Econ311 Review for First Midterm
Lecture 1: The sources of 1%
One thing to make clear about economic growth in the United States is that for a long period of time it has been roughly 1% to 1.5%. This is amazing because the country has sustained this growth rate for a very long period of time, whereas most countries burst into growth and quickly flare out. In fact, in human history, economic growth has been nearly zero for almost all of it. How do we know this must be the case?
Population growth for most of recorded history has been about zero - population stayed relatively stable for thousands of years. If the economy was growing really fast, people would have gotten rich very quickly (lots of wealth for the same amount of people). So the growth rate of wealth must have been pretty close to the growth rate of population up to the industrial revolution. We can see this by assuming a 1% growth rate and working backwards in time - humanity goes broke in medieval times and everyone would have starved. Since we know this is not the case, it cannot be that humanity has had significant (1% type) growth for hundreds and hundreds of years.
How fast has the US been growing? If you use the Rule of 72, you get doubling of GDP just about every 50 years. If you look at table 1.1 in Atack and Passell, this is more or less what you see. So where does this growth come from? Dr. Wallis made the distinction between extensive growth (rise in overall GDP) and intensive growth (rise in per input GDP). We think intensive growth is the right way to measure economic progress, and tend to look at per capita income. One way to see growth in the US is by Paul David's method using labor force estimates. If you don't know how this works, ASK. The labor force of the US was somewhere around 80% in farming at 1800, so during colonial times it was likely somewhere between 80 and 90 percent. This is a big deal - that the American colonial and early national economy was predominantly agricultural. So where does the productivity gains come in for David? In a small productivity gain for each of those many agricultural workers.
Lecture 2: Claiming the New World and Land Tenure
In the 15th and 16th Centuries, the major powers in Europe were Spain and Portugal (plus Italy I guess). The main thing that determines who is the major power at this point in history is naval power (see Mahan). In 1588, Sir Francis Drake destroys the Spanish Armada in the English Channel, and this changes the balance of power drastically. Up to that event, if you wanted to trade on the high seas, you needed to be able to protect your ships from pirates and other nations. Early on, the goal is to find a way around the Islamic monopoly on trade to Asia and this is solved when Dias goes around Africa by water. But in 1492, Columbus hits the New World, and European powers race for the new lands. Who wins out? Spain and Portugal.
Suppose you wanted to set up a colony in the Americas. You needed to be able to protect your colonists from the native American Indians and then you also had to protect them from the possibility of invasion by another European power. Shipping is the great engine of trade because it overcomes friction and allows for very cheap transport of goods and humans. Spain could control the highways of the seas and land troops and cannon wherever it pleased. The Edict of Nantes in 1685 gives Spain basically everything except Brazil by contract with the Pope.
Of course, the British, French, and Dutch aren't happy about this situation, but must take it since the Spanish and Portuguese navies are so powerful. When the balance of sea power changes, these formerly lesser powers become able to stand up to Spain and Portugal and create colonies in the New World. The key is being able to hold and defend your colonies. Everyone claimed everything in the Americas, but what really determined who owned what was who had the guns to back up their claims.
In medieval times, all land was held by the King, who is called the allodial owner. The allodial owner has no obligations to anybody and retains absolute control over the land. This allodial owner may permit people to reside on and use his land, by granting them contracts or charters - but the allodial owner is still the supreme owner of the land! This is an agrarian word, though, and land by itself is worthless. What you really want if you're an allodial owner is people on your land so they can raise crops for you. As an incentive to get people to move to the New World, European powers (we consider Britain in particular) grant their subjects charters to establish colonies on the land the crown is still the allodial owner of. If you have lots of land, people are valuable - the labor is the scarce resource in the Americas. In most cases, the people on the land could not do as they chose with their charter or contract rights - they were bound to the land and owed specific obligations (think of the knight example and feudal dues of military service). See p.12 and 13 in Hughes and Cain.
This is what made the colonial charters in the Americas interesting. The Jamestown settlement under the Virginia Company had land tenure rules of free and common socage. This meant the land could be bought and sold, was heritable, and did not hold any specific feudal dues. This is very close to what we would call fee simple ownership today (as opposed to renting). Ownership of the land meant you had the right to the future benefits of any improvements you made to your land, and this is a huge gain in trying to line up incentives to get people to invest and be productive. What kinds of investments could be made? The big one is clearing land - trees and rocks in the fields of New England make for bad farming, and improved (cleared) land is really what counts when you want to farm.
Lecture 3: Specialization and Division of Labor in Colonial America
The different charter types of the colonies are important because they tell you what degree of self governance the colony had. Along with the corporate charters of colonies like the Virginia and Massachusetts Bay, you have proprietary colonies that are granted whole as debts or gifts (Pennsylvania to William Penn, Maryland to Lord Baltimore) and crown colonies under direct royal supervision. Proprietary charters are the major oddity because in those cases the entire block of land was given to one person, much like James II gave New York to his brother, the Duke of York. Otherwise, you had mostly small landholders on independent farms in the north and somewhat larger plantation owners in the south.
