If I had to give the Most Underrated Professor Award to anyone I studied under, it would easily have to be Professor Meir Kohn. His work falls squarely outside the paradigm of mainstream economics, which (coming from me anyway) could not be a higher compliment – yet also makes it difficult to get traction inside the field. Kohn himself wrote a great essay contrasting the mainstream paradigm of Samuelson and Hicks with the lineage of more qualitative thinking descended from Adam Smith, including fields like economic history and new institutional economics and public choice theory among others.
He has been working on a theory of economic development for two decades now, and in my opinion it appears to be substantially correct. He first composed an unpublishable opus about European economic development from 1000-1600, which I read in its entirety. Then he wrote a more condensed version, where he applied the theory to China as well as Europe, which is likely going to be published in the next couple of years. In private correspondence, he has indicated that he and his students are now applying the model quite successfully to analyzing other economies throughout history.
The first chapter of his first opus contains the best description of his overall model I have yet read. Because I hold it in high regard, believe it to be fundamentally true, and I refer to it often, I am posting my summary of it below. All errors and omissions are mine.
Trading costs, the expansion of trade and economic growth in pre-industrial Europe
The Ricardian theory uses an exogenous factor “technology” as the primary driver of growth, and thus does not give an economic explanation for technological change. The Smithian theory, in contrast, emphasizes the organization of production: the market allows division of labor and comparative advantage to be harnessed. (Focus on production vs. focus on exchange.) Smithian theory: Merchants create markets. Price differentials create profit potential, which can be realized if it is larger than the trading cost. Trading costs can be transactions costs (dealing with others), transportation costs and financing costs (delay between transactions). Transaction costs: gathering information (slow communications), deal with buyers and sellers, default risk. Transportation costs: cost of carriage (impt. for heavy or bulky relative to value), cost of predation. Financing costs: depends on value of goods and transit time, interest rate, default risk (transportation risk, market risk).
Level and volume of trade depend on trading costs. Distance raises transportation costs directly, finance costs with time, market risk due to communication delay, dealing with strangers (no repeated interactions to create reputation). Hierarchy of trade – local, regional, inter-regional within zones, between zones – decreasing volume, increasing margin, higher value-to-weight/bulk. Downward trends in cost increased trade, sharp increases (war) decreased trade. Lowering costs and connecting markets was not automatic, merchants had to actively make it happen, creating new institutions to lower transaction costs, and new technology to lower cost of carriage; lower the cost of production, find or create new goods. Increased trade itself also tended to lower costs: justifying investment in infrastructure (which is largely indivisible, with fixed costs), and commercial reorganization/specialization.
Expanding trade induced reorganization of production, and accelerated technological progress. Commerce and production were distinct activities in pre-industrial economies – a mass of producers coordinated by a network of merchants. The expanding market changed the relative prices of goods, self-sufficiency gave way to production for the market and purchasing cheap goods. Agriculture was driven by comparative advantage in the climate and land, while industry was driven by division of labor, separating tasks into sub-processes. Division of labor only made sense when the increased output could be accommodated by the market, and the market helped to coordinate the production process.
Technological progress was mostly incremental, through trial and error. Increased output and the division of labor allowed more room for experimentation. There were also occasional, major innovations, often from bringing in an idea from another location or another product. Expanding markets increased the opportunities for these jumps to occur. Division of labor allowed sub-tasks to become mechanized, and bottlenecks created incentives. Adoption of new technology often took time, since it was risky, and mechanization frequently lowered quality (requiring a mass market for cheap manufactures). Merchants aided in this adoption, since they were less risk averse than small producers.
Expansion of the market progressed along with urbanization, trade was centered on urban areas: local/market town, regional/city, zone/urban central region. The center coordinated trade on the level as well as connected it above and below. Much urban employment was trade-related, so cities grew with trade, and cities also provided other services where demand grew with increasing income (administrative, religious, educational, medical). Towns also became centers of manufacturing – trade itself demanded transportation, and processing could increase value to bulk/weight. New and expensive goods arrived, and urban imitators began to make cheaper copies of them. Towns were also areas of low trading costs. Low external trading costs allowed better access to markets, for buying materials and selling products. Low internal trading costs facilitated division of labor (this could extend across entire urbanized regions). Availability of skills, goods and services made cities a breeding ground for innovation: division of labor created well-defined problems, with a diversity of resources to solve them, and proximity to a variety of ideas which could jump to new processes. Agriculture was also affected by towns: ag prices were high, stimulating restructuring and intensive cultivation, both major sources of productivity growth. Towns provided financing and manure. Low external trading costs exposed them to market forces, encouraging comparative advantage.
