Economic history notes, Appunti di Storia Economica

Scarica Economic history notes e più Appunti in PDF di Storia Economica solo su Docsity! 1 ECONOMIC HISTORY summary/answers 1. Medieval innovations in technology. From the XI century Europe faced an economic recovery, mainly due the end of barbaric invasions and a consequent demographic growth and territorial expansion. Europe was an agrarian society, until 14th century, the urban population was about 7% of the total, rural realities had a low level of complexity associated with a limited range of needs and production was mainly used in self consumption, indeed this kind of economies were closed realities and only few types of goods were exchanged. However, agrarian societies were by no means immobile and they were capable of notable progresses, such as technological improvements. Several innovations were implemented in the agriculture, the heavy plough and the three year crop rotation enabled important increases in agricultural productivity. Increased productivity meant production surpluses, which, on one hand, permitted the population to grow because more food was available and, on the other hand, encourage trades. One of the most crucial innovation was the water mill, already known during Roman times, but widespread from the VI century. Initially it was used for milling flour, but, over time it proved to be versatile and was adapted for different applications, from fulling cloth to iron working [e.g. silk production in Bologna XIII century]. Another key invention was the mechanical clock, as the historian Le Goffe argued, the mechanical clock made possible the switch from a “christian time” to a “business” one. This means that people started to divide time and use it in a more rational and practical way: dividing labor time from leisure time; using Lewis Mumford words, the mechanical clock dissociated time from human events. Most of these European inventions where actually found in Asia in more ancient times, indeed, many of them originated from Asia and then, thanks to the easiness of traveling across Eurasia, were brought to Europe and europeans proved to be excellent in adapting and enhancing asian inventions. 2. Medieval innovations in business. From the late XI century, Europe faced an era of commercial revolution. Indeed, all sectors of the economy expanded due regional and long distance trades. The latter represent overland trades from Europe to Asia, that were long and dangerous ventures and, consequently, only expensive, light-weighted and non perishable commodities were worth to trade (spices, silk). Europeans exported less than what they imported and so, to counterbalance, they used to make up for the difference with silver and gold. Trades brought wealthiness across Europe and cities expanded and the so called “urban life” begun. One of the first innovation in cities was the creation of guilds: associations of workers and employers, which were sanctioned by local governments and had the aim of holding a complete monopoly within the city, people were legally obliged to belong to a guild if they wanted to run any business. Guilds controlled production, costs, quality standards and imports, prices were fixed within the city and there was mutual aid: competition was meant to be among cities, not within one. As the trades increased, trading techniques had to be developed, the development of a legal system did not come from above, but originate from the necessity of preventing fraudulent behaviors and generally regulates tradings. Law schools were instituted to create a class of professionals and “legal deeds” (act to affirm a legal object to someone) became common and necessary in trading ventures. Several business organizations were born: a) Company (societas/fraterna): most natural form of merchant society, brothers and relatives cooperating instead of competing, with more total capital and less competition. Companies were legally established and usually represented long term ventures (trade, banking, production), the main feature was the unlimited liability of partners, owners had full legal responsibility for all business finances (and debts). It was a serious weakness because the owner’s entire patrimony was at risk and, in case of the company’s failure, people would have had the right of coming after him. 2 b) Partnership (Commenda): they represented mostly short term ventures (mostly sea trades) and it was legally established among two parties: Stans [person(s) who financed the venture] and Tractator [person who actually run the venture]. This kind of business organization combined indeed the money and the ability and, for the first time, the ownership was separated from the actual “management” of the business. On the maturity date of the contract, profits were shared as agreed. In case of losses the financier would have lost his capital (up to the total invested, limited liability of Stans) and the Tractator his reputation. Other innovations in trading techniques were: a) Accounting: accountancy had the task of recording everything that was happening financially and the Bookkeeping process was a key innovation because it provided rational basis for economic decisions. In the Double journal entry, revenues and assets (written on the left) were separated from liabilities (right). Luca Pacioli’s “Tractatus de compitis et de scripturis” had a large section of business math that became an international accounting standard. As argued by Sombart, accounting innovations and techniques put the foundations for the spirit of capitalism. b) Credit system: early development in Europe [XII - XVI century]. The pioneers in this field were pawnbrokers and “money changers” (exchange currencies), which later became deposit bankers; the latter offered safe strong boxes where to leave deposits. Later on, they started introducing “scriptural money”: in case of a transaction among two people having deposits in the same bank, the banker would have just transferred the money from a deposit to another and the transaction would have happen without a concrete exchange among them. Another innovation was the introduction of “advances”, they indeed realized that people on average did not use the whole deposit they left in the bank, so that unused amount could have been given to other people as advance, in doing so, bankers would have made money out of people’s deposits. [However lending expecting interests was considered as usury and legally banned, “Decreto Gratiani”, 1142] c) Bill of exchange: innovation that supported international trades, because it permitted to remit money without carrying it. [originated in Asia, in Europe from XIII century] In other parts of the world it was used as a personal tool (traders that known each other), while in Europe it became an impersonal tool and it ended up circulating more easily than money. Functioning: person A (taker) purchases a good from person B (drawer) and he pays with a check. In a second time (city and currency), person B (now the payee) gives the bill to a person C (the payer) that will give him money. The bill would last no longer than a year. With time became more complex (used also to issue loans), its usage was crucial because people could, for the first time, exchange money instead of goods. d) Public Finance: medieval cities-states were usually small and had little patrimony, to get revenues they would usually use ordinary taxation and extraordinary taxation (emergencies, wars). Because they needed frequently additional resources, they understood that the most efficient tool was to issue loans, that would have been more profitable and more accepted by citizens. In the XII century cities in Italy started to mobilize debt (almost unlimited finance available), instead of savings (taxation). At first, loans were “forced loans”: because usury was prohibited, the governments obliged citizens to sign loans and so, because it was said by law, you could also have gotten interests. Citizens, in doing so, were renting their capital: financing the state became an investment and loans became increasingly voluntary. Governments applied forced loans together with taxation to raise capital. 3. Black Death and its impact. In the middle of XVI century, the Black death triggered an accelerated phase of transformations of social and economic structures. It represented, first of all, a dramatic demographic catastrophe, indeed, the great interconnection between Asia and Europe (Mongol empire had improved efficiency of the road networks, among all, of the ancient Silk Road), allowed the plague to spread from the Himalayan region to all Eurasia. 5 - The impact of colonization on the Americas was devastating. Europeans explorer were few, but the technological gap was so deep that it was easy to take control over those territories. The conquistadores carried out a major plundering (mainly precious metals) and caused a dramatic demographic catastrophe, due both for the violence inflicted to the natives and for the pathogens they brought in the continent and for which American natives did not have any immunity system. America became, for this reason, an empty continent and there was the issue of a serious labor shortage, lack satisfied with African slaves. Furthermore, the Americas became the main source of bullions (hard cash). Spain got the monopoly over American silver and became the largest supplier in the world and the Spanish dollar became the international currency. The increase and diffusion of hard cash promoted a great economic expansion in Europe. - The impact on Africa was dramatic. Africa became the main slave labour supplier of the world and its population did not change between XV - XIX century. 6. The triangular trade, colonial commodities, and slavery. From XVI century, a pattern of trades was established among Africa, Europe and America, thanks to which, the needs of a continent were offset by the exports of another. - America was an empty continent and needed labour force - Europe needed raw materials for its expanding economies - Africa lacked of manufacturing (finished) goods The so called “triangular trade” represented: Africa providing Slaves and so Labour force to America, America exporting raw materials to Europe and Europe exporting finished goods to Africa. This pattern of global economy had its engine in the labor force forcedly exported from Africa. Systems of servitude and slavery had been known for centuries, however it had a dramatic turn with the beginning of Atlantic route. Portugueses dominated this market (even if all europeans participated), thanks to their settlements along the African coast line, and slaves became the main export from the continent. From XVI to XIX, 10 million people were exported as slaves from Africa to America and exploited in the new world mines and plantations. Primary commodities produced in America were exported to Europe to nourish the manufacturing sector, that indeed boomed thanks to the low prices of colonial commodities that enable lower costs of production. Europe clearly benefited the most from the triangular trade. Europe, lastly, exported manufacture goods (textile, alcohol) to Africa, which, being an underdeveloped economy, lacked of them. It has to be kept in mind that these trades were still controlled by europeans, who considered Africa as an exclusive market for exports. 