The big moneymaker in the New World was not to be found in North America. At first, everyone in the Americas wants to find gold - and the Spanish do find lots of gold and silver early on. As time progresses though, the metals run dry, and the truly valuable commodity turns out to be sugar. Mainly Britain, France, and the Netherlands fight over the West Indies, which is a great place to grow sugar. Unfortunately it is also a very deadly place to live and sugar cultivation takes lots of labor (and no Europeans were willing to do it).
The dominance of sugar in the minds of the European powers is probably what kept North America in the background for a long time with regards to British policy. What kinds of things did the colonies do? You can break the British colonies in North America into four regions.
In the northeast, colonies like Connecticut and Massachusetts produced fish, timber, naval stores, ships, insurance, and shipping services. In the mid Atlantic colonies like New York and Pennsylvania, the output was mostly food in the form of wheat and grains. The upper south had the best cash crop of North America in tobacco, while the lower south grew rice and indigo in addition to producing some naval stores. Be careful to note that nobody is growing cotton at this time! North America is basically shipping, bread, drugs, and rice from north to south. It is important to understand why the comparative advantages and not the absolute advantages are what is driving this pattern of specialization.
Lecture 4: The Atlantic System and Demographics
During the 17th and 18th Centuries, most of Europe followed the doctrines of mercantilism. While there is no clear cut set of rules as to what this is, you can say that it involves directing trade through the mother country as much as possible (create an entrepot) and maintaining a positive balance of trade to accumulate specie. The first is important because it helps you maintain lots of ships and sailors who are easily converted into naval military might, and the second is important because hard cash is needed to buy mercenaries - this is all military power.
The Navigation Acts in the 1660s set up a system in the North Atlantic that sends raw materials and semiprocessed goods from the colonies to Britain in exchange for British manufactured goods. Unfortunately, there is no way that even a large volume of low value goods could have paid for this in direct trade between the colonies and Britain. Take a look at the Shepherd and Walton figure 2.3 in Hughes and Cain on p.35. The only region that can pay for its own imports from Britain is the upper south (drug money). Everyone else has a large deficit. The lower south is sending rice to southern Europe, but if you look at the mid Atlantic and New England colonies, their deficit is wiped out by the West Indies trade.
The way that northerners paid for their manufactured goods is by sending wheat and other necessary supplies to the West Indies for rum, molasses, and cash. The rum and molasses was processed and sold to the Canadians for more cash, and all of this was used to settle the deficits in trade with the United Kingdom proper. Why was there complicated commerce in the north but not the south? The main reason is that England wanted tobacco, so there was no need to do anything fancy. This may have helped the northeast in the long run by forcing them to develop mature commercial institutions.
The other feature of the south that distinguishes it from the north is the use of slavery. We already noted earlier how the West Indies needed lots of labor and that death rates were high. There, the Crude Death Rate was very high and the Crude Birth Rate could not keep up - so constant importing of slaves had to make up the gap. You should know what these crude rates are, what the Rate of Natural Increase is, and what an immigration and fertility rate is.
In the colonies, there were only about 600 thousand of the 10 million slaves total brought to the Western Hemisphere. The population of both European and Africans exploded in the North American Colonies, though, and the driving factor is the rate of natural increase. See Hughes and Cain p.46 for the actual birth and death rates. Dr. Wallis talked about the sources of mortality in early America, which was mainly infectious and respiratory diseases. With the primitive state of sanitation and medicine, even pneumonia was lethal. Also, the mortality rates are going to be very high for babies (particularly newborns) and the elderly - these two groups are very susceptible to sickness.
Why are demographics such a big deal for us? Because the economy was agrarian and the land is only valuable if you have labor to work it, so we care a lot about how many people there were.
Lecture 5: Transportation and Money
These two subjects are important because they talk about connecting markets. Transportation involves movement of physical goods and naturally has to happen if you want specialization and division of labor. Financial developments are needed because there has to be some way to coordinate and make these trades easy to negotiate. Transportation and financial centers sprung up around breaks in transportation - where you needed to move goods from one mode to another mode of transport (like boat to cart). The major metropolises of the colonies were at Philadelphia, Boston, New York, Baltimore, and Charleston. Of those, only Charleston is in the lower south and Baltimore is only marginally southern. Why are all the cities in the north? Because there are no breaks in transportation in the south - recall Dr. Wallis' story about ships sailing all the way up to George Mason's dock for tobacco. The south has enough navigable rivers that you didn't need to shift things around a lot. In thr noth though, we will see that significant man made transportation improvements had to be constructed to connect markets.
