
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North and Weingast (1989) Glorious Revolution codified a power sharing arrangement between sovereign and House of Commons (the rich) that resulted in an ability to credibly commit not to indiscriminately confiscate wealth (of the rich) Provided sovereign with ability to borrow which was crucial in warfare after 1688 Provided citizens security which was important for further innovation and investment 8
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But Why England? Why did the Revolutions of 1640 and 1688 happen in England and not somewhere else? Acemoglu, Johnson and Robinson (2005): Argue that Atlantic trade + non-absolutist initial institutions were crucial 9
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First Great Divergence 10
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Concentrated in Atlantic Traders 11
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AJR’s Hypothesis Atlantic trade itself created growth But not enough to explain huge difference In countries with non-absolutist initial institutions, Atlantic trade enriched and strengthened commercial interests This commercial class demanded political institutions that protected property rights and constrained the monarch These institutions key to subsequent growth 12
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Consequences
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