7. Mercantilism, features and tenets. Mercantilism was the prevalent economic doctrine in Europe from XVI century to the first half of XVIII century. It can be seen as a form of economic nationalism that favors the state interventionism over markets and that oriented markets towards strong competition rather than cooperation. This ideology was designed to built a wealthy and powerful nation where economic and political decisions merged together. Mercantilists held that the state had the duty to protect its own commerce, encourage exports and discourage imports as far as possible, it followed that foreign trades became increasingly intercontinental (towards colonies). Moreover, competition was allowed within the country itself. Gold and silver bullions measured the wealth and power of a nation, exports were supported because, with exports, hard cash was imported. Consequently, a positive trade balance would have enabled the accumulation of gold and silver reserves, increasing the nation’s wealth. This model of trades represented a zero sum game, because someone’s gain always meant someone else’s loss (a country’s growth was always at the disadvantages of others). [This theory was refused by Adam Smith who strongly believed that free trades would bring wealthiness to everyone] It followed that the competition among countries exacerbated and military conflicts were frequent. National conflicting strategies were: colonial competition and trade wars. 6 - Colonies were direct source of wealth because they represented a source of goods at low prices and an exclusive markets for the mother country exports. It followed that trades with other countries could be restricted. - Trades were driven and maintained by war and economic expansion coincided with the political and territorial one. An example of mercantilist policy are the“Navigation Acts” introduced by England in 1651, this measure established that all goods arriving in English ports and those of its colonies had to be transported by English ships. The aim was clearly wresting other countries’ (mainly Dutch) international colonial trades. This provision was followed by several wars with the dutch republic at the end of which England emerged in a stronger position. 8. New commercial organization: joint-stock companies. Privileged trading companies were mostly founded in England, the Dutch Republic and France from 16th century, in order to exploit the commercial opportunities offered by the new trade routes and to make up for the lost time in comparison with the Portuguese and Spanish. They were legally established as private companies licensed by the state and so they represented regulated and joint stock companies. This model turned out to be extremely successful and profitable for the states that implemented it. These companies of merchants had long-term charter (15/20 years) and possessed special privileges, such as the exclusive right to use certain routes or trading monopolies for certain goods. The major companies where also to be given the right to stipulate commercial and diplomatic treaties where they operated, to recruit and maintain a fleet and army end to govern the territories they obtain outside Europe. Substantially, colonial tradings and the running of the colonies itself was entrusted to the boards of investors and entrepreneurs. The revenues from trades were used to maintained a professional army, that was mandatory to being able to trade in Asia. [this process alimented itself] • Dutch East India Company (VOC),1602. It was established with the goal of reaching the spices market (most lucrative one) and obtain the monopoly. It indeed represented the dutch monopoly on Indian Ocean trades and possessed both political and militar powers, in addition to the trading ones. Initially, it belonged to only dutch shareholders (1143 people). Subsequently it grew exponentially reaching huge power both in term of capital gain and size of the company (1753: 36k employees). The VOC set up a vast trading system stretching from Persia to Japan, However, they did not occupied much territorial space. Their organization used to be quite advanced (data still available due to bookkeeping process), they elaborated a complex system of recruitment called on young men all over Europe. Features: - Limited liability + secondary market for selling shares - Huge profits: dividends 18% a year - 6.45 millions capital stock • East India company (EIC), 1600-1874. The EIC was an hybrid sovereign company, it was a private corporation, but it was entrusted with “public” powers because it regulated territories far away from England (flag, coinage, armed troops, law courts). At first the company was a regulated company with 200 investors; in 1612 it became an unlimited joint stock company with headquarter in London. As the VOC, it tied investors with limited liability and obtained spectacular capital gains (capital stock £72k). The EIC implemented a flexible model: the Factory system. The company was strictly organized, the management was highly professional and specialized and it was indeed separated from the proprietors. Furthermore, EIC was a decentralized firm, meaning that the central headquarter licensed entrepreneurs that would have run the operations overseas. These employees had an high level of autonomy, they negotiated with local merchants and could aim at greater freedom and profits. Private profits became the engine of the company and its key of success. 7 The company firstly planned to enter the spice trade market, but it was repelled by VOC (1623) and so tried to enter a different market: India. The two companies signed a contract to avoid rivalries: VOC would have had the monopoly on the spice trades, while the EIC on Indian markets. The political condition of India was unstable (Mugal empire melt down) and EIC got involved in politics and military conflicts with the aim of protecting its trades and privileges. EIC gained great power within the country and, by 1818, EIC had direct control over 2/3 of Indian sub-continent. 9. The financial revolution. In the XVIII century, a long process of inventions and implementation of key innovations in the financial system provoked the big bang of capitalism and a reorganization of the financial order. Britain was certainly the leading country and it came up with an efficient and stable system, later on adopted by almost every developed country, the fields in which this revolution took place were: trades, stock markets, credit system, public debt system. 1. Trades: creation of charter and joint stock companies with limited liability [born as an exception, then key model]. This companies were born with the aim of mobilizing private capital and develop overseas trades. 2. Stock markets: organization of the market for the exchange of securities (already existed from XVI century). In XVIII they became actual specialized places established as meeting market spaces where brokers could meet up and trade [board with securities displayed + meeting floor]. Stock exchange markets became universal standard institution and trade marks of developed countries. Trading securities were (in order of quantity exchanged): Commodities, Bonds and Shares. Features of the stock exchanges: • Possibility of future contracts: fixed price purchase at an agreed time in future. • Call of put options: buy or sell at a given time • Speculation: betting on the rise of a stock’s value. • Information: creation of journals giving info about stock markets. - De La Vega “Confusion de Confusiones”, 1688: first treaty on stock markets. He introduced terminologies that still exist (Bulls/Bears) and provide guidance on how to behave. • State’s regulation: states introduced regulation whenever a crisis disrupted market operations (financial crisis). - Licensing brokers, 1697: people who operated in markets had to be licensed (possessed expertises). - Annual register of companies, 1780: companies had to be compliant with settled standards. 3. Credit system: development of public banks, the first example was the Bank of England. The model of public banks represented a symbiosis of public and private credit: it was a tool of the state (publicly owned and licensed by the parliament), but managed privately. Public banks were safer due to public finances baking and provided general banking services and managed public money (safe deposits, clearing, money exchange, settlement of payment, bill of exchange). Public banks also issued paper notes, at first they represented symbolic money (“redeemable money”: receipt for bank deposits) and were used as an asset. Later on, paper notes were issued not only against deposits, but also against the borrowings of gold and silver by public bodies (“credit money”: receipt for the bank’s liability to the private people) and so they were used as liabilities. [money given to the bank and lent to the state - paper notes were used by people as an asset but represented monetized state debt] Bank of England: it established a crucial model that permitted to finance the state. Chronology: the bank was licensed through an act of parliament and royal charter, 1694. It started as a limited liability-joint stock company of investors (1268 subscribers) that financed the state through a loan, £ 12 million was raised in 12 days. Functioning: the bank was given exclusive possession of gov’s balances and it was entrusted with the capacity of issuing paper notes. The lenders had given the government hard cash and so they issued 10 II. On the social prospective, an unemployed, landless working class was created. The increase in productivity provoked a further excess in labor demand (numbers of workers in farms dropped from 70% to 37% of English workforce). This led to a deep social dislocation and suffering, unemployed farmers migrated either to cities, representing cheap labour required in the developing industries, or to other countries. Moreover, the social dislocation, together with the general demographic expansion led to a strong increase in urban population. 12. The industrial revolution. From the second half of the XVIII century, England faced a sustained high rate of population growth and a rapid transformation of the social pattern of the country, which experienced a strong phenomenon of urbanization and industrialization. By 1850, 54% of the population lived in towns and London represented the most advanced and urban city of Europe. The population growth was due the lowering of prices and the abundance of primary commodities (food, colonial commodities and coal at stable prices) and with some state and private investments that opened the way to a market economy oriented society. First of all, England financed great sum of investments in infrastructures [also other countries in Europe]. Infrastructures where essential because they supported trades and favor a national market (interconnection of regions) and a mass distribution of goods. - Turnpikes: toll roads built by private developers, faster and cheaper transport. By 1825, all major cities were linked by good roads. - Canals: fast, cheap and safe way of transportation. XVIII century: canals boom in England. - Technological breakthroughs: steam engine (later used for transportation) England was the first industrial nation, however, historians agree that the long lasting process between 1760 and 1830 it represented a decisive transformation and not a “revolution”, indeed the GDP growth had been very spread out over a long period of time (average growth rate: 1,5%). England was pioneering these transformations and consequently did not have any competitors and could develop relative slower. England pioneered because it had favorable factors such as: a large domestic market (infrastructures), an international market (international ventures + colonies), a great availability of natural resources (coal - cotton - iron ore). Several factors helped shaping a new society: - Spread out of technical innovations and knowledges: between 1760 and 1800 there was a striking increase in the number (976) of legally patent innovations. From this period, the means of science itself changed, from academical and empirical researches that represented in the past, scientific innovations were now strongly tied with their possible use in production and so their practical application. Joel Mokyr argued that the industrial revolution began also became the Enlightenment demonstrated extraordinary interest in technology, since the Renaissance’s introduction of the scientific method, science had become more systematic, however, it is during the XVIII century that it converged with technical knowledge. These regarded two main fields (that actually intersected): the productive sectors and the invention of new sources of energy. • Productive sectors’ innovations: textile (spinning - weaving), iron works and mining. The automatization of production led to a dramatic rise of output produced (especially in the textile sector, “spinning Jenny”) and, consequently, costs were sharply reduced and profits boomed. In the textile sector, the added value of cotton produced rose from 500k in 1760 to around 25 millions by 1825. • New