Was there a shortage of money in the colonies? See Hughes and Cain p.50-53. Yes, there wasn't enough currency and there surely would have been less if everything in the trade deficits (see lecture 4) had to be paid by shipping out specie. Instead, what comes to be used are bills of exchange. The bill of exchange is s simple piece of paper that says someone agrees to pay someone else - an IOU. This makes trade a lot easier because you don't need to move heavy specie around. The only hard part is you need for everyone to trust each other that they will honor the bills.
A typical procedure works like this. George Mason has tobacco and wants cash. He can't get cash because specie is rare in the colonies so he goes to a tobacco agent (factor) for some rich British firm. The factor gives a bill of exchange to Mason that says "London will pay the holder of this note X pounds." Mason hands over the tobacco and is happy because the bill is as good as gold (everyone knows the rich London firm will pay its debts). Mason takes the bill to the store (which might be run by the factor) and uses his bill to buy stuff. The factor ships the tobacco to Britain, where it is either sold or re-exported to Amsterdam or wherever. At any rate, there is a bill floating around that says "London will pay the holder of this note X pounds" and some firm in London just sold the tobacco for X pounds. The note will make its way back to London where someone will walk up to the firm and present it. The firm will pay him the X pounds and the bill of exchange can be torn up.
In this exercise, no specie had to move anywhere and many productive transactions took place (Mason sold his tobacco, Mason got goods, firm sold tobacco, etc). Every transaction has some gains from trade, so the bills of exchange are good in that they allow for trade to happen without the burden of lugging around heavy specie (which is hard to come by anyway).
Lecture 6: Thomas and the Navigation Acts
The Navigation Acts were a series of laws passed in the 1650s and 1660s that enumerated certain strategic goods that could only be exported to England, decreed that all foreign trade with the colonies had to pass through the London entrepot, that trade with the colonies had to be on British owned ships with 3/4 British crews, and set up a series of tariffs, bounties, and production restrictions that modified trade patterns. Thomas tests the hypothesis of whether the increased shipping burdens from the enumeration and British ships/crews as well importing by way of London was costly enough to spur the colonies to revolt.
Of all the procedures in Thomas, the one to know about is how to draw the diagram that shows the burden on consumers of imports and sellers of exports. In particular, these are very well displayed in figures 3.1 and 3.2 in Atack and Passell on p.60-61. The fundamental conclusions that Thomas draws are that the net trade only burdens are about $1.25 per person while the gains to being in the Empire are about $1.00. The total net effect on American incomes is somewhere between 25 and 50 cents. Given that per capita income is about $100.00, an extra quarter or fifty cents is not a big deal at all - and this is why Thomas says that purely economic concerns could not have been the main cause of revolting.
Lecture 7-9: Bailyn and the Ideological Origins of the American Revolution
The way to understand where the mindset of the revolutionaries came from is to analyze their British heritage. In the 1770s, the colonists thought of themselves as Englishmen and believed in the desirability of orderly government with a mixed constitution. Why did they like these things, who did they get their revolutionary ideas from, and what was the ultimate goal?
In the early 1600s, Charles I became King of England and started abusing his power to dismiss Parliament and strongarmed people into giving him money to fight wars. Internal strife played a role as well, when Scottish Protestants resented Charles' push to hand down religious doctrine to them. In the end, Charles was ousted and beheaded in the Puritan Revolution of 1640. The Long Parliament set up shop and named Oliver Cromwell Lord Protector of England. Cromwell's government was just as tyrannical (or worse), and a second overthrow occurred. The Stuarts (James and Charles' line) was restored, but not two kings into this new monarchy, James II causes problems with his Catholicism and he gets ousted in the third turnover of the 17th Century: the Glorious Revolution of 1688. This time, William and Mary of Orange are brought in to assume the crown on condition that Parliament receive significant powers of self governance.
In this environment, Englishmen saw the dangers of having the king dominate (like James II), having the Parliament dominate (The Protectorate) and how instability could rock the country (three revolutions in a span of 50 years). People wanted stability and they wanted a government where no one entity could dominate. Most of all, they feared the dominance of a powerful executive in the form of a King. This is the nature of Whig opposition politics - that a strong executive of the King and his ministers were able to corrupt and buy off other elements of the government. Walpole's manipulation of Parliament and placemen allowed for stability in government and Tories loved this, but the Whigs feared it was upsetting the virtues of the mixed constitution.
The mixed constitution is the precursor to American separation of powers and checks and balances. The idea is that in the running of government, if you had three vested interests in the form of the King, the nobles, and the commoners, they would all play off each other and nobody would gain absolute corrupt power. The king ruling would be tyranny, the nobles ruling would be oligarchy and the commoners ruling would be mob rule - all of these are bad.
