CHAPTER ONE
INTRODUCING THE PROBLE,M:
THE EMERGENCEOF EFFICIENTINSTITUTIONS
IN THE MIDDLE AGES
New Institutional Economicsand the Eficiency of Institutions
Economichistorians,inspired by DouglassNorth and his broad reassessmentof new institutionaleconomics,tend to believethat the quality
of the institutional framework of a nation or region has direct bearing
on its economic performance.As explainedin the introduction, the
core assumptionof this approach is that elficient institutions ('rules
that constrain behaviour') reducetransactioncostsand thus increase
market exchange,specialization,and thereforeeconomicgrowth. The
way to test such a hypothesiswould be to developmethods for measuring the efficiencyof institutions, and link such measurementsto
observableeconomicperformance.Much of the work in this field has,
however,focusedon the supposedefficiencyof certain specificinstitutions, such as merchant and craft guilds, systemsof property rights
and tenure (how efficient is sharecropping?),or on the efficiencyof
the commons and their abolition via enclosures.Typically, new contributions to this literature have suggestedthat institutions that were
'conservative'
'inefficient' previously considered
such as guilds
and
and commons,manors,or sharecropping were surprisinglyefficient,
if the functioning of these institutions were examined more closely.
Guilds,for example,took careof the efficienttransferof knowledgeand
technologybetweengenerations(and betweenregionsvia wandering
journeymen), stabilizedlabour and product markets,guaranteedthe
quality of products (necessaryfor domesticconsumptionand export),
and werean efficientsourceof taxationfor (local)government(Epstein,
1998).Somehavearguedthat this soundstoo good to be true, and that
revisionismignoresthe 'dark side' of institutions such as the guilds namely,that they excludedoutsiders(e.g.women), monopolized markets,and tried to suppressinnovation (Ogilvie, 2007).
One of the problems with this approach,which tries to determine
how efficientdifferent institutions were, is that all institutions are
IO
CHAPTER ONE
embeddedin a specificsocial,political,and cultural context,and therefore are interdependentand interconnected.Moreover,there is a complex relationshipbetweenspecificinstitutions and the 'problems'they
are supposedto solve:particular institutions (such as, for example,a
merchant guild) are often associatedwith more than one problem,
and the solution to one particularproblem by a specificinstitution
often hasconsequences
for the way other problemsare handledaswell
(Gelderblom,2008).
A closeiyrelatedissueis that it provedvery difficult,if not impossible,
to measurethe effectsof individual institutionson transactioncostsand
performance.The quantitativemeasuresof the successof institutions
that have been developedin the past few decadesare almost always
proxies of the degreeof eficiency of markets;they thereforemeasure
the resultsof a complex set of interrelatedinstitutions that in combination causemarkets to perform better or worse. Hence,they do not
measurethe effectsof individual institutions as such. The discussion
on the long-term effectsof the Glorious Revolutionis a casein point:
different ways of assessingits impact have resulted in very different
measures
of its success,
or lack thereof(North and Weingast,1989;see
Clark, 2007 for a contrastingview). The point is that the institutions
of a given societyform a more or lesscoherentsystem,which makes
it almost impossibleto assessthe efficiencyand growth enhancing
'rules
effectsof individual
of the game'. It seemsthat, in order to test
the links betweeninstitutions and performancethat are suggestedin
the theoreticalliterature,we have to focus on the institutional systems
as integratedwholesto try to establishthe effectsthey haveon growh,
rather than try to establishthe effectof any specificinstitutions.
In the light of the Great Divergencedebatewe can specifr this question to one about the relativeefficiencyof the setof institutionsgoverning economic life in Europe and Asia. The question is therefore:can
we assessthe relative efficiencyof the institutions of Western Europe
with respectto those in other parts of the world (China and )apan,
specifically);and, if Western Europe appearsto have comparatively
high-quality institutions,when did they arise- and why?
The literature suggestsa number of ways to assessthe quality of
the institutional framework of an economy, although the amount of
systematichistoricalresearchon this issueis surprisinglysmall.lWhat
I SeeAcemogluand
fohnson (2005)for variousindicatorsofthe efficiencvofcurrent
institutions,which can however not easilybe applied to historical research.
THE EMERGENCE oF EFFTCIENT INSTITUTIoNS
19
we proposehere is to developspecificcomprehensivemeasurements
to
assessthe quality of the institutional framework of a society,and use
thesemeasurementsto determinehow efficientinstitutionsin Western
Europe were, and how they comparedw'ith institutional frameworks
elsewhere.There are three groups of elementsthat can shed light on
institutional effciency.2
The first group consistsof elementsthat can measurethe extent to
which institutionsguaranteeproperty rights and promote trust:
. The interestrate is probably the classicmeasureof the extent to
which the institutions in a particular societyprotect property rights
(of debtorsand creditors)and enhancethe amount of trust in a
society,and thereforea low interest rate is arguablythe best proxy
of the quality of the institutionalframework(North, 1981;De Soto,
2000;Reis,2007).