energy sources: England was provided with great availability of coal, that was the engine of the industrialization in XVIII century. Watt’s steam engine (1792) granted a dramatic increase in the automatization of productions. The machine was developed and improved during more than century of experimentation, adaptation and enhancements of its mechanisms. Companies adapted new 11 technologies, extending their use to a much greater number of industries and improving production processes. - New consumption patterns: the expansion of the overall demand for goods [increase productivity, lower costs], led to a change from conspicuous-elite consumption (pre modern society) to mass consumption and consumer society (modern society). The reason has to be found in the great availability of cheap and abundant colonial commodities. - New working patterns: Jan De Vries argued that an “Industrious revolution” (labour-intensive economic growth) took place. New pattern of consumption encourage households to adopt strategies in order to increase their income, the increase in consumption was proportionate with the increase in working hours: • Proto industrial enterprises: putting out systems (production moved outside the urban areas - countryside had lower labor and production costs). This led to an increasing amount of rural manufacture districts. • State intervention: States had developed an increasing attention towards economic activities, from XVIII century, England (and others) aimed at protect local infant economies through protectionist measures (discourage imports). “Catolico Acts” (1720-1721) restricted imports and sales of Indian cotton to encourage more textile production and distribution within the country. Interpretations of industrial revolution: • Toynbee came up with the term “revolution”, it interpreted it as a radical transformation. • Claphman gave a more British interpretation, highlighting a gradual change more than a radical transformation, he gave great importance to the putting out system. • Ashton and Landes underlined the importance of technological innovations. • Wringley gave a key role to the source of energy: from an “organic” to a “mineral based” economy • Rostow highlights how this moment signed a new and permanent king of growth. 13. Steam power and its applications. The industrial revolution most famous invention was the steam energy, it was firstly used in the mining sectors (from 1698) and used to pump water out from the mines to reach coal. This technological innovation faced a process of adaptation and efficiency, flexibility and safety enhancement. After almost one century, in 1792, the this kind of energy was used to power Watt and Boulton’s invention: the steam engine. Their work was based on an earlier invention: the Newcome fire engine and it was aimed, indeed, at improving the latter, which was extremely inefficient. The steam engine was developed and improved during more than century of experimentation, adaptation and enhancements of its mechanisms. It was a breakthrough invention that was adapted in several sectors and that made possible on overall increase of productivity. Some historians have identified the establishment of the factory system as a key element. The latter, implemented in industrial companies, had its core in the complex machines powered by inanimate sources of energy, that required great capital investments. The theory is that the concentration of production launched a phase of social mobility in which entrepreneurial spirit was the engine of the success. Key sectors: • Mining: it pioneered the usage of steam power, which made possible to increase the quantity of coal extracted. Technological innovations led from the usage of wood charcoal, to coal, to coke (purified coal) that was cheaper and more efficient. The coalfields provided the location and aided the development of many great Britain’s first industrial regions, enabling many improvements in the iron industry (cast iron and steel production). • Textile: by XIX century, Britain held the monopoly over textile production. In the previous century, this sector grew dramatically due innovations of mechanical devices and the reorganization of production [factory system]. The steam engine was firstly used to powered the “spinning Jenny” a machine built to spinning yards (1779), subsequently Edmund Cartwright mechanized the looms for spinning and weaving, allowing a complete automatization of the process, that increased productivity over 150 times. 12 By mid XIX century, these machines were widely spread across the country and Britain overcame the Asian primacy over textile (cotton) production and exports; profits were spectaculars and Britain obtained a leading role in the world economic system. 14. XIX century national paths to industrialization in Europe. The revolution spread out in Europe, indeed, other countries wanted to achieve the results held by Britain and competition was boosted. The process of industrialization spread in Europe is known as “peaceful conquest”. The key to imitate Britain was certainly the spread of knowledges, for this reason, proximity helped certain countries (continental Europe) in obtaining English innovations. Other factors created favorable circumstances: putting out manufacturing and availability of natural resources (coal and iron). Countries adopted strategies to obtain knowledges: 1- Hiring of English personnel (technicians) 2- English business men operating overseas (so implementing expertises in foreign territory) 3- Educational trips to England 4- Industrial spionage As said before, continental Europe held a favorable position and this led to the advent of early industrialization in the so called “golden triangle” [1830-1880]: Belgium, France, Germany. The followed quite similar national path to industrialization: they implemented institutional reforms that allowed a rapid development , a swift construction of railway networks (encouraged both domestic and international markets) and a development of financial services (credit/investment system). 1. Belgium Belgium was the closest example to Britain, because it owned a similar resource endowment and, due its proximity to Britain, it had traditional cultural and commercial link with it. They also held a similar industrial development (textile, coal mines, iron works). Innovations in Belgian model: a developed credit system [Societe General de Belgique] and the organization of production. Belgian economy was mainly export oriented (small domestic market) and was composed by several big corporations that represented vertical integrated firms (control of the whole line of production). 2. France France faced an aberrant pattern of growth (also lower and with fluctuations) linked with the diversity of the country. As a matter of fact, France did not benefit from availability of natural resources and indeed it had a slower growth, worsen by the great reliance of traditional sectors. However, as England, it implemented a revolution in the credit sector (Credit mobilier) and a creation of a railway network (national market). Innovations in French system: use of new sources of energy and new technology [France development increased when new technologies became available], an unusual structure of enterprises, with the predominance of small firms widely spread out in the countries and a crucial importance of the luxury manufacturing. 3. Germany Germany was the most successful country among the golden triangle. In the XIX century experienced both economic and political unification. In 1833, the Zollverein was founded: a custom union that enabled free trades throughout munch of the German territories, reducing internal competition. The creation of a German common market was both a prerequisite of political unification (reached in 1871) and cause of the economic development and subsequent industrialization (boosted also by the creation of a railway network). Germany production had its core in the coal and iron industry where state coordination (protectionist tariff) and universal banks played an essential role. Furthermore, the production was organized in large productive units, that led to the tendency of the creation of big corporations and cartels. Germany also pioneered the production in new emergent fields such as the chemical, electricity and mechanical sectors. In the XIX-XX century, Germany experienced a dramatic increase in output produced and in the shares of world manufacturing, it followed a demographic boom and overall increase of the national wealth. 15 Japanese society understood from Europe that a strong currency was necessary for increasing imports (required to accelerate industrialization), because they did not focus on agricultural exports, it was easy to adopt the gold standard. Japan also imported European political tendencies and developed a rapid interest in colonial expansion. 16. Main XIX century flows: people, commodities, capital. In the XIX century, the western world experienced global scale changes at a faster pace; essentially, flows that were already crossing the world, drastically accelerated, shaping a new global regime. This moment (last quarter of XIX century) can be labeled as a second wave of globalization, as a matter of fact, the world became strongly interconnected as it had never been before. Three main flows strongly accelerate during XIX century: commodities, people and capital. 1. Flow of trades: the flow of commodities traded increased up to 40 times from 1820 to 1914. The XIX century represented a turning point in the kind of commodities traded: the new infrastructure networks made possible to reach destinations in shorter times, with higher safety. Due to the sharp cost decrease, also industrial and primary products were exchanged, while in the past only luxurious good were worth to trade. Moreover, travel time was cut off and this made possible to trade also agricultural commodities (also favored by the designed of refrigerated ships) that became 2/3 of commodities exchanged. A consequent global impact was the greater availability at lower costs of commodities, that led to a mass consumption of goods. Less advanced economies (e.g. Mediterranean area) were deeply weakened from the competition with such cheap commodities and local small businesses suffered from dislocation, both (traditional) manufacturing and farming sectors had to apply huge transformations to keep up with the markets and a flow of economic refuges continuously exited these areas to reach more developed ones, in order to find opportunities. In this process, Asia and Europe found themselves having reverse roles. 2. Flow of people: unlike the XV century, this century was characterized with enormous flows of free people. People were now able to easily move from a continent to another, seeking for opportunities. Europeans represented the main group in the flow of immigrants, some of europeans tried to migrate in the African colonies, but African climate was certainly not favorable to them. Indeed, most of the flows were directed in other countries: the American continent (both north and south America), Australia and New Zealand. These movements in and out continents, turned out to be favorable to both of the parties involved. Indeed, European countries could “expel” excesses of labor force, while the Americas were lacking of work force and benefited from the flows directed to their countries. As a matter of fact, American continent provided advantages to immigrants, they were welcomed and encouraged (Argentina, Brazil and Canada granted land to facilitate new settlers), countries implemented open door policies. As as consequence, demographic booms were recorded, mostly in the Americas, American society was reshaped by immigrants (“New European society”) and became a true ethnic melting pot. Flows of people were recorded also in Asia: from India to Japan, even if the latter did not promote incentives, and from China to North America. As numbers of immigrants soared, restrictions were introduced and ethnic discrimination became common in several countries. In America, the presence of Chinese immigrants was particularly not tolerated. Mostly in the west coast, they represented a large and strong community and Americans feared that they could represent a political liability, Chineses were excluded from society. In 1882 the “Chinese exclusion act” blocked Chinese migration for circa 80 years. 