Economic History – The Big Picture

Thilo Huning discusses the ways in which a deeper understanding of global history can make us better economists. 

Every day we are confronted with new questions that require an in-depth understanding of international trade–debates on tariffs, ‘renegotiating’ NAFTA, talks of ‘no deal’ with the EU, and attacks on the WTO. But where did these institutions come from, how can we understand their economic rationale, and how can we know what share of our living standards we owe to them? Understanding the origins and consequences of different types of institution, from early nation-states to global parliaments, is the core of a growing branch of economic history.

In this post, I will point out some of the main insights and trends in this research. I hope to convince you that learning something about borders, positioning of airports, the location of Roman cities, and the Congress of Vienna will make you a better economist – and allow you to better understand the world around you.

Obraz: "Port morski"
This painting by Lacroix contains all the elements that Rodrik (2003) identifies as the origins of economic differences: institutions, productivity, trade, endowments, and ultimately geography

One of the most influential articles in this field was a 1995 article by John McCallum. He finds a puzzling trade pattern between the US and Canada. Both countries share a common language, relatively similar culture, and a free trade agreement (NAFTA) abolishing tariffs between them. All these suggest that it shouldn’t matter on which side of the border a factory, or a consumer, is situated. And yet it does. Controlling for size and distance, McCallum found trade between US states and other US states, and Canadian provinces and other Canadian provinces, to be 22 times larger than between US states and Canadian provinces.

Economic historians never found this very puzzling. Just because there has been a trade agreement in place for some years, the economic geography of countries doesn’t instantly adjust to a new equilibrium, with factories and consumers efficiently located.

If you search for the largest airport in Europe per country, you won’t be surprised to find them in their respective capitals. However, this is not the case for Germany – the largest airport is in Frankfurt. Redding et al. (2011) trace this anomaly back to the German division. Before 1945, the airport in Berlin was the largest, as with any other country, but after the city was walled in, West Germany built its hub in Frankfurt and extended it over the decades. History has permanently shaped economic geography. The existence of an international airport hub allowed Frankfurt to develop from a regional banking centre to one of the world’s largest financial hubs, not to forget the home of the ECB. One of the main reasons for this is that transport infrastructure is expensive, and can’t be packed into a suitcase to move it to the most efficient location.

It is this mechanism that Michaels and Rauch (2018) inspect. While the Romans left today’s France with a well-developed system of roads and cities, this was hardly the case for Britain. On this island, Roman cities were therefore more often abandoned in search of a better place to live, which was usually at the coastline. In France, the Roman roads trapped people inland. Innovations in maritime transport reduced the costs of sea transport relative to overland travel, and the British city network was better prepared, ironically due to worse initial conditions.

Rembrandt_Christ_in_the_Storm_on_the_Lake_of_Galilee
Transport and trade are leitmotifs of economic history. Institutions such as the WTO and the EU were born from the lessons of the rockiest period of 20th century economic history: The Great Depression and WWII

All these ideas build upon a long list of thinkers in the field of economic history who have taken a long-run and ‘big picture’ approach to development: Jared Diamond, Eric Jones, Douglass North, Robert Fogel, to name just a few. Econometrics, geographic information systems (GIS), and novel datasets, all allow us to test their hypotheses. As factors for long-run development, they identified geographic endowments, international trade, institutions, but also culture, which all interact. For example, did you know that in some regions in Europe, the soil type made it beneficial to use a heavy plow which could only be used by men, and that in exactly these regions gender-roles today are more unequal than elsewhere (Alesina et al., 2013)?

But what does this tell us about the future? Well, we can tell that culture, trade, and institutions were not formed in a vacuum. In a paper with Nikolaus Wolf, I show how Britain unified Germany in the 19th century, by potentially underestimating the role of geography. The Congress of Vienna (1815), in which Britain was a decisive negotiator, placed Prussia in a (geographic) position to bring all other German states under its leadership.

Geography matters to this day, and trade-costs matter immensely (Hummels, 2007). In an age of ‘Just in time’ production, every minute of queuing at borders can decide the location of a factory. If we ignore the role of distance in influencing trade, and believe there is no difference whether we trade with 22% of the world’s GDP on the other side of the Channel, or negotiate ‘deals’ with countries with no substantial trading history with the UK, and these countries are also thousands of miles away – well then Napoleon was right that the only thing we learn from history is that we do not learn from history.

 

References:

Alesina, Giuliano and Nunn (2013), “On the origins of gender roles: Women and the plough”, QJE 128(2), p. 469–530

Hummels (2007), “Transportation Costs and International Trade in the Second Era of Globalization”, JEP, 21(3), p. 131–154

Huning and Wolf (unpublished), “How Britain unified Germany: Endogenous trade costs and the formation of a customs union” (a manuscript is available here)

McCallum (1995), “National borders matter: Canada-US regional trade patterns”, AER 85(3), p. 615–623

Michaels and Rauch (2018), “Resetting the urban network: 117–2012”, EJ 128(608), p. 378–412

Redding, Sturm, and Wolf (2011), “History and Industry Location: Evidence from German Airports”, ReStat 93(3), p. 814–831

Rodrik et al. (2003), “Institutions Rule: The Primacy of Institutions Over Geography and Integration in Economic Development”, Growth 9(2), p. 131–165

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