Overview of 1000-1600 Europe: Prior to the 11th century, trade was disrupted by invasions on all sides: Islam in the Mediterranean, Vikings in the north, Magyars from the east. Self-sufficiency was the norm. This abated around 1000, Vikings settled down to trade, the Italians began to take back the sea. The Crusades began in 1096, a boon for Italian cities and securing the Mediterranean. The Commercial Revolution occurred between the mid-12th and early-14th centuries, trade and economies expanding enormously. Production boomed, land was reclaimed for agriculture. Trade expanded beyond luxuries, to moderately well-to-do goods, especially textiles; growing middle class with spare income, communication improvement and social mobility led to spread of culture across large regions.
This growth peaked at the turn of the 14th century, by the 1320s trade was shrinking and population was in decline. Black Death hit in 1347 and recurred for decades, particularly devastating urban regions. The climate was unusually cold in the 14th-15th centuries. The crisis was precipitated by widespread warfare, thus increasing trading costs. Northern Europe was in nearly continuous war from 1290-1453, Italy as well had various struggles happening concurrently between multiple parties. Civil war in Germany, war between Aragon and Castile and the Muslims. Acre fell in 1291, rerouting trade to Alexandria where it was taxed heavily. Mongol Empire collapsed in the mid-14th century, closing the trade route. War directly devastated the countryside, as well as indirectly harming trade. Increasing specialization meant moving away from self-sufficiency, which increased incomes but also increased vulnerability, and the collapse of trade could and did threaten the survival of market-dependent areas.
Financing the war was also harmful – expenses of princes doubled and quadrupled. They resorted to damaging means to raise these funds: merchants were a concentration of wealth, various taxes were burdensome in size and collection cost. Tolls greatly increased, and trade was forced into regulated markets. Taxes proved not to be enough, so they turned to borrowing, crowding out commercial financing. Princes usually defaulted, devastating financial markets. They also turned to debasement of the currency for immediate revenue, increasing the cost of payments and making credit impossible.
The Black Death killed a substantial portion of the population, radically altering relative scarcities. The fall in population decreased the demand for food, lowering agricultural prices, lowering rents on land, reducing the income of the land-owning nobility and clergy. Labor became more scarce, in cities wages rose, and landowners competed for tenants with better terms and improvements. This altered the income distribution, reducing the demand for luxuries and increasing the demand for non-grain food and simple manufactures. Demand for mass consumption goods is highly elastic, so merchants had an increased incentive to cut costs. With quality less of a concern, and labor expensive, mechanization became profitable. Trade revived within local and regional markets, with agricultural specialization occurring within a region, and cheap manufacturers springing up everywhere. Local markets and regional fairs proliferated.
The end of the Hundred Years War in 1453 and the Treaty of Lodi in 1454 brought peace to Europe, and with it a revival of trade within and between zones. Trading costs declined: new commercial and financial techniques out of Antwerp lowered transaction and financing costs; organizational and technological progress lowered transportation costs. As costs fell, trade expanded to include heavy/bulky items, competition induced inter-regional specialization, and trade with Asia and the Americas increased. Population recovered and urbanization increased. Epidemics declined and the climate improved. With rising population and booming economies, the income distribution reversed its earlier trend. The pattern of trade and growth paralleled the earlier Commercial Revolution, and brought cultural advances. Warfare broke out again in the 16th century, but did not cause a widespread economic decline similar to the previous period.
[Editor’s note: upon rereading this summary, it is clear to me that it focuses more on trade and production than the rest of the theory. The full theory encompasses the growth of financial markets in response to trade, how governments financed their wars, and how different governmental structures that could extract the wealth of their economies at lower cost survived over time. Nonetheless, this summary represents a good start.]