3. Flow of capital: XIX finance institution and credit organization and expertise made possible to move and control long distance capital, people could finance long distance investments. During 1860-1914 the world faced a strong rise in capital mobility, rich and developed countries experienced high productivity and, consequently, possessed surpluses of capital and they became exporters of it. The financial capital of the world was London (80% of global foreign investments), leader also of the international monetary system, Britain exported capital to the New world (3/4 went to Americas and 16 Australia). Other major capital exporters were Germany and France [Ottoman empire railway financed by France]. The large possibility of investments was counterbalance by the risk capital exporters countries were facing in financing less developed countries (political, economic instabilities). It followed that flows went from rich countries to resource-rich countries, countries where investors could expect profits from. Capital flows went into countries where either natural resources or production processes could have been enhanced and further developed, that is, countries either already rich or in a development process. The interconnection among these countries (flows of capital, production, labor) led to a process of self reinforcement and enrichment that, in turn, incentivized global economy and increased interconnection. Poor countries did not take part of this process of reciprocal help and were left behind. In the XIX century, the gap among developed countries and underdeveloped ones was indeed extremely exacerbated. 17. XIX century communication networks. The XIX century was characterized with the swift development of infrastructure networks. The world became suddenly strongly interconnected because covered by both communication and infrastructures networks that led to the first stage of the “shrinking” of the world [shrinking world theory]. Investments in transnational infrastructures essentially made possible to create safer, faster, reliable and cheaper ways to move across the world goods, people and information. These innovations were due the strong impulse in technological and scientific researches given by the industrial revolution and regarded two main fields: transportation (railways and steamships) and telecommunication (telegraph). Transportation developed thanks to two innovations, both linked with the widespread use and adaptation of the steam engine: the steam train and the steam ships. These certainly accelerated the process of globalization. • Steam trains: Railway networks already existed, but were used mostly for industrial proposes (transportation of coal). In the early XIX, thanks to the usage of the steam power, steam locomotives were created, making possible a faster and more reliable way of transport. England pioneered the construction of a railroad network with the aim of connecting different regions of the country and so create a national network. Railways represented the first major infrastructure development and it was rapidly adopted in most countries, even in the less developed. Railways lines were used as key indicator of development. • Steam ships: the adaptation of steam power to ships made possible to accelerate intercontinental travels, favoring the flows of people and goods. Because intercontinental travels were safer and shorter (and, consequently, cheaper), a larger variety of goods could be exchanged across continents. The process of perfecting this technology was incredibly fast, indeed, the first ongoing steam ship sailed in 1813, after only 6 years a steam ship crossed the Atlantic (in 30 days) and in 1840 it had the first profitable adaptation: “Cunard Line” started to provide first regular services (people and cargos) across the Atlantic, the estimated travel time was 12 days. Steamboats could carry more passengers and goods both more cheaply and quickly. In 1859, a French/Egyptian enterprise started the ambitious project to create a canal to connect the Mediterranean with the Red Sea (and so the Indian Ocean): the Suez Canal. The construction was finished in 1869 and it made possible to cut the route to Indian Ocean by 40%. Telecommunication were revolutionized by the employing of telegraph (half of XIX century). For the first time, telegraph made possible to dematerialized information, information travelled way faster than people or goods and they could reach the other part of the world in few seconds. The instant speed of information and communication allowed greater security and greater volume of transactions. Electromagnetic telegraphs needed great infrastructures because they work through a network of cables (huge network of submarine communication cables). The progressive enhancement of this technology was due the great commitment of scientific researches to this cause (Gauss-Weber, 1833; Morse, 1837). 17 Its first commercial application was implemented in 1837: Cooke and Wheatston system, they created a “needle telegraph”, the receiver consisted of a number of needles which could be moved to point to letters on a board. This feature made possible a widely spread use of the telegraph because users did not need to learn codes. In 1845, the use of telegraph was widely spread and the “Electric Telegraph Company” was created, it was the world's first public telegraph company. The Cooke and Wheatston system had been already taken up by several railway companies for signaling purposes and the company intended to open up the technology to the public at large. The historian S. Pollard considered the role of technology innovations in XIX century and theorized the “Differential of contemporaneousness”. According to his theory, the advent of technology can accelerate and advantage certain countries, however it can represent an additional burden to others. As a matter of fact, countries need to be ready to embrace innovations, they need an adequate social and economic pattern to benefit from new technologies implementation, otherwise, they could fall behind even more. For example, while railways represented a clear advantage to most of European countries, in the Ottoman Empire [moreover, railway network financed by foreign capital] contributed in a rapid destruction of domestic manufacture that could not compete with imported, cheaper goods that were now (thanks to railways) easily accessible. 18.The gold standard and international trade. The international trade system in XIX century was based on two main ideas: firstly, that governments should not intervene in the markets and let them regulates themselves; this approach was clearly based on Smith and Ricardo’s theories, that praise the benefits of specialization and free trade. As Smith explains in the Wealth of Nations, the division of labor [ encouraged by the extension of the market beyond national borders] plays a pivot role in increasing the wealth of individuals as well as nations. Indeed, specialization spurs labor productivity at home. Furthermore, Ricardo argues that trade emerges because individuals or countries have different advantages in producing different goods. If such differences exist, specialization will always prove to be mutually beneficial. The second tenet of XIX century international trade was that an international financial/monetary order was to be created to provide integration and cooperation. Because of the spread of industrialization, England had expanded its exports and, essentially, it was at the center of the world trade system. Moreover, the superiority of its banks (BoE) made the sterling be the international currency. In XIX century, countries performed an international cooperation in creating a common monetary order, but no formal international bodies were established: England was informally the leader in the new economic/financial order. The BoE adopted the Gold standard in 1819, several countries implemented it later on and the model gradually became the international standard (until 1929). The gold standard, essentially, ensured that countries' currencies were based on gold reserves. Because national currencies were exchanged at a fixed rate, the international system was unified and homogeneous and international trades were provided with predictability and for this reason favored. The gold standard was a stable system because a country’s internal stability depended on its international stability, the money supply was directly linked to the inflows and outflows of gold and so to either a positive or negative balance of trades payments. If exports outweighed imports, gold would enter the country, prices would therefore increase, so that economic actors would prefer foreign products, thus allowing a realignment of the exchange rates. International trades were drastically expanded in XIX century and Europe (among all countries: Britain) became the “workshop of the world” [Benjamin Disraeli], 2/3 of the world industrial production was indeed European. Moreover, North American share of world manufacturing grew greatly. 20 paying money to poor people would increase their number. Only people with high difficulties, such ad disables, would have been helped [principle of less eligibility]. 2. Workers organizations: they represented horizontal organizations aimed at achieving an higher degree of protection and to fight for better conditions. Workers effort took several directions: • Mutual associations: provide financial and social services to members in exchange of a fee payment. • Friendly societies and cooperative enterprises: voluntary, cooperative associations aimed at sharing profits (peer relation among members). • Trades unions: associations of wage earners with the aim of defending their professional prerogatives and bargain better conditions. They were hindered by the Combination acts (1800) and legalized only in 1871 because considered to have a negative intervention in the market, as a matter of fact, they provide an effective way to unionize and bargain higher wages. Furthermore, the social question provoked the emergence of new political movements aimed at representing the new born proletarian class; moreover, new economic theories were proposed. “The Capital”, written by Karl Marx, focused upon production processes, making the capitalist mode of production historically specific. Particularly, it explained how the surplus value added in the process of capital accumulation was directly linked with the exploitation of the labour force, meaning that capitalists paid workers less than the value they added in the production process. Moreover, he argued that the huge and growing profits were linked with economies of scale and had become the stigma of modern development. Socialism promoted cooperation and mutualism and denounce the exploitation of workers; it strongly contrasted the liberal doctrine of individualism [industrial revolution’s engine]. Socialism turned economics and politics in a struggle between who was benefited from industrialization, “haves” and who was not“haves not”. It encourage the cooperation among workers, providing an optimistic reeding of future current events: poor workers would have win over capitalists. The working class actually represented the first international movement (First international, 1864), which aimed at uniting different left-wing socialist, communist and anarchist groups and trade unions that were based on the working class and class struggle. This movement would incentive the governments to take action. Germany experienced a rapid transformation in the industrial heartland of Europe and, consequently, trades unions and a new socialist party rose. On the contrary of England, Germany, headed by Otto Van Bismarck, introduced the first social welfare reforms in order to reconcile the working classes to the authority of the state. Germany government promulgated the advanced social legislations, later applied also by other European countries: compensation to workers in case of illness, 1833; accident insurance law, 1884; old age pension scheme for people older than 70 years old, 1889 [state did not provide resources, but forced workers and employers to set aside resources and pay for insurance and retirement plans]. At the end of XIX century, other countries took the action through institutional responses to the social question to protect workers. 