Interestratesare not alwayseasilyto observe(due to lack of sources);
indirect indicators,which are linked to interestrates,are:
. The skill premium, the differencebetweenthe wage of a skilled
labourer and that of an unskilled labourer, is closelyrelated to the
interest rate; as we will seein Chapter 5, the skill premium is the
reward for investmentin human capital;this investmentin human
capital involves not earning an income during (for example)an
apprenticeshipperiod, in return for the higher income that is going
to be earnedafter the training period; when interestratesare low, a
relativelylow skill premium will alreadybe sufficientto make such
an investmentworthwhile (but, as we will seein Chapter 5, the skill
premium also measuresthe extent of efficiencyof labour market
institutions); in brief, a low skill premium reflectsthe trust one can
have in getting future returns on skill formation.
. The seasonalvariation in grain prices,which, following the seminal
paper by McCloskeyand Nash (i984), can alsobe interpretedas a
proxT for interestrates (and relatedstoragecosts).''
I A fourth approach to measuring the elliciency of various kinds of institutions
also making it possibleto distinguish betweenhorizontal and vertical institutions, is
developedin Bosker,Buringh and Van Zanden(2008).
J The McCloskey and Nash (1984) hypothesisis that the higher the interest rate,
the more expensiveit will be to store (for example)grains after the harvest,the larger
the seasonalvariation in grain priceswill be; in fact, the price of thesegrains in month
20
cHAprERoNE
A secondgroup aims to measurethe extent of market integration in
an economy, the assumption being that efihcientinstitutions reduce
transactioncosts,and thereforelead to high levelsof market integration. Direct measuresof market integration are:
' The variability of (annual) prices, reflectingthe extent
to which
marketsare able to cushion shocksvia trade: generally,there is low
variability in market systemswith low transaction costs and high
volumesof trade,where suchshockscan easilybe absorbedbv trade.
and high variability in poorly developed-u.t"t systems;
' The convergenceof prices:the extent of correlation and
mutual
dependenceof markets - high convergencepointing to a highly
developedmarket systemand vice versa;studer (2007)-d.n-,onr,rut.,
in an analysisof grain marketsin eighteenthand nineteenth-century
India that the differentcriteriafor assessing
the elficiencyof marketsvariability of, and correlation betweenmarkets _ yield very similar
results,indicating that thesemeasuresall relate to the efficiencyof
the underlying institutions.
In practice,most historical studiesof the extent of market integration
measurethe depth and breadth of the market for grain, but iimilar
methods can and have also been applied to financial markets (Neal,
1990,for example,studying the eighteenthcentury)
It may be possibleto add a third group of indicatorsthat measure
the level of development,the 'depthand breadth'of
factor markets.
Historically,in most societiesmembersof a householdcan earn their
livelihood by becoming wage labourers or by keeping the market
'at
arm's length' via subsistence
production. Transactioncostswill
(partially) determine this decision:rvhen factor markets
are weak
and unreliableand trust in marketsis low, in short, when transacuon
costsare high, the alternativeof subsistenceproduction will be more
attractivethan in a situation of perfectlyworking markets which can
be relied upon. Therefore,if a large part of the pJpulation is activeon
the labour rnarket,this may indicate that institutions are eflrcientand
transactioncostsrelativelylow. on the basisof a similar logic, the
t+l rvill be.theprice_inno11! t prus the rnonthlyinreresrrateplus
additionarsrorage
costs;seealsoPoynder(1999).
THE EMERGENCE OF EFFICIENT INSTITUTIONS
2l
extent of participation in the capitalmarket (via savingsor borrowing
money) may be a proxy of its efficiency.
Theoretically,all thesecriteriawould be expectedto point in approximatelythe samedirection:onceinstitutionsare efficientand transaction
costsare low, institutional economicspredictslow interestrates,high
levelsof market integration, and densemarkets.The factors enhancing exchangealso seemto reinforceone another.Economic theory
postulatesthat reputation mechanismsare very important fbr sustaining exchange- they are a key institutional ingredient in any market
economy(Greif,2006).Reputationmechanismscausepeopleto behave
well (to keeptheir promisesand adhereto their contracts)becausethey
fearbeingexcludedfrom future transactionsif they renegeon promises.
such a sanctionwill dependon the number of transactions
that canbe
expectedin the future (from the networkin which the actoroperates),
and on the interestrate (which translatesthe valueof future transactions
to their presentworth). In short,peoplewill tend to behavewell and
enhancetrust in their behaviour when interest rates are low and the
current value of future transactionsis thereforehigh, and when they
expectmany iransactionsto occur in the tuture. The level of markets
exchangein generaland of interest rates in particular will therefore
explain to a large extent (if this theoreticaiapproachis correct) the
efficiencyof trade networks and the degreeof trust on which they are
based(seethe more detailedanalysisin Grantham, lggg).It alsofollows
that there may be multiple equilibria in the long-term move from thin
marketsand high transactions
costs(and thereforehigh interestrates)
towardshigh levelsof marketparticipationand low transactioncosts.
