Annual Meeting of the German Economic Association

Earlier this week the German Economic Association (Verein für Socialpolitik) had its annual meeting. On the picture above you can see the nice conference venue in Münster. This year’s motto was “Economic development — theory and policy”. Accordingly, I can report from an interesting keynote speech on development economics by Matthias Doepke from Northwestern University.

“Knowledge Transmission and Long Run Development”

Matthias’ lecture was my highlight of the meeting. He presented recent work on development differences before the start of the Industrial Revolution. Economists usually label this period as “Malthusian times” and paint a dark picture of stagnant societies caught in the Malthusian trap. The very little economic growth that happened was literally eaten up by a growing population such that income per capita remained at the subsistence level.

With the help of historical data Doepke and coauthors now show that there were indeed differences in GDP per capita across countries, even before 1800. Britons, for example, enjoyed an income level around twice as high as China at the beginning of the Industrial Revolution. This is far from being spectacular. Nowadays we see income differentials of a factor of 40 between the most developed and poorest countries. Nevertheless, the Malthusian times were not as stagnant as one might believe. But what caused these income differences?

In modern times growth is mainly driven by education, i.e., human capital accumulation, and formal R&D in firms and universities. These channels were almost non-existing before the Industrial Revolution. The few people that went to school or college learned something about the Bible rather than practical skills. But young people had the possibility to learn a craft from the elders. Direct knowledge spillovers happened through these master and apprentice relationships.

The paper argues that the institutional setting in Europe compared to China allowed for a higher rate of knowledge flows resulting in higher growth rates. As an apprentice it’s decisive where you can find a skilled instructor to learn from. In China, the larger family clan was central in this process. It was most likely that you learned your skills from an uncle or somebody you at least shared an ancestor with. As you might expect, this led to very similar occupational choices across generations. The creation of new ideas remained quite low in this system.

In Europe instead you had the system of guilds which served as a market place for apprenticeships. Here, your educators didn’t have to be a member of your own clan. Thus, young folks simply had more opportunities to pick up new ideas. As the best ideas a new generation is exposed to survive, this speeds up the evolution of knowledge. How did these institutional differences come about?

Central to the story is a moral hazard problem in the master apprentice relationship. Parents care about the education of their children and send them to a master. They could also educate their children themselves but that’s the least efficient way of knowledge transmission. The master has an incentive to accept an apprentice because they work for her. But whether she also teaches him well is not so clear since teaching is costly to her. To prevent this shirking you can either resort to close family members as instructors or you develop a marketplace for education like in Britain. Masters were suddenly accountable for their teaching efforts. The market allows for contract enforcement which solves the moral hazard problem.

There is an interesting story about adoption of institutions in the paper. Britain probably overcame the shortcomings of the clan system because the church actively discouraged kinship in Europe. Churchmen feared to lose their authority over people when ancestors were worshipped too much. In any case, the paper illustrates the importance of subtle institutional differences for sustained economic growth. Europe, and Britain in particular, was quite lucky in this respect.

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