22. The second industrial revolution and the rise of big businesses. The second industrial revolution (last quarter of XIX century)was marked by major technological innovations and the systematic application of scientific knowledge to industrial processes. It also involved new forms of company organization to deal with the increased size and complexity of emerging sectors. A new kind of energy was used to powered industries and every day life tools: the electricity. The second revolution reshuffled the hierarchy of energy fuels, leading industrial sectors and leading states. As Alexander Gerschenkron argued, technological innovations keep the relationship between more and less developed countries very elastic [every technological game changer can potentially change the hierarchy of countries]. Indeed, the impact of the second wave of industrialization provoked different reactions among countries: countries already industrialized (“first comers”) tented to be more conservative in embracing new 21 innovations, because they already held a position of advantage compared to the “late comers”. However, because the latter certainly were more open to new technologies and innovations, if they adopted them quickly, they could actually have reached first industrializers. New leading sectors: • Metallurgy: steel and alloy (no more iron), steel indicator of industrial efficiency. • Power production: internal combustion engines and electricity (versatile form of power - Edison and Siemens). Energy powered by petroleum and hydropower. • Chemistry (Germany): production of artificial and synthetics products (thread and rubber). • Food processing: help the internationalization of farming (canning and refrigerators). • Communication (telegraph). • Automobiles. In the last quarter of XIX century, in almost every industrial field demand increased, however, while in certain industries (such as textile) the only transformation was to implement bigger plants, the new emergent and leading industries needed much more radical reorganization. This led to the establishment of “big businesses”, that were large, multinational corporations controlling big portions of international trades and mass production. Big corporations were strongly dependent from the injection of capital ensured by the new investment banks. Businesses exploited the new networks to reach wider markets, that allowed them, furthermore, to dislocate their production plants from the headquarters. Production was moved where costs were lower (less developed countries), while headquarters remained in the economic core. This led to a dubious effect on national economies. In addition, companies reorganized their own internal systems of production and distribution, implementing a vertical integration needed to protect the company against any risk: corporations controlled the whole line of production, marketing and pricing. In response to the new complexity of company units, a class of professional managers had to be created. In this moment it was clear that owners could no longer run the company, because specific business skills and knowledges were needed. This trend was born in America and then spread out, in the XX century managerial schools emerged all over the world. Secondly, “scientific management” was implemented in production. Frederick Winslow Taylor developed a management theory [Taylorism] through the analysis of work flows in order to improve economic efficiency, especially labor productivity. He believed that, studying working practices, companies could have reorganized them in order to be as efficient as possible; his aim was to develop a system of standardization of working practices to so achieve higher speed of production. This led to the born of assembly line, machinery was positioned so that the different stages and processes in manufacture of the finished product took place in a continuous sequence inside the same factory, which was supplied with large amounts of fossil fuel. This made it possible to achieve significant reduction in unit costs as the volume if output increased (economies of scale), giving larger factories an incomparable advantage. Henry Ford firstly implemented Taylorism in the production process of a vehicle: the Model T (1908), the cut of costs made the Model T the first mass product, indeed, it was extremely affordable and available to middle-class Americans. Moreover, following Taylorism, Henry Ford implemented other key features in the labour organization: 1. A clear division of tasks and responsibilities. 2. High pay for high-performing employees (efficiency wages). 3. A hierarchy of authority and strict surveillance of employees (employees who did not perform well were not accepted) The rise of corporations was studied by Alfred Chandler in its analysis “Visible hand”. He argued that in XIX century, Adam Smith’s markets invisible hand was supplanted by the "visible hand" of the new born kind of management, which became the most powerful institution in the American economy. 22 23. XIX century imperialism. The gradual integration of international markets was counterbalanced by the rise of nationalism, aimed at expanding international trades to increase national power, hence, contributing to an antagonistic vision of international relations. The main expression of these rivalries were colonial conquests, colonies represented peripheral areas with which Europe could trade a growing quantity of manufactured goods. The technological improvements in transports had made the world smaller, moreover, the improved weaponry increased Europeans military power. This represented an historic turning point because Europeans were, for the first time, able to penetrate colonial territories’ hinterlands. Europeans started a race to build empires, Imperialism represented the last, violent stage of colonialism which did not was only an economic phenomenon, but also a social and cultural one. Target of the imperialism race was the African continent (no territorial occupation until 1880). From 1885 to 1914 a “scramble for Africa” [Hobson] took place. Europeans were carving for the establishment of new colonial empires and the African continent was divided in several European (French, British, Germany, Italy) colonies. The economic motifs were obvious: European countries needed raw materials and exclusive markets to exports finished goods in order to maintain protectionist economies. However, competition took also social and cultural dimensions: political leaders presented the new annexed territories to the masses as inevitable and played on national pride, the race was fueled by national competition and the desire of power and prestige. Furthermore, imperialism developed its own ideology born as a justification: colonialism was seen as the road to economic, social, cultural progress of the colonized. Furthermore, organismic metaphors and evolutionary theories, famous among the educated public, were transferred to market mechanisms by suggesting that an aggressive behaviors was an expression of progress. What Kipling called “The white man’s burden” represented exactly this ideologies: because incapable inhabitants of those backward territories would have failed to developed, white men (the colonizers) had the duty to educate and bring them progress, even if with forced actions. 24. WWI (1914-18): the end of a world, industrial war. The first decade of XX century is associated with the Belle Epoque, the peak of development and European cultural hegemony and prosperity, it represented the last stage of the Hobsbawm’s “Long Century”. However, globalization had also negative outcomes: first of all, the growing divergence with poorer (periphery) countries; secondly, the expansion of world trades had led to an harsh competition among core countries. Countries all over Europe opted for protectionists policies and strong nationalistic ideologies, increasing their military power (weaponry race), enhanced by technological innovations, and employing immigration restrictions and feeling of superiority towards foreigners. From 1914, the world left behind an age of prosperity and experienced processes of economic nationalism, de-globalization and war; the first world war represented the disintegration of European economy. In 1909, Norman Angell published the book “The Great Illusion”, in which he studied the relation of military power to national advantage. He argued that, in the modern world, war was economically and socially irrational because, in any case, it would have been harmful for every party involved. The reason was to be found in the strict financial and economic interconnection between modern industrial states, indeed, the benefits of a war victory would always be offset by losses because a defeated country, obliged to pay war reparations, would be rendered worthless. According to him, only economic interdependence between industrial countries was guarantor of the good behavior of one state to another. Nonetheless, the public opinion was galvanized by imperial rivalries and international competitions and arm race and war plans started to appear, becoming the factual prerequisite of the war. Furthermore, several European states signed international treaties, establishing alliances: Triple Alliance, 1882 (Germany, Austria - Hungary, Italy) and Triple Entente, 1907 (Britain, France; Russia). 25 All over Europe inflations became the most dangerous issue, strong devaluation of currency was happening in both victorious and defeated countries, however, continental Europe (Austria, Hungary, Russia and mainly Germany) suffered from a runaway inflation. Germany: the Weimar Republic instituted in 1919, represented a revolutionary institution, promoting an archetype of national community and state intervention in ensuring social wealth. However, it was a fragile reality [communist uprising by Spartacus legacy] and it was strongly hit by war repayments. The Republic was not able to pay war debts and German currency (the Mark) was already strongly devalued. The government responded to a general sit-down strike of workers (passive resistance) by printing banknotes to pay wages and salaries and the hyperinflation ensued (1922-1923). [1913: 1 Mark= 20£ or 4 $. End of 1923:1 Mark=20 billion £ or 15 billion $.] Paper money became totally worthless and workers had to be paid twice a day, the press could not keep up with the change because inflation was too rapid and paper notes with new value were stamped. Within the country the damages were uncountable because it wiped out the saving of a generation (especially the middle class), at the end of 1920 a huge unemployment hit the country. This would lead to a widespread nihilism of the population that allowed the subsequent political radicalization of Germany. At the middle of 1920s, some kind of financial international connection seemed to appear, obligations already tied countries one to another and a banker from Chicago, Charles Downes, theorized a plan to restore a global economic stability starting by financial flows. Debts: winning countries to USA, 12 million. Germany to winning countries, 33 million. The plan, accepted and applied, would connect war debts and repayments to restrict German obligations. It would essentially reconstruct debt payments’ schedules introducing private American loans: Germany: pay 2 millions reparations to the allies. Allies: repay 2.6 millions war debts to the US. USA: issue a 2.5 millions loan to Germany (so it would start repayment to allies). This plan improved international relationships and encourage financial equilibrium, however, it only lasted until 1930 when the Wall street crash provoked a gigantic crisis. 