It has,for example,beenobservedthat South-EastAsia seemsto have
been on a thin markets/highinterest rates trajectory for the past few
centuries,and appearsto be unableto move to anotherequilibrium
(Henley,2008;Van Zanden,2004).
An importantdistinctionthat canbe added,madeby Acemogluand
fohnson (2005),is betweenpolitical(or propertyright) and economic
(or contracting)institutions.Greif (2006)hasarguedthat the dynamic
commercial(and urban)developmentof WesternEuropecomparedto
the Arab world was basedon the superiorityof its institutionsregulating market exchange.His views differ from thoseof North (19g1,
1990)'rvhohasmaintainedthat it rveremainly the politicalinstitutions
constrainingthe predatorybehar.iorof statesthat madewestern Europe
exceptionallysuccessful.
All measuressuggested
here,to some extent
reflectboth aspectsof the equalityof the institutionalframework of
22
CHAPTER ONE
THE EMERGENCE OF EFFICIENT INSTITUTIONS
23
a region or country, but the level of market integration (controlled
for distancebetweenmarkets) probably comes closestto measuring
'horizontaf
the
institutions that Greif thinks are most important, and
interestrates,as suggested
by North (1990,p. 69), urguublyto a large
degreereflect long term trust and property rights protection.
With this list of criteria for institutional elliciencywe can try to
answerthe question:how elicient were Europeaninstitutions before
the Industrial Revolution?And if so,when did this increasedefficiency
begin?The main argumentof this chapterwill focus on the first group
of criteria,especiallyon interestrates,asthey are the easiestto measure,
but other indicatorswill be usedas well.
GlobalDistributionof InterestRatesand OtherMeesuresof
Institutional Eficiency
Interestratesare a good startingpoint. Studiesby Clark (1988,2007)
and Epstein(2000)havedemonstratedthat in WesternEuropeinterest rates declinedsignificantlyduring the late medievalperiod and
reacheda level of 5 to 6,0/0
as early as the fifteenthcentury.This level of
interestis still normal today.Theseresultsare consistentn'ith studies
that analyseseasonal
patternsin grain pricesby McCloskeyarrdNash
(1984)and Poynder(1999),which alsopoint to a sharpfall in interest
rates(and seasonal
variation)in the late Medievalperiod.In addition,
Figure2 providesthe resultsof recentresearchon interestratesin the
Netherlandsby Zuijderduijn (2007),showing the typical long-term
patternof the declineof interestratesin this part of WesternEurope
(seethe almost identical figure in Clark, 2007,p. 169).a
The transition to an economycharacterizedby relativelylow interest
ratesoccurredin WesternEuropeduring the fourteenthand fifteenth
centuries.But what do we know about interest rates in the rest of
Eurasia?Adam Smith was convincedthat interestratesin Europe,
especially
in GreatBritainand the Netherlands,
lveremuch lower than
'twelve
in China:
per centaccordinglyis saidto be the common interest
of moneyin China',he stated,whereashe considered3 to 4.5 per cent
to be normal in GreatBritain (Smith,177611976,
p. 198).The extreme
a The number of obsen'irtionsbefore 1250is lirnited,
due to the fact that the capital
market was rather thin at that time, but this does not affectthe main point of Figure
2, that is that during the l3th century a capitalmarket emergedrvith alieady relatively
low interestrates.
117.1ll99 l:24 1249127{ 12991321131913741399t424 1119t171 t199 Is24 ls49
Source:Zuijderduijn(2007)
Figure 2. Long-term interest rates (on losrenten)in Holland, Il74-1550
of the spectrumof interestrateswas probably SoutheastAsia. Recently
'high
interestrates/thin
a discussionbegan about the causesof the
capital markets' equilibrium trap, which characterizedthis region in
the seventeenthcentury - and in which it still seemsto be trapped (see
'normal'
interestrate found by Boomgaard(1986),
Henley,2008).The
for example,in an in-depth study of the capitalmarket in Buitenzorg
(near present-da1'
/akarta)in 1805was 40 to 50% (alsoVan Zanden,
2004).In anotherpaperabout interestratestbr credit transactionsof
South and Southeast
the EastIndierCornpanyin seventeenth-century
Asia,
Asia,he showsthat suchhigh rateswerenot unusualin Southeast
but that in generalthey were somewhatlower: 24-360/oin fambi (on
in Thailand.In
Sumatra),I8-24o/oin Banten(on Java),and about24o/o
(the Company
(East
or
received
paid
India, the VOC
India Company)
was both a debtor and a creditor) I2-l8o/oin Coromandeland Bengal,
At the sametime, in
and somewhatlessin Surat (Boomgaard,1996).
the Netherlandsthe Cornpanywas ableto borrow at 3.5 to 570.Other
sourcesconfirm that relativelyhigh interestrateswerenorlnal in South
'Pricesand
Asia. Divekar(1989,p.44), for example,in his study of
wasconsidered
Wagesin PuneRegion'quotessourcesstatingthat24o/o
the usual rate of interest,but that small suns rvereoften borrowed at
higher rates (up to 75o/ofor small loans in kind).
