Tag Archives: Trade

How important was colonial trade for the rise of Europe?

I recently gave an interview to Garret M. Petersen of the Economics Detective Radio where we discuss some of my work. You can listen to it in this link: Money, Trade and Economic Growth in the Early Modern Period (interview).

In the interview, we discuss at one point the matter of how important was colonial (and otherwise intercontinental) trade for macroeconomic outcomes such as growth and urbanization in Europe. As I notice in the interview, my position on this (see my Cliometrica article for details) stands between two extremes:

  1. that of Eric Hobsbawm or Immanuel Wallerstein, who argue Europeans profited a huge deal from the colonies. This view is very prevalent in some political circles today, if not the person on the street, who often believes that “imperialism” or “colonialism” is what what made the West Rich, through exploitation of the rest of the world. It is related to “dependency theory”.
  2. by contrast, that of many if not most economic historians, who believe that such trade (and the violence that came with it) didn’t matter very much for outcomes back in Europe.

The latter view became the orthodoxy among economists and economic historians after Patrick O’Brien’s 1982 paper, which in one of many of Patrick’s celebrated phrases, claims that “”the periphery vs peripheral” for Europe. He concludes the paper by writing:

“[G]rowth, stagnation, and decay everywhere in Western Europe can be explained mainly by reference to endogenous forces. … for the economic growth of the core, the periphery was peripheral.”

This is the view that remarkable scholars such as N. Crafts, Deirdre McCloskey, or Joel Mokyr repeat today (though Crafts would argue cotton imports would have mattered in a late stage, and my reading of Mokyr is that he has softened his earlier view from the 1980s a little, specifically in the book The Enlightened Economy.) Even recently, Brad deLong has classifyied O’Brien’s 1982 position as “air tight”.

Among economists and economic historians more on the economics side, I would say that O’Brien’s paper was only one of two strong hits against the “Worlds-System” and related schools of thoughts of the 1970s, the other hit being Solow’s earlier conclusion that TFP growth (usually interpreted as technology, though there’s more to it than that) has accounted for economic growth a great deal more than capital accumulation, which is what Hobsbawm and Wallerstein, in their neo-Marxist framework, emphasize.

Let me be clear from the outset that the idea that it was European exploitation of foreign peoples that made it rich is, by itself, highly simplistic, and, in short, nonsense. The view held by many historians and members of the public, that colonialism essentially equals why the west is rich is evidently false. This view is seductive in part because of the nasty violent means and institutions (such as slavery), clearly immoral from the normative standpoint of our times, which was often associated with it. Even if partially true it fails to ask why was Europe the part of the world capable of doing this, which in turn raises the obvious suspicion that the deep causal factor lies elsewhere.

To a degree in the interview I react more against the opposite version, the point (2) above, the idea that it did not matter at all. But this is because I hold the fact that (1) is false as more evident.

One irony with all of this is that for more than a decade now, Patrick O’Brien has changed his mind. He has, indeed refereed to this in writing (as far back as 2006), and several people have witnessed seminars where the speaker mentions “as Patrick O’Brien has concluded, colonies didn’t matter for European development…” only to have Patrick raise and kindly but firmly inform the speaker of his change of heart.

Last year at the American Economic Association meeting in S. Francisco, my good friend Deirdre McCloskey even told me in disappointment how me she feels Patrick should go back to his old view! But I feel there’s good reason for his change of mind. Patrick certainly hasn’t adopted a Hobsbawm-Wallerstein type of position. He is now simply of the view that, at the margin, trade with other parts of the world did matter for European development. It’s does not explain everything, but it mattered a bit. This is what I find empirical support for in my own work.

My discussion has focused on the impact of trade for the European economy.  As Brad deLong notices, a different matter is that of whether such trade had an impact on other parts of the world (positive or negative). Patrick O’Brien sometimes refers to himself as a “mercantilist”. So I conclude by noting that some ideas related to the benefits of protectionism (once an idea almost banished from the realms of “serious” economics), especially as it applies to countries that are not at the frontier, has been taking hold among some young and very competent economic historians, such as Réka Juhász or Luigi Pascali. Perhaps I’ll write more about this in a future post.