26. The Russian revolution of 1917, the planned Soviet economy and the NEP. During WWI, Russian population (already in terrible conditions) was exhausted by the war economy and the huge demographic losses. The general discontent led to a revolution (February and then October) that had long term consequences on Russia and the rest of the world. The revolution ended with the victory of the Bolshevik, the more revolutionary side of the communist party. In 1918 a soviet government was created with Lenin ahead. Lenin believed that an internal political and social revolution was the first urgency, his main aim was put communist theories into practice. For this reason, Russia signed the Brest Litowsk armistice in the same year (1918). Lenin implemented a new political and economic regime based on Marxist theories, however, Marx had theorized a communist revolution in a highly industrialized country (strong proletarian class), while Russian economy was mostly agrarian. The government ended any landowners’ right and any workers’ control over production and food distribution. Moreover, banks and industries were seized and controlled by government and free enterprises became illegal. In addition, he stressed the importance of the workers showing discipline and a will to work. In doing so, Lenin implemented the so called “War communism”, a system aimed to combat the economic problems brought on the civil war in Russia. The Russian revolution provoked a “red scare” all over European countries. Indeed the apparent success of the communist model galvanized socialist parties across western world and states started to fear that this could have led to a wave of socialist revolutions in Europe. However, consequences of Russian civil war, that ended in 1920, actually turned out to be devastating: 15 millions people were killed, production was down to 80%, the currency was devalued and a runaway inflation took place, in addition to it, Russia gave up 34% of its pre war population and suffered territorial losses. The centralized State planning committee (Gosplan) proved to be ineffective, the state was essentially unable to manage and control manufacturing industries. 26 In 1921, Lenin promoted a radical change, experimenting several policies: the New Economic Policy (NEP). The NEP partially restored the market economy, but state planning prevailed. Domestic trade was liberated and peasants were allowed to sell their surpluses, small businesses were permitted and some of them were privatized (10% of output to the state). Moreover, mixed companies were formed with the participation of foreign capital. The NEP encouraged some kind of economic recovery, however, its more ambitious economic objectives were not achieved. In 1928, Stalin gained controlled of the party and launched agricultural collectivization and imposed a state planned industrialization. The Gosplan launched the “five years plan” program, representing complete state intervention over the economy: the state commissions set priorities and production targets to be reached in the stages of economic development. Stalin implemented a complete control over economic, social and cultural realities of the population. Indoctrination and violence toward dissidents provoked a huge public success of Stalinism [e.g. Stakhanovite movement]. The plan turned out to be economically successful: industrial output increased four times in the 1930s in a general context of European economic recession and Russia experienced a 5% GDP annual growth rate. Russia completed the industrialization process, industries became the leading sector (45% in 1937). However, industrialization was speeded up and driven by public state consumption(industries for defense and infrastructures); not private, which was actually compressed. It followed that a common wealth among citizens was not reached. Although, from the rest of the world, Russia seemed a successful alternative to economic liberalism, that could fulfill the market economy model that socialism movements across the world were aiming at. 27. From the “roaring 1920s” to the great crash (1929). Europe was experiencing a slow recovery from the Great War, after 1924 expansion involved several countries, new industries evolved (“five good years”), even if the process was not homogeneous everywhere and states were still very fragile, unemployment remained very high and economic growth was moderate and relied mostly to American loans. USA were living a complete different condition, the 20s represented a decade of great prosperity, GDP and trades growth [USA held 90% of world production], low unemployment and huge mass production [e.g. cars: 60% of American households possessed a car]. Mass consumption was encouraged by a wide rage of affordable product and a greater common wealth [e.g. homeownership double]. Mass consumption led to the creation of a mass society, that is, a society that possesses a mass culture and large scale social institutions, indeed mass broadcasting was spread all over the country through movies and radio and mass marketing promoted an increasing consumption of goods and services. In the roaring 20s, it spread out the ideology that increasing consumption of goods and services purchased was always a desirable goal because people’s wellbeing was strongly dependent in material possession (Consumerism). However, the roaring 20s represented complex and contradictory years, indeed, consumerism and increasing consumption was accompany by the strengthened of puritan ideologies that reflected in the Volstead Act promulgated in 1920 that forbid the production, sale and consumption of alcohol, with a consequent creation of a strong and great black market. Furthermore this extreme growth and wealth had several weaknesses within the system, firstly, the prosperity was based on durable goods (e.g. houses and automobiles) that did not allow a durable growth. For example, house production peaked in 1926, when demand for it was already diminishing, also because immigration was limited due isolation policies. Moreover, USA found lot of difficulties to keep up with the reduction of international flows and and cooperation, many foreign markets closed to the American market. The leading economic mainstream was still ruled by the Say’s law, economist were expecting that aggregate demand would just adjust itself to the production, but this did not happen, the reduction of exports and the consequent decrease in prices led the American market to an overproduction of goods and services, particularly in the farming sector. Lower wages were established due the loss in exports and income started to be unevenly distributed, indeed, in the roaring 20s, America’s wealthy citizens were getting wealthier at 27 the expense of the majority of the most [richest 5% had 33% of income] that certainly is not a condition that encourage economic growth. The condition of increasing trust in a perpetual economic growth led to several financial issues: Firstly, people excessively bought on credit and stipulated loans (mostly to buy homes), furthermore, people were strongly convinced of the stocks value rise and bonds and stocks were often bought with borrowings. Moreover, speculation (betting on short term rises of stocks for profits) became hugely popular. It followed that industrial output and stocks were not rising linearly, financial markets values were increasing much more than the actual economy. The moment when the American economy started to slow down, represents when Americans started to feel confident about the safety of financial markets and this led to a strong jump in stock prices that did not remotely represented the growth in output [GDP grew by 50%, stocks by 400%], a speculative bubble had been created and the condition in America at the end of the 20s was extremely favorable to the explosion of it, mostly because financial transactions were not controlled or limited in any kind and the speculative bubble (which was known by the Fed) was no reduced. At the end of 1929, share prices collapsed. This consequently deprived banks of their margins on assets under warranty and debtors preferred to lose their deposit rather than pay the sum agreed, the stock exchange crisis spread to the credit market: citizens and companies run on liquidity to protect it and this led to a progressive collapse of share values, while assets ceded to support loans were depreciating and levels of debts were increasing. The recession spread to the real economy, causing investments, unemployment and consumption to collapse. 28.The Depression (1930s). The withdrawal of capital from New York stock exchange created gigantic losses. The industrial production declined rapidly and prices and imports plummeted; in the farming sector, agricultural products were so devalued that it was not profitable to produce anymore. Also exports were contracted, by over 20%, both damaging internal and other countries’ economies. Deflation increased rapidly in two stages: the first was from the collapse of the stock exchange to the contraction of manufacturing (with a consequent reduction of stocks) and the second was from the fall in share prices to the fall in goods prices and in the value of imports. The American crisis shortly became a global crisis because of the strong interconnection of economies, indeed, protectionist policies did not completely isolate countries, mainly because they were all tied one with the other due war loans. The government response to the financial crush is the main cause to the following economic huge recession that provoked a deep, long-lasting and damaging consequence of the financial crisis, indeed, the bottom of recession was hit in 1932. The American government opted for policies that followed the economic neoclassical thinking and limited state intervention into markets. Policies: 1. Wrong monetary policy: the Fed raised the interest rate and it did not act as a lender of last resort. It reduced money in circulation being worried that the currency could devalue with the aim to prevent inflation. Fed should have done: decrease interest rate to favor investments and increase money in circulation by buying bonds. 2. Wrong economic policies: the government opted for a neoclassical approach [public authority should not intervene]. The expectations were that the crisis would have just passed and the economy would have fixed itself, because downturns were normal parts of business cycles. The government should have increase state intervention to create jobs and favor a recovery, Hoover’s presidency deeply damaged economy. 3. Wrong fiscal policies: taxes (income, corporate and VAT) were raised and other fiscal policies were introduced. The state should have decreased taxes so to increase population’s disposable income and favors commerces. 4. Wrong trade policies: the government implemented trade barriers, tariffs that discourage international trades, with a hyper protectionist policy, USA closed its domestic market to the rest of 30 Firstly, globalization had to restored, through the slowly reintroduction of international relationships, free trades should have been encouraged removing barriers hat had damaged the international economy. Secondly, nations should have been created through the Self determination principle: a group of people with similar cultural, social and political customaries and so national identity had the right to create their own independent government or state. It followed that foreign lands occupations without the consent of locals were to be forbidden. Decolonization and reintroduction of global trades, introduced by the Atlantic charter, would represent two essential feature of the postwar global order. Indeed, reconfirming what established by the Charter, in the postwar countries decided to free former colonies and help them develop, because in the new economic order there would be only self determined nations. The American century’s aim was to reach international cooperation, stability and prosperity; this was to be done through both political and financial planned reforms, because greater economic cooperation would have provided prosperity, however, phenomenons like unemployment and hardship and social dislocation were not collusive to stability and indeed it was necessary to implement policies in order to reduce social suffering. International cooperation started in 1945 with the foundation of the United Nations (UN), that represented a world political forum for discussions and diplomacy with the fundamental aim to avoid global conflicts. [The UN took example from the Society of Nations (1919), which however, due the strong political and economic instabilities had failed.] International monetary and financial agencies were in addition established to promote financial stability and improve global economy. They represented institutions providing safety nets to prevent economic downturns and, in case of regional recessions, avoid their global spread. 