the lower
But perhapsit is more relevantto look at China,especially
(i998)
relatively
Yangtzedelta,where,followingPomeranz(2000)and Li
advancedinstitutionswerefound.lamesShih (1992,p.29)observedthat'
'customarily,
during the earlyMing period in the lower Yangtzedelta,
CHAPTER ONE
if one borrowed one shi of rice, one had to pay back two shi after the
autumn harvest;if one borrowed money (i.e., silver or copper cash),
one had to pay 50 percentyearly interest'.sIn the sameperiod, the
fifteenth century, the normal return on loans among merchantsin
Suzhouwas a monthly 2 percent(Marm6, 2005,p. 145).ln the seventeenth and eighteenthcenturies,Chineseinterest rates had clearly
comedown from thesevery high levels.It is an interestingreversalfrom
Europeanpatterns,wherewealthymerchantswere alwaysthe sourceof
royal credit, that the greatsalt merchantsof Yangzhouborrowed large
sums of money fiom the Imperial Household Department in Beijing
'rock-bottom'
interestrate of l0%. (Finnane,2004,p. 121).The
at a
bestinformation on eighteenth-centuryinterestratesis in the study by
Paulvan Dyke (2005,pp. l5a-56) on the CantonTrade,analysingthe
many credit transactionsbetweenEuropeanand Chinesemerchants
in this period. Europeansborrowed money from other Europeans
(and sometimesfrom Chinesemerchants)at about I0 to l2o/oannually, whereasinterestrateson loans to Chinesemerchantsrveremuch
(or 1.5 to 3o/oper month for short-termloans).
higher,at 18 to 360/o
We can concludethat Adarn Smith was right: interest rates in China
were much higher than in Western Europe,even when they probably
showeda declining trend in subsequentcenturies.
The availabledata for Korea point in the samedirection; according
to /un and Lewis (2007)the interestrate in eighteenthand nineteenthcentury Korea fluctuatedfrom 25 to 50%, with an averageof 37o/o.
fapan is probably the major exceptionin Asia. Studiesof the Osaka
capital market that emergedin the seventeenthcentury indicate that
evenfrom the start interestrateson credit betweenthe large merchant
by
houseswerebetweenl2 and l5% (Crawcour,1961).Recentresearch
Saitoand Settsu(2005)has shown that the long-termtrend in Osaka
was also clearlydownward: interestrateson loaus to daimyo declined
from 12 to l3o/oin the first half of the eighteenthcentury to about 8olo
in the first half of the nineteenthcentury,a declinethat was alsofound
in other markets.Althoueh not aslow asin WesternEurope,theselow
t Shih(1992,p. 29);before1367a'normal'rateof 4o'o
per rnonthis quoted,although
the statutoryceilingwas 3oloper month (pp. 46,27I, note.14);on pp. 59-60 he also
per year for
mentions a number of interest ratesfor late Ming which are lower (24o/o
example).
THE EMERGENCE OF EFFICIENT INSTITUTIONS
25
interestratespoint to an increasinglyefficientway of organizingcapital
market transactions.
When looked at from this angle,the view that Western Europe had
alreadyacquiredan institutional frameworkthat wasrelativelyefficient
in the Middle Ages - more efficient than institutions regulating the
capital market and property rights elsewhere- seemsto be confirmed
by the evidenceon interestrates.The study of the skill premium, which
is the focus of Chapter 5 and will thereforeonly be summarizedvery
briefly here, points in the samedirection: from the late Middle Ages
onwardsthe skill premium was quite low in Northwest Europe,much
lower than in, for example,Korea, India, or Indonesia.The declinein
the skill premium in Europe - which was concentratedin the period
between1350to 1450- appearsto be concurrentwith the declinein
interest rate in the post-BlackDeath years,suggestinga link between
the two (although,as Figure 2 makesclear,a large part of the decline
of the interest rate occurred alreadyin the twelfth or early thirteenth
centuries).Two Asian regionsseemto haveapproachedthe European
levelof skill premium: the south of China and Japanprobablyboth had
a ski-llpremium (and thereforeeffcient institutionsregulatingthe supply
of skilled labour) comparableto the westernEuropeanlevel,although
the evidencefor )apanis mixed.The North of China (including Beijing)
had a relativelyhigh skill premium (seeChapter 5 for details).
A different approachto the sameissue- measuringthe eficiency of
market institutions- is to look at how marketsfor agriculturalproducts
such as wheat or rice actuallyperformed.When transactioncostsare
low, one would expecthigh levelsof market integration,and, asa result
of the fact that local demand and supply shockscan be cushionedby
trade betweenmarkets,a low volatility of prices.Soderberg(2004),for
example,used measuresof the volatility of markets to establishthat
grain marketsin North WesternEuropein MedievalEuropewere much
lessunstablethan thosein the Middle Eastin the sameperiod.In the
earlymodern period someadditionalincreasein market efficiencymay
haveoccurred(Persson,1988;facks,2004),but this hasbeencontested
by Bateman(2006),who haspointedout that alreadyin the 15thcentury
levelsof market integration were alreadysimilar to those attained in
the l8th century.If Batemanand Soderbergare correct,we haveto go
back to the late Middle Agesto find the genesisof the efficientmarkets
characteristicof Europeaneconomicdevelopment.