 

 

nbm

 

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Spending a Windfall

sketch-of-cerro-de-potosi-1553

The paper “Spending a Windfall: American Precious Metals and Euro-Asian Trade 1531-1810”, by André C. Silva and myself, is now available as a GGDC working paper.

Here’s the abstract:

During the early modern period, Asia ran a large current account surplus with Europe. We show that the critical factor to stimulate Euro-Asian trade was not the new trading routes to Asia, but the European access to American precious metals. We use a dynamic general equilibrium model to reproduce historical data and calculate alternative scenarios. We find that European imports of Asian goods were up to thirteen times higher than they would have been without new routes and without precious metals. The effect of American precious metals is six times larger than that of the discoveries of new trading routes.

90% of the European imports of porcelain, silk, tea, and other luxuries from Asia during the early modern period were paid for in silver. The traditional and still currently accepted explanation by most historians for this imbalance of early modern Euro-Asian trade relies on cultural factors. It is said that Asians have always had a penchant for hoarding treasure (this is the view of Hamilton, Keynes, Kindleberger, and Maddison). By contrast, our explanation for the patterns of Euro-Asian trade in the early modern period does not rely on different preferences for Asians. Instead, the observed trade patterns emerge as a natural consequence of rational agents taking decisions in a dynamic general equilibrium context.

Our model of international trade has two “countries”, two goods and money. The demand for money is obtained with a money-in-utility specification. The two agents, denoted Europe and Asia, have identical preferences. Each agent produces a domestic good. All of the silver windfall is given to the European agent. There are also transaction costs, which apply to international transactions only.

We feed the historical data to the model. The windfall is given to the European agent. From 1500 to 1800, 85% of the world’s silver and over 70% of world’s gold came from America. The following figure (taken from Figure 4 in the paper) shows, in blue, the annual amount of “discoveries” of precious metals in America during 1531-1810, expressed in grams of silver per capita. In red, in shows our counterfactual: a world where new routes to Asia were found, but no precious metals existed in America.

fig01

The following figures (also taken from Figure 4 in the paper) then decouple the results of the historical and counterfactual scenarios for consumption and trade between Europe and Asia. In this one we can see that thanks to the new routes and the precious metals (mainly silver), European consumption of Asian goods was about 13 times what it would have been by the second quarter of the seventeenth century. However, most of that effect was due to the availability of American precious metals and not to the new trade routes themselves (note that two new routes to Asia were found, one through the Cape of Good Hope and the other through the Pacific). The new routes (and its associated technical and organizational change) would have at most doubled the previous trade levels.

fig02

Not only did the new routes have a much smaller economic impact on trade than did American precious metals, but the sign of their effect on trade patters was also different. This is clear if we look at what happens to net exports of European goods to Asia: in the counterfactual world of no precious metals existing, they increase. Historically,  we know that this wasn’t the case.

fig03

fig04

As the figures suggest, our simulations show that the combined effect of the discovery of precious metals in America plus new trade routes to Asia led to Euro-Asian trade volumes that were up to 13 times what they would have otherwise been. After peaking in the second quarter of the seventeenth century the effect diminishes over time as the early modern period advances but is still over 10 times as late as 1750.

In the paper, we also consider the effect of rising incomes in Europe, and show that its effect was marginal relative to what can be attributed to the windfall of precious metals.

Early modern Euro-Asian trade started off a historical dynamic process with broad consequences for Europe. While foreign trade accounted for a small percentage of European GDP at this time, it provided dynamic expansion opportunities. Early modern trade with Asia led to the emergence of mercantile companies such as the Dutch VOC and the English East India Company, which in many ways were the prototype for modern multinationals.71 It permitted the development of modern financial markets in Amsterdam and London. It induced an industrious revolution which encouraged additional labor input and market participation in Europe, necessary preconditions for the process of modern economic growth and for the industrial revolution itself. It stimulated economic growth and urbanization, through a process of spillovers and agglomeration economies. Trading with Asia (and America), may have also induced a shift in the wealth and political power from the land-owning elite to the hands of a merchant, entrepreneurial class. Positive spillovers also resulted from the increased inter-continental exchange of ideas. Finally, international trade and war always came together, and external warfare was one of the most powerful drivers behind European state-building.

manila-galleons