1944, Bretton Woods: 44 countries conference to discuss about the postwar monetary and financial order that would promote stability and consequently peace, both American allies and neutral countries participated. It was established that international currency would no longer have been the British Pound but the American dollar, Bretton Woods signed the born of the Dollar Standard. The latter established that US dollar would have been used as currency for international exchanges, becoming global standard for exchange rates for other currencies. The dollars was pegged at the amount of 35 dollars per ounce of gold, while all other currencies’ values would have been established based on the rate of exchange with the dollar. This system succeeded in providing monetary stability [until the 70s]. Also, several agencies were established with the aim of promoting economic and financial stability: 1. IBRD: the International Bank for Reconstruction and Development was meant to be the postwar world bank, it had the aim to speed up the reconstruction of destroyed countries and promote economic progress in underdeveloped countries. 2. IMF (1945): the International Monetary Fund represented a powerful international financial body supervising the overall financial structure, it had the task to intervene in case of financial crisis, providing financial resources to prevent that a local crisis would become global and spread out. 3. OECD (1948): the Organism for the Economic Cooperation and Development was created to prevent unhealthy competition within Europe and avoid economic disruptive protectionist approaches, it aimed at restoring international confidence. 4. ITO, GATT (1948): the General Agreement on Tariffs and Trade was an international agreement signed in order to recreate a world economy, discouraging tariffs and promoting free trade and international cooperation. On the basis of GATT, ITO (International Trade Organization) was created to implement concretely what stated in the agreement. Moreover, the so called “Marshall plan” was implemented in 1947 by the US. The plan provided aid assistance to speed up the reconstruction of all European destroyed countries, both allies and defeated countries, to speed up recovery. The postwar years promoted also new approaches to social policies, in England a new welfare philosophy was created that aimed at introducing social contention to reduce social tension within countries: the Beveridge Report (1942). Understanding the mistakes made in the 1930s, an English parliamentary committee proposed a program of social insurance and allied services, representing a prototype of the modern welfare state. 31 Arthur Greenwood believed that the purpose of victory was to live in a better world, which was reachable in a more equal society. The plan had three main features: equal opportunities, equal distribution of wealth and public responsibility that national social security standards were to be granted to anyone. Universal social security standards: 1. Minimum standard of living guaranteed to anyone. Human dignity became a fundamental right. 2. Degree of security provided to people. The major risk of earnings losses (sickness, unemployment, old age, accident, maternity) was to be covered by national insurances to guarantee social services. 3. Progressive tax rates to reduce inequality and pay for public spendings [became standard]. People with higher income would have payed more in order to provide finances to grant help the people in needs. Britain was the first country to implement a spread welfare system, representing a clear example of Keynesian theories put into practices. Britain’s model turned out to be successful in providing freedom from poverty through a national insurance, diseases through a national health system, ignorance through an improvement of School system [education act - more equal system], Squalor through new council housing [New Towns Act - more public houses] and unemployment through state intervention. “Appointed day” 5 Jul 1948 is remembered as Britain’s introduction of the first National health system in the world and it still sign the born of the welfare system. The welfare state model provoked a huge lead in public spending due the necessity of finances to promote welfare provisions. In certain countries, public expenditure nearly double compared to GDP. [Clear contrast among welfare: state power to finance well being of citizens vs warfare: state power to promote national competition and war]. 31.The Marshall plan or European Recovery program. USA clearly was advantaged in term of manufacturing capacity and world trades and generally of wealth, it possessed unequalled resources in finance, technology and skills. As a matter of fact, although it had participated to war, it was not severely damaged because the war field had been Europe and the Far east. At the end of the war, it produced 50% of world manufacturing and held 27 % of world GDP. On the other hand, Europe was devastated by the war and countries had the strong desire of recovery and return to normality, countries understood that the recovery should have been centered on manufacturing and industry and should have promoted continental cooperation. However, Europe could achieve a recovery only through external intervention: the USA decided to take this role and became leading European investor and provided a massive program of development aid. In doing so, the US had an essential leading role in the road to peace [economic prosperity]. From the 1948 until the 1952, the US promoted the so called “Marshall Plan” or ERP (European Recovery Program), which reversed traditional approach (no war reparations), financing European countries through an extensive economic aid. The European reconstruction was a sensible matter because of both political and economic reasons. Firstly, the suffering, impoverishment and discontent of western Europeans could have provoked revolutions and a political shift to communism, due to Russia’s proximity and influences. The US could have not permitted this to happen, because of their strong opposition to communism. Secondly, America had developed an economy based on foreign exchanges, its own domestic market was not enough to support production, it followed that they needed trading partners so to open trades, and western Europe represented a desirable target for the American exports. provisions to speed up reconstruction: • food and goods provisions for free [especially right after the war]. • Creation of a Joint administration fund that European countries could have spent those funds with the American approval [strict control over funds granted]. • provision of long term investment loans (30/40 years) at a very low interest rate. 16 Europeans countries benefited from the ERP and the total aid approved by the US congress was 12.4 billion dollars, also, a series of other initiatives aimed at consolidating European capitalism were promoted. 32 The plan included also USSR and countries under its influence, however, USSR did not accept and did not allowed any eastern European country, with Yugoslavia as only exception. In response to the ERP, the Soviet union established a system of aid funds directed to the Eastern Europe block, to promote a new economic community (COMECON). Comecon was a council for mutual economic assistance, aimed to encourage economic development of socialist countries and to promote integration within the USSR, limiting trades with western countries.The Comecon did not succeed because it did not promote sufficient economic integration and Russia did not have adequate financial means to run the program efficiently. The establishment of a close economic block turned out to be a failure, after 1963 external trades grew way faster than in the Comecon area. In 1952, the plan clearly had succeeded and Europe experienced a great economic recovery, becoming the greatest consumers of American goods. Moreover, in the 10 years after the war, US financed other several aid programs that circulated around the world: eastern Pacific area, Australia, south America, Near east and Africa. However, the majority was directed to Europe (35 billion) and the Far east, especially Japan. It was clear the the US financed countries that were destroyed by war, but still had the opportunity to reconstruct a strong economy and, subsequently, represent American exports targets. ——— Cold War:1945 - 1989. Europe and the globe was divided in competing political and economic systems (market economy and state commanded economy). Military treaty had been established to reinforce the separation: NATO (1949) aligned with the US (Canada and several European countries) and Warsaw Pact (1955) aligned countries that were under the Soviet political umbrella. The competition from an economic and political prospective became global when the Chinese civil war ended in 1949 with the victory of Mao Tse Tung and its communist party. However, military conflicts did not erupt in a full global scale, thanks to international institutions, the diplomacy made possible to limit the war only in regions and not develop in third world war. Furthermore, war between the two super powers did not emerge because both of them were in possession of nuclear weapons and the world was young witness of what had happened in Nagasaki and Hiroshima and USA and URSS knew that a nuclear war would have meant mutual and complete destruction. ——— 32. Postwar de-colonization. In the postwar years, following the principles firstly stated in the Atlantic Charter, European colonial empires voluntarily retreated and left colonies in a process remembered as “Decolonization”, based on the idea that colonies freedom would have led to their economic development and greater cooperation. In the 40s and early 50s, Asia was decolonized (USA left the Philippines in 1946, UK left India in 1947), afterwards, Africa was decolonized (1960s). Most countries were liberated without any military conflict mandating self determination; as a matter of fact, decolonization opened the way of new national movements, for example, the ex Indian colony resulted in the creation of two independent nations (India and Pakistan), national and religious feelings led to reshape former colonial countries. However, certain liberations involved bitter conflicts such as the ex-French Algeria and Vietnam, which took ideologic features because the independence of the country was supported by communist parties and, for this reason, also the US was involved. Moreover, political independence did not follow the same path as economic development, indeed, the countries did not usher in a phase of prosperity and wealth. Firstly, colonies’ economic control remained largely foreigner and these countries lacked of a ruling class; secondly, structural problems that already existed did not change: these economies were mostly based on primary sector exports, subjected to strong fluctuations and the manufacturing sector was highly backward. It was believed that certain countries had more assets that other, Latin America and Africa, indeed, had a great natural resources endowment, while East Asia did not and was, consequently, supposed to remain poorer. Actually, Latin America and Africa suffered the most and developed the least because of the 35 taken in 1978, withe the creation of a common European monetary system to limit competition within Europe and fix currencies in a semi fixed rate of exchange. The creation of European Union is dated 1992 due to the Maastricht treaty, that signed a new stage in the process of European integration, mostly in provisions for a shared European citizenship, for the eventual introduction of a single currency and for common foreign and security policies. In 1998 the European central Bank was created with the aim of maintaining financial stability, few years later the