THE EMERGENCE OF EFFICIENT INSTITUTIONS
CHAPTER ONE
Recentresearchsuggeststhat Indonesia(in particular Java)is a case
of a rather poorly performing market system(Van Zanden,2004);rice
marketson )avain the first half of the nineteenthcenturywereextremely
volatile,which can be linked to the poor qualiry of institutionsand
the low level of commercialdevelopmentof the region. An analysisof
seasonalpatternsalso demonstratedthat Javanese
marketsperformed
much more poorly than those of Qing China of early modern Europe
(Yan Zanden,2004).
In order to add ]apan,China and India to this comparison,we follow the lead of Shiueand Keller (2007)and Studer(2008)who have
applieda comlnon methodologyto rneasurethe degreeof market integration in different parts of the world. They measurethe correlation
coelficientsbetweenpairs of markets,and relatethem to the distance
betweenthem. Thereobviouslyis such a relationship,as transport and
other transactioncostswill increasewith distance.By controlling for
this, clear patternsof market integrationcan come to light: Studer,
for example,demonstratedthat levels of market integration in eighteenth century India were rather low, much lower than the high levels
found in early modern Europeand China. Shuieand Keller pointed
out that over long distancesChinesenarkets seemto havebeenmore
integratedthan Europeanones,whereason short distances
correlation
coefficientsbetweenEuropeanmarketswas (slightly) larger.For Japan
Iwahashi(1981)haspublisheda datasetfor 14 market placesbetween
c. 17l0 and c. 1860which makeit possibleto establishthe relationship
between distanceand correlation coelficients;for Indonesia the first
setof similardatarelateto 1878-1896.6
The detailsof this analysiswill
be presentedin Chapter9; here we presentthe most striking results
(Figure 3). They demonstratethat in fapan between1760 and 1809
markets are aireadyhighly integrated;the correlation coeffrcientsare
comparableand sometimesevenhigherthan thosetbund in Europeand
China (for example,on the distancebetween150-300km, European
valuesof the correlationcoefficientrangefrom .65 (1770-1794)to .g+
(1931-1855),China for 1770-1794is .74,and fapan is slightlyhigher
at .75) (Studer,2008,p. 407). Eighteenthcentury India is the other
6 The price data have been made avirilable on the website of the Global Price and
I n c o m e H i s t o r y G r o u p a t U C D a v i s ( a t h t t p : / / g p i h . u c d a v i s . e d u / ) ;I t h a n k O s a m u S a i t o
f o r h i s k i n d a s s i s t a n c ei n i n t e r p r e t i n g t h e p r i c e d a t a ; m o r e d e t a i l s a b o u t t h e s e d a t a
and their analvsis will be presented in Chaoter 9. where the Indonesian data will also
be discussed.
27
E 1,000
.9
! o,aoo
;
€ o,ooo
5
;
s
6
0,400
F o,zoo
<35
]5- 70
70-150
150-300
300 600
600-1000 1000-1500
distance
ffi
) _ 1 9 1| 4
Sources:Studer (2008), Shuie and Keller (2007), and own calculationsbasedon
Iwahashi (1981) rice price data in annual Colonial Reportsof Indonesia(Indisch
Verslag,1878-1896)
Figure 3. Market integration in lapan, Indonesia and India
extreme;at 150-300km distancethe correiationcoefficientis only
.26. Only in the late nineteenthcentury, after the transport revolution
of railways and steamships,is Indian market integration comparable
to that of eighteenthcentury ]apan. In Indonesialevelsof market
integration at the end of the nineteenthcentury are still smaller than
in fapan in the previous century, which is a striking result. The high
level of market developmentin Japanis confirmed by other evidence.
Osaka,the centralhub of the cornmercialnetwork in TokugawaJapan
had alreadyin the late seventeenthcentury developeda futures market
for rice (Takatsuki,2007).One of the reasonsfor comparingIapan and
Indonesiais that they have a similar geography,making it possible
for a large part of the trade to uselow cost coastalshipping.This may
help to explain why Japanwas able to have such a highly integrated
market systemby the 18th century;in WesternEuropelevelsof market
integration were on averagemuch higher in the North-Seaand Baltic
region than in the inland zone (Bateman,2006).The fact that under
similar geographical
circumstances
Indonesiadid much more poorly,
points to the importanceof other factors,such as the efficiencyof the
institutions regulatingexchange.