Opposition writers (many of whom were Scottish) thought that the extension of tax collectors and placemen and selling titles was draining the vitality of the British constitution. These were very fringe thinkers - radical Whigs. But in the colonies, these ideas did not seem so out of the ordinary. After all, the colonists had no direct representation in Parliament and the British government after 1763 was creating a legion of tax collectors in the colonies. This was the prophecy of the Whig opposition coming true right before their eyes. While the British felt that the colonists had to pay their due share (remember 100 index for Britain and 2 index for colonies), the colonists had gotten used to being relatively independent (see Bailyn).
Lecture 10: Articles of Confederation
The problems of the Articles of Confederation can be boiled down to three things: the national government (it is not a federal government yet!) Could not levy taxes, the national government could not regulate internal commerce, and unanimous consent was required to pass anything.
Recall from last time that the colonists (the revolutionaries anyway) are thinking the language of the Whig opposition - they hate central authority and fear oppression from anywhere. At this time, colonists identify most with their colonies and think of themselves as "New Yorker" or "Virginians." So their loyalties are to their home colonies and not to the cause. This is a big problem because selfish loyalties prevent them from agreeing to do anything for the greater good, and unanimity is required to get anything moving. This is why initially the United States calls itself the united States of America in Congress assembled. A congress is a meeting of equals, and the colonists thought of their colonies as being equal sovereigns. The situation of financing the war gets so hopeless that Robert Morris, the financier of the revolution, threatens to quit in hopes that it might get some action going. Since Congress can't tax, it has to basically beg for money from the colonies.
The major resource in America was land, and though the Articles had flaws, it took land claim concessions to get states to even agree to ratifying the Articles of Confederation. Since most revenues came from either tariffs or property taxes, and tariffs were not available to all states (not all states traded equal amounts) plus property taxes were politically despised by citizens, selling land was a great way to raise money. The extra benefit was the fact that your citizens liked to have land - ownership of land had almost a mythic value to it, with the yeoman farmer as paragon of republican virtue.
Land policies in the 1780s provided for the formation of new states and the sale of these ceded lands. This is a big deal because the procedures for admitting states into the Union would dictate how future voting patterns would look (since sectional attitudes influenced how state representatives voted).
Lecture 11 and 12: Land Policy and the Constitution
From last time, a big problem with the Articles was that states could pass laws (they're states now after independence!) That contradicted each other and national policy. This is especially a problem with commerce because the major source of revenue for everyone other than property taxes are tariff revenues from taxing trade. The more barriers you have to trade, the less the economy can work itself out to grow - so you'd rather have a uniform system of trade with low or no barriers. The Annapolis convention in 1786 was going to address this, but only like half the states even sent delegates. The guys who did show up determined that there were more serious flaws in the Articles and they planned for a new convention in 1787 in Philadelphia.
The Constitutional Convention was an illegal convention that did not have any authority under the Articles to draft a new system of government. Most states thought they were sending delegates to recommend modifications to the Articles, not wholesale change.
Major features of the Constitution to understand are the limits on taxation (no direct taxes unless apportioned to population, no export taxes), the idea of federalism and national supremacy in interstate commerce and foreign diplomacy. Most of the powerful clauses in the Constitution like the necessary and proper "elastic clause" and the full power of interstate commerce authority was not developed until the 19th Century. Judicial review does not exist anywhere in the Constitution in writing. Neither does any right to privacy - this is an implied right. The fact the Constitution is vague is one of the strengths of the document because it allows for the interpretation and implementation of it to evolve with the society around it.
Last, but not least, the Constitution provided a solution to the dilemma of the mixed government. Since there is no nobility in the United States, how do you form a mixed government? The solution was to separate not the interests of the segments of society, but the powers of government. Instead of King, nobles, commoners, we have a separation of powers in Executive, Judiciary, and Legislative branches. It is also significant that in the beginning, the President was not directly elected by the populace and that the Senate was elected by the State legislatures. The goal was to insulate some parts of government from popular opinion to defend against mob rule, but at the same time prevent total concentration of power in the federal government. The division of power between states and the national/federal government was a huge check in the minds of the framers - especially antifederalists. As Dr. Wallis pointed out, this is the origins of States' Rights.
Land policy in the early republic was very sectional, except unlike slavery the sectional rift was east-west instead of north-south. People in the west wanted to settle the lands for two reasons: new farmers wanted land to farm, and existing owners wanted more people to move in so their land values would rise (remember the value of land is tied to how much labor is available to work it). The national government wanted to sell land to make money, but there's too much raw land available - so people won't pay a lot for it. Much of the public lands are sold for the minimum price, and the government eventually gives up and homesteads the land out in the mid and later 19th C.
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