Politics and the World Economy
Lecture Outline
1. Our Political Economy Framework
a. Things we want to explain
b. Variables we use to explain things
2. Prologue to the Modern World (17th-19th century)
a. International conditions
– Political: mercantilism, colonialism
– Technological: innovations of the industrial revolution
b. Domestic conditions
– “Endowments,” “Interests,” and “Institutions”
– Case Study: America and the World Economy, 1600-
1865 1
2. Explanatory Framework
Things we want to explain (outcomes)
• Economic growth, over time and across countries.
– Economic growth is the source of material improvements in human
welfare
– Growth a modern phenomena (Figure 1)
• Distribution of wealth and income, across countries and
within them.
– When wealth is distributed inequitably, the benefits of economic
growth may not be shared by most people
– Inequality between countries has increased dramatically (Figure 2)
• Link between globalization, economic growth, and the
distribution of wealth
– Does integration with the world economy promote economic
growth and greater equality among nations? Does globalization
create inequality within nations?
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Explanatory Framework (cont.)
Variables we use to explain things
– explanatory variables are of two types: int’l and domestic
INTERNATIONAL variables:
1. Global political conditions
• Variation in military conflict
• Trends in colonization and decolonization
• Existence of a dominant global power (e.g. Pax Britannica, Pax
Americana)
2. Global economic conditions
• Global price trends and shocks (inflation/deflation)
• Global financial conditions (interest rates, financial crises)
3. Technological change
• Innovations that promote growth or encourage globalization
• Technology is “international” (available to all)
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Explanatory Framework (cont.)
DOMESTIC variables:
1. Endowments
• Nations differ in terms of their endowments of capital,
labor, and land and this shapes their relationship to the
world economy
– Recall Heckscher-Ohlin Theorem
2. Interests
• People differ in terms of their interests toward the world
economy; some gain while other lose from globalization
– Recall Stolper-Samuelson Theorem
3. Institutions
• Nations differ in terms of their domestic political
institutions, which shapes the interplay of endowments
and interests
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3. Prologue to the late 19th Century
• Mercantilism and Colonialism (late 17th –mid 19th centuries)
– Use American case to illustrate INTL and DOMESTIC variables.
• INTERNATIONAL variables
– Global political conditions
• Highly conflictual due to mercantilism (e.g. Navigation Acts of
1660) and colonialism
• frequent wars between European great powers
– Global economic conditions
• Slow economic growth until the eve of the industrial revolution
• Wars, economic embargos, and mercantilism reduce the
attractiveness of the global economy
– Technological change
• Innovations in textiles, metals, and power promote the
industrial revolution in Great Britain
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DOMESTIC variables:
Case study of America 1700 - Civil War
– Endowments
• American colonies abundant in raw materials; scarce in capital
and skilled labor
– Interests
• Opposition to British rule tied to ownership of endowments:
people that owned abundant resources opposed mercantilism
and empire (Virginia planters, Boston shipowners and
merchants, primitive manufacturing).
• Support for British rule on the frontier (Ohio Valley), for
security reasons. Ended with defeat of the French in 1763
– Institutions
• Imperial rule allowed little opportunity for colonists to shape
policy
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Independence to the Civil War
– International setting
• Napoleonic Wars (1793-1814), Embargo of 1807, War of
1812 cut US off from world markets (Figure 3). Isolation
from the world economy stimulates rise off manufacturing
(e.g. MA textile industry)
– Interests
• After War of 1812, nascent US manufacturers appeal to
government for protection (tariffs on British imports)
– Institutions
• Alexander Hamilton’s economic nationalism, and the
government’s need for revenue (a tariff is a tax that the govt
can collect even with primitive bureaucracy), meshes with
the protectionist interests of manufacturers.
• Origins of revenue-generating/protective tariff date from this
period. 7
Economic Origins of the Civil War
– International conditions
• With the industrial revolution, England’s demand for raw cotton
explodes (5% growth annually 1820-1860). Also, growing demand
from U.S. textile mills.
– Key technological change
• Rise of “short-staple” cotton / Whitney’s cotton gin (Figure 4)
• U.S. South become major supplier of world’s cotton (Figure 5).
– Interests
• South wants free trade; Northeast wants protection (Midwest aligns
with Northeast)
– Institutions
• Stalemate in Congress but South at a growing disadvantage
• When Democrats (party of Southern planters) were in office, tariffs
went down; when Republicans (party or Northern industry) controlled
government, tariffs went up (Figure 6).
• Civil war settles the issue. With South out of Congress, tariffs
skyrocket.
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Figure 1: Growth is a recent phenomena
The era of rapid economic growth, when the material wealth of
humankind explodes, does not start until the 19th century
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Figure 2: The Distribution of Wealth has
become more inequitable over time.
Year Ratio between incomes of
richest and poorest country
1870 9:1
1960 39:1
1990 45:1
• Rapid economic growth over the last two centuries has increased the
gap between rich and poor countries, not lessened it.
• The gap is not increasing because poor countries are growing poorer,
but rather because the level achieved by the richest country keeps
increasing.
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Figure 3: Napoleonic Wars and Embargo
of 1807 reduce trade
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Figure 4: The Cotton Gin
Before Eli Whitney's cotton gin, the
laborious hand method of picking out
cotton seeds restricted the amount of
cotton that could be produced. The
influence of the cotton gin was almost
instantaneous. The gin made practical
the use of the heavily seeded “short-
staple” cotton, which could be grown
in upland areas more readily than
long-staple cotton. England's textile
industry ensured favorable prices and
increased market demand.
To do the work of the fingers which pulled out Whitney’s patent application is at
the “lint,” Whitney had a drum rotate past a
sieve, almost touching it. On the surface of the
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drum, fine, hook-shaped wires projected which p?doc=14#
caught the lint. The restraining wires of the sieve
held the seeds back while the lint was pulled
through.
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Figure 5: U.S. Cotton Production
1791-1860
1791 1831 1860
Million lbs. 2.0 385.0 1,650
Percent of 0.4 49.6 66
world total
Eli Whitney’s cotton gin (1794) allowed for the
cultivation of short-staple cotton in a wide area of the
American south
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Figure 6: U.S. tariffs
In 1860, after declaring war on the South, the Republican
Congress raised tariffs
Average U.S. import tariff rate
More generally, tariffs
rose under Republicans
(Tariff revenue/imports)
and fell under
Democrats in the
antebellum period
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