fqi'Fr-
28
oNE
cHAPTER
Estimatesof the size and extent of labour and capital markets are
more difficult to find and compare internationally.The literature on
the developmentof the labour market in Northwest Europe suggests
howeverthat as early asthe fourteenthor fifteenthcentury a largepart
of the population - ranging from one-quarterto one-half,and in some
caseseven more - was activein the labour market at leastfor part of
the year (Dyer, 1989;Van Bavel,2003, 2006).Over the life cycle,the
extent of the labour market participation may even have been larger
than that; in their teensand (early)twentiesmuch more than half the
population engagedin wage labour (or as servantsor apprentices),
and wageemploymentwas a normal aspectof the life cyclefor almost
everyoneliving in either the countrysideor the towns of England and
the Low Countries.Chapter4 discusses
this featureof the labour market
of the North Searegion in more detail, linking it to the demographic
patternin this part of WesternEurope,which wascharacterized
by small
nuclearfbmilies.We haveno similar studiesfor early modern China,
India, fapan,or Indonesia,but the generalimpressionthat emerges
from the relevantliteratureis that wagelabour wasmuch lesscommon
there (Saito,2005b:for fapan;Boomgaard,1990,2005:for Southeast
Asia).Theonly estimatein the literatureis that in lateMing (sixteenth
century) China, perhaps lo/oof the rural population engagedin wage
labour - a figure that is very different from the 30 to 60% estimated
for Englandand the Netherlands(Xu et al.,1999,p. 37).
The conclusionthat emergesfrom this surveyof the various measuretnents of institutional efficiencyis that from the late medievalperiod
Western Europe alreadyhad a relativelyefficientset of institutions,
which led to low transactioncosts,large-scale
involvementof householdsin factor (and product) markets,and a high degreeof market integration. In particular,the very low interest ratessuggestthat property
rights were well respected,and that a relativelyhigh level of trust was
common in WesternEurope,which was especiallyimportant for the
developmentof labour and capitalmarkets.The comparisonof levels
of marketintegrationsuggests
that Europedid not performbetterthan
|apan and China in that respect.The relativeadvantageof Europe rvas
therefore probably related to the quality of its 'vertical' institutions,
regulatingthe relationshipsbetweenstate and citizens;'horizontal'
contractinginstitutions may have been equally efficientin eighteenth
centuryChina and Japan.Acemogluand |ohnson(2005)havepointed
out that for the explanationof recent economicperfc,rmancethese
THE EMERGENCE OF EFFICIENT INSTITUTIONS
29
vertical institutions seemto be much more important than horizontal
institutions, a conclusion consistentwith recent economic historical
research(Bosker,Buringh and Van Zanden,2008).Viewed from this
perspective,it should come as no surprisethat this part of the world
was ableto generatelong-term economicchangeto an extent that was
probably unknown in other parts of the world as predicatedby new
'modern
ecoinstitutional economics.In otl-rerwords, the genesisof
but the resultof
nomic growth'in WesternEuropewasnot accidental,
of the region
the relativelyelficientinstitutionsthat werecharacteristic
from at leastthe fifteenth century onwards.
By all measuresthe institutional efficiencyof Western Europe contrastssharply with the poor performanceof institutions in south and
south-eastAsia (India and Indonesiain particular),where markets
were much lessintegrated,interest rateswere high, and also the skill
premium was much higher than anywhereelse.Before 1850labour
markets are relatively marginal, even in the more denselypopulated
regionssuchas |ava (Boomgaard,1990);parts of India are the exception here,becausewe do find relativelyhigh levelsof wagelabour in a
few areasof the subcontinent(Lucassen,
2005).
This survey also suggeststhat the only regions that compare well
with WesternEuropein terms of skill premiun, and in particularin
the degreeof integrationof rice or grain marketswere,unsurprisingly,
Tokugawafapanand Qing China.From the (late)seventeenth
century
onwards,both regionsshowed similar signs of institutional maturity,
although in some respects- for example,their participationin the
Iabour market - they remained significantly difl-erentfrom Western
Europe.Moreover,since(at least)the samelevelof institutionalmaturity
had alreadybeen realizedby WesternEurope in the century tbllowing 1350,this implied that Europehad a head start of at leasta few
hundred years.Looking at interest ratesand capital market elficiency
alone,the leadingpositionof WesternEuropewas completelyunchallenged:no part of the world had interestratesas low as 3 to 5olo,as
wereby then usualin seventeenth
and eighteenth-century
Netherlands
and England.
The questionthat is addressedin Part I is why, as early as the fifteenth
century, institutions in Western Europe were notably efficient.When
exactly did theserelatively elficient institutions emerge?The century
after the Black Death of 1347148is perhapsthe obvious candidate,
because
the declinein interestratestrom about 10-12o/o
to 60/o
occurred
V
30
cHAprERoNE
at that time (Figure2). This period hasthereforeso drawn the attention
of economichistorians(Clark, 1988, 2007; Epstein,2000; Zuij derduijn,
2007);Clark (2007, pp. 17t-I75) has, for example,speculatedabout
a rather sudden changein time preferencein this period. our global
overviewof interest ratessuggests,however,that the pre-BlackDeath
level of 10%was alreadyquite low (in the yangtze Delta, for example,
interestrateswere 24o/o
or more). Moreover, the declinebetween1350
and 1450can to a large extentbe explainedby factorsrelatedto supply
and demand,which brought interestratescloserto the minimum that
reflectedtransactioncosts.The first stageof the fall in interest rates,
which occurredwell before1300,wasmore fundamentaland wasrelated
to important changesin the institutionalstructureof Europeanmedieval
society.Thesechangesalso facilitatedthe secondstageof declineafter
1350,as will be explainedin chapter 4, which dealswith institutional
changein the late Medieval Period.