European currency, the Euro, was adopted by 12 countries, creating the Eurozone. [now 19] 35. The «oil crisis» (1973) and its consequences. In 1960, OPEC (Organization of Petrol Exporting Countries) was found in Baghdad as a cartel that tried to set fair and stable prices on oil, limiting the interference of Western companies, which controlled 85% of oil reserves [cartel of seven sisters]. The founding members of OPEC were Iraq, Iran, Kuwait, Saudi Arabia and Venezuela, and one of its main aims was to get better deeds for producer countries. As Richard Nixon had abandoned the Bretton Woods agreement in 1971, exiting the new “gold standard” and leading to the depreciation of dollar and an age of monetary instability and disorder, with advanced countries affected by high inflation, OPEC tried to limit the damage of dollar depreciation by fixing oil prices to gold. In 1973, OPEC proclaimed an oil embargo that was targeted at nations which were suspected of supporting Israel during the Arab-Israeli conflict of Yom Kippur. OPEC detained 50% of world oil production and proceeded to block the shipment of petrol to the US and other hostile countries.The negative supply shock provoked the price of oil jump from 3$ to 12$ a barrel. Energy costs became higher, with lots of consequences for the way production was organized [innovations that led to 3rd industrial revolution]. The second shock took place in 1979: the Iranian revolution that culminated with the overthrow of the Pahlavi dynasty led to a steady decline in oil output and the price of crude oil jumped to 39.5$ a barrel. The consequences of the oil crisis were a worldwide economic slowdown (which did not turn into a global recession) and the destabilization of oil dependent economies. Oil exporting countries rose in financial terms due to the increase in the price of oil and the traditional flows of capital changed, they became net global investors [excess of money earned from oil exports]. A new dollar per oil system was introduced (Petrodollar: any U.S. dollar paid to oil-exporting countries in exchange for oil). In 1975, OPEC members agreed to price oil in dollar in exchange for military protection, making the new system valid. Members of OPEC agreed to invest surplus oil proceeds in US securities. The decline in oil supply provoked greater interest to develop new oilfields, along with the interest to develop new energy sources that could replace oil, such as nuclear of renewable energy. Nevertheless, the oil crisis had a disruptive impact that changed the pattern of economic development and growth, and also led to major events, such as the collapse of the USSR and the third industrial revolution. In this period, developed economies relying on oil found themselves trapped in the so-called “stagflation”, a macroeconomic term used to describe a period in which low economic growth, high unemployment rate and increasing inflation rate are combines. The increase in commodity price of this period led to the end of coordinated capitalism (market economy with state intervention); the crisis led to the advent of “neoliberal” capitalism and the economic mainstream of Monetarism. The economist Friedman (Chicago School), criticized Keynesian prospectives and advocated a different economic thinking centered on the principle of money supplied (to control prices) and a reduction of state intervention (welfare state retreat). The crisis also led to the rise of conservative governments that favored the reduction of state economic intervention (mixed economies restored to private companies and limited regulations) and decided to reduce social welfare programs, also being hostile to labor organizations. They believed welfare policies were counter productive because people would have not be willing to take risks or to work harder to improve their efficiency. These new conservative governments were crucial in re-drafting the economic policy of the western world; political figures like Thatcher and Raegan that welfare programs had gone so far that they had become 36 On the contrary, many third world countries had to deal with various issues as a result of the oil crisis: they were vulnerable to price fluctuations of few farming and mining exports and suffered from a very high debt. The gap in per capita income doubled as a result of the greater divergence between third world countries and well-off nations. The performance of said countries actually varied deeply: India and China grew, whereas Latin America and sub-Saharan Africa the 1980s were called “the lost decade” due to huge losses on development opportunities. 36. The collapse of the USSR (1989-91) and its impact. In the period between the two wars, the state planned economy of the Soviet Union had performed well, as well as during the golden age. However, in 1975, while western countries were rebounding from the oil crisis, Soviet economy was stagnating. As a result, the Soviet economy started relying on western loans and imports: productivity and living standards were lower and backwards in comparison with western countries [e.g. 9% of citizens had a car], moreover, the common area of Comecon stopped to work. The commanded economy, while succeeding in supplying state’s investments, failed in improving conditions of private consumers, that had became the foundation of modern western Europe economy [consumerism]. In 1985, Gorbachev proposed the “perestroika”, the restructuring of the economy, and the glasnost, a new policy of openness to the west. Nevertheless, between 1989 and 1991 the Soviet Union disintegrated; Eastern European countries broke free from the Soviet grip and the Soviet Union turned into CSI (Commonwealth of Independent States), which was a loose confederation of independent states. In the first 90s, Russia embraced economic reforms and started privatizing industries, but this led to the creation of oligopolies; the process was overall managed poorly and Russian economy took a dramatic twist: economic disruption was caused by the liquidation of state assets and industries, and the command economy ended without any replacement. Inflation rose and GDP saw a major drop of 40% between 1989 and 1992; by the mid-1990s. 25% of Russian population lived below the poverty line. Conflicting view rose after this major event; according to Francis Fukuyama’s “The end of history and the last man”, the end of the cold war confirmed that liberal democracy and market economy was the final system for all nations, with no possible alternative; Samuel Huntington’s “The clash of civilizations and the remaking of the world order” saw this event as the final stage of an ideology which would bring the world back to the status quo, which should be the one signed by cultural conflicts (especially between “the west and the rest”). Differences with China’s approach (in the 80s it opened to market economy): China (Japanese model) attracted in the country expertises and capital, implementing economic reforms so to build a new economic structure, but not political reforms. On the other side, Mikhail Gorbachev implemented both a radical change in economy and in politics. The combination and the speed of the two reforms applied brought the system melt down. 37. The «third industrial revolution» and the economic rise of the Asian « tigers ». The third industrial revolution came out as one of the responses to the oil crisis. This event led to the birth of new digital technology that tended to respond to several issues that were standard before the crisis: production depended on intensive energy consumption, produced large quantities of outputs, employing lot of labor and consequently needing large industrial plants. More expensive energy meant higher costs that had to be reduced to overcome the crisis. The rapid introduction of electronics implemented a digitalization of production and a digital economy that led to the digitization of products, an increase in productivity with fewer workers and the consequent downsizing of industrial plants and the relocation of production (relocate factories from economic core to where 37 workforce was less organized and less protected, indeed, cheaper). Principal moments of the third industrial revolution was the birth of Intel 4004 CPU in 1971, Microsoft in 1975 and Apple Inc. In 1976 [already existed but were favored in this decade]. Japan actually accelerated the coming of the revolution: in fact, Japan, along with other Asian countries, distanced itself from oil intensive industries and easily adapted new electronic technologies, leading huge financial investments in those new lines of production. This period also saw the tremendous economic success of some Asian countries and the departure of China from a traditional policy of isolation, which was substituted by a policy of engagement and globalization. The major “Asian tigers”, at the beginning, were Hong Kong, Singapore, South Korea and Taiwan, along with the gradual emergence of Indonesia, Malaysia and Thailand. Asian countries tried to follow the Japanese pattern of development ( fast adoption of new emerging technologies), including the social model (disciplined work force, investments in human capital), the role of the state and state-business ties (developmental state), and their organizational model (team work), moreover, because they all were small countries, they developed export-oriented economies. Japan, furthermore, moved huge flows of capital in neighbor countries, directing investments and exporting expertises, because of the partly delocalization of their industries. China was also on the rise as well, becoming Asia’s “New Dragon”. On the 22nd of October 1978, Deng Xiaoping paid a benevolent visit to Japan, setting aside disputed to pursue joint development, thus signing the beginning of the opening-up program and a series of reforms. Chinese economy shifted from planned to a socialist market one, with the introduction of market principles and the beginning of de- collectivization, while maintaining political continuity (socialist system). One of the main reasons why China was seeking cooperation with Japan was that they could related more easily to them; Japan could provide a social and economic model that the Chinese could understand and imitate. State owned industrial complexes were privatized and contracted out, entrepreneurship was encouraged [as Japan:seek for foreign expertises without letting foreign corporations in control] along with the opening to foreign investment. In 2001 china entered the WTO. In the last years of the XX century there’s was the common belief that the economy core had shifted westward to the pacific. 38. Reducing the role of the state: privatization and deregulation after 1980. From 1989, with the collapse of the USSR, the role of the state was reduced, as the market itself was acquiring a major role in the new global age. The 90s signed the beginning of a more interconnected world [last stage of the “shrinking world” theory]. New economic giants, such as Brazil, China, Russia, India and South Africa [BRICS], were emerging and the process of de-regulation started: in order to create more competition within some industry sectors, the government power was reduced. The idea was that less state intervention would let the market be more free (after 2008 change in the mainstream). This era also saw the birth of big multilateral economic blocs, such as the European Union, MERCOSUR (Southern Common Market), AFTA (ASEAN Free Trade Area, 1992), and NAFTA (North American Free Trade Agreement). These larger economic blocs were created by the urge for a decline in national policy and increasing competition, in order to compete in the global market. These new economic orders granted free flows of trade, data, people and capital, the last one of which was incentivized by deregulation itself, innovation and financialization. Privatization gradually dismantled a structure that had been built up over fifty years, beginning with gradual state intervention in the economy during the great depression. It was believed that the privatization of companies would increase their capacity to produce income and profits, also with an improvement of services offered to customers, in a period of increasing competition on a global scale.