That the declinein interestratesafter 1350may be causedby changes
in demand and supply is clearfrom a brief review of thesefactors.The
period beforethe Black Death of 1348,or perhapsbefore the Great
EuropeanFamine of l3l5-I7, which was probably the turning point
in many parts of WesternEurope,was one of rapid population growth
and strongeconomicexpansion.Investmentactivitywasextremelyhigh
for both religious and economic reasons.This was the period during
which the great reclamationsof agricultural land occurred, and the
large foreststhat still coveredsubstantialparts of Europe before l 100
disappeared,in which the basicinfrastructureof roads and bridgesin
Europe was constructed,in which cities emergedand their walls and
churcheswere built, and in which many thousandsof fortified castles
sprangup in the countryside.This spectacularinvestmentboom ended
in the first half of the fourteenth century, as is clear from the number
of church building projectsstartedin Englandin theseyears(from
Dyer, 1998,p. 102).Moreover, the processof urbanization - one of
the driving forcesbehind the investmentboom - beganto slow during
the thirteenth and fourteenth centuries(seechapter2).
The Black Death of 1347-49suddenlychangedthe parametersof
this economy. Investment activity dropped dramatically,perhapsfor
lack of funds but also becausethere was no longer any need to invest
in new buildings or infrastructure.Becausethe population declinedby
one-third (rangingfrom perhaps20o/o
in the Low Countriesto perhaps
as much as one-half in England),and capital stock was unaffected
by these changes,the ratio betweenavailablecapital and population
THE EMERGENCE OF EFFICIENT INSTITUTIONS
31
changedsuddenly.The demand for capital fell dramatically,but real
incomes went up, which may have increasedsavingsper capita.TAt
the sametime, demographicchanges,resultingin the emergenceof the
nuclearhouseholdand the EuropeanMarriage Pattern,also enhanced
savings(Chapter4). In sum, the strong declinein population from
1350to 1450led to an increasein savingsper capitaand a declinein
investment,both favouring reductionsin interestrates.The halving of
interestratesin this period can thus be explainedby changesin supply
and demand. As a result, Western Europe, n'hich had been a capital
scarceand labour abundant economybefore 1315,now becamean
economywith low interest ratesand high real wages.
What follows from this interpretationof the declinein interestrates
from 1350to 1450is that the most important institutionalchanges,
which helped bring along the very low levelsof interest rates characteristicof post 1450WesternEurope,may alreadyhaveoccurredbefore
the first phaseof the declinein interestrates
1300.As Figure2 suggests,
took placeduring the twelfth and thirteenth centuries,when ratesfell
'normal'
from levelsthat were
in the world economyat the time (about
30% and more) to the I0-I2o/othat was characteristicfor pre-1300
WesternEurope.It is to the medievalfoundationsof this development,
which were laid during the centuriesfrom 950 to 1300,that we now
turn for an explanationof why WesternEurope in the centuriesbefore
1300managedto developa set of institutions that were more efficient
than those found elsewhere.
7 Income redistribution favoring low income earnersmay however have cancelledout
someof this effect:real wages,for-example,
approximatelydoubled,whereasincomes
from land and capital fell relativeto other sourcesof income.
148
THE BIRTH OF THE EUROPEAN KNOWLEDGE
ECONOMY
CHAPTER FIVE
High real
wages/standard
ofliving
THE HUMAN CAPITAL OF COMMON WORKMEN
EUROPEANSKILL PRIMIUM IN A GLOBAL PERSPECTIVE
Introduction: What the Skill Premium Can Teil Us
lvlass
Consumption
of books
Figure10. Thecauses
of the high levelof humancapitalformationin Earlv
ModernEurope
Countriesand Great Britain. SouthernEurope and parts of Central
Europedroppedbehind afterthe sixteenthcentury,and EasternEurope
continuedto lag throughout.Only partsof the northern peripheryof
Europe,which had been marginal during the Middle Ages - Sweden
and Scotland- showedsignsof catchingup, especiallyin the eighteenth
century. The hypothesisformulated in Part II, that from the fifteenth
century onwards,the North Searegion investedmore heavily than
other areasin human capital,will be verifiedhere.We lvill try to show
that this region producedand consumedmore knowledge(on a per
capitabasis)than otherpartsof Europeor Eurasia,and that a low skill
premium and a high level of book production per capita are strongh.
reiatedto economicpertormance.In fact,this higher level of human
'predict'
'Great
capitalformationcan be usedto
the
Divergence'of the
nineteenthcentury.
Relativeprices are the DNA of an economy. They are basic units of
information that both reflect and define its structural features.They
tell us about relativescarcities,and are the incentivesthat guide economic behaviour.In particular,in the period beforethe mid nineteenth
century,when other sourcesof information (such as historic national
accounts)are difficult to obtain and subjectto large margins of error,
relativeprices and wagesare crucial sourcesof information about the
structureof the economyand its levelof development.
The study of relativepricesshould thereforehelp us understandthe
backgroundsand dynamicsof Western Europe in the centuriesbefore
the Industrial Revolution.As alreadymentionedin the introduction to
this book, a team of scholarsled by PeterLindert hasbeenassembledto
find out if the study of relativepricesand wagescan contribute to the
'global
'Great
Divergence'.The first resultsof the
discussionabout the
historyof pricesand incomes'presentedin BuenosAires in 2002suggestedthat in the earlymodern period the structureof relativepricesin
northwestEuropemay havebeendistinctive.it wasarguedthat capital
goods and knowledge intensiveproducts were relatively inexpensive
in this part of the world, that interest rates were relativelylow there'
whereasagriculturalproductsand foodstuffs(and land) were relatively
expensive(Lindert et aL, 2002).So, perhaps from the late medieval
'high
period onwards,WesternEuropehad a comparativeadvantagein
tech' products in combination with a well-developedcapital market.
one aspectof this hypothesis:theremuneraThis chapterinvestigates
tion of human capital.It testswhetherWesternEurope really had a
comparativeadvantagein knowledge-intensivesectorsby examining
the long-term developmentof the skill premium in different parts of
Europeand the most developedparts of Asia. It focuseson one particular skill premium that we know a great deal about: the difference
in daily wagesbetweenskilled craftsmen(carpentersand masons)and
[50
CHAPTER FIVE
unskilledlabourersin the constructionindustry, and offerssomeadditional information on the skill premium in other trades.
Why study the relativewagesof carpentersand masons- apart from
the obviousreasonthat we know a greatdealaboutthe remunerationof
this profession?
one advantage
in focusingon the constructionindustry is that technologicalchangewas relativelyslow there, so the skills
acquiredby thosecraftsmendid not changemuch over time. Their skills
were also very similal acrossthe world, although some variation did
occur,of course.lIt can alsobe arguedthat carpenters
and masonshad
very strategicskills.They were the builders and often the designersof
capitalgoods:of houses,mills, ships,carts,and a large variety of other
constructionsmadeof wood and stone(see,for example,Goldthwaite
1990,p. I25 tr.). The relativeprice of their skills must thereforehave
affectedthe relativeprice of capitalgoods,and thus the profitability of
investment.Moreover, it will be arguedthat studying this segmentof
the labour markethelpsus understandthe conditionsfor human capital
formation in the economy as a whole, and that the skill premium of
constructionworkerscan be usedto developand testhlpothesesabout
the relativeefficiencyof institutions in general.Finally, the construction industry was organizedin guilds in many parts of Europe.It has
been argued in the past that the Europeanguilds retarded economic
developmentbecausethey tried to monopolizemarketsand limit entry
to the professionthey controlled. More recently,their role has been
reassessed,
and the guilds are now seenby many scholarsas relatively
efficientways to collectivelymanagethe skills of a professionand
transfer this human capital to subsequentgenerations(cf. Epstein,
1998).If the critics of the guild systemare right, the skill premium (the
relative pay of master craftsmenwith respectto unskilled labourers)
would be expectedto be higher in regionsand citieswhere guildswere
strong,and lower outsidetheseregions,which would be proof that
indeed guilds restrictedeconomicdevelopmentby artificially keeping
skills scarce.Comparing regionswith and without guilds, comparing
Western Europe,where guilds were very important, with other parts
' SeeVan Dyke (2005,p. 62) for
an example in which captainsof the ships of the
Dutch EastIndiacompany hired, when arriving in the port cltiesof Asia, 'ind^igenous'
carpentersand other craftsmen_
to repair and maintain their ships,indicating thit their
skills could easily_be
used for that purpose and were to a large extent interJhangeable
with the skills of Europeancraftsmen.
THE HUMAN
CAPITAL OF COMMON WORKMEN
151
of Eurasia where they did not occur, can help to solve the debate on
their functioning.
The Skill Premium in the Mid-Twentieth Century
The starting point of this inquiry is the hlpothesis that a low skill premium reflectselicient institutions that produce high levelsof human
capitalformation (seealso Chapter l). But demand may also play a
also
role; an increasingskill premium may in certain circumstances
be indicativeof a growing demand for highly skilled labour. Thereare
a number of reasonsto assumethat the kind of evidencethat will be
presentedhere is more indicativeof supply side factors:the tlpe of
labour (construction)and the time dimension(the relevantdata covers many centuries,during which the skiil premium perhapstendsto
convergetowardsits long-term level,dominatedby the actualcosts
'producing' the skills). That supply factors dominate the skill preof
by an examinationof similar data from the
mium is also suggested
mid twentieth century.Sincethe 1930s,the ILO has publisheddata
from the October censusin its annual publication on international
labour statistics,which is an inquiry that is very similar for all countries
involved.It yieldsdataon wagelevelsfor variousoccupations.For 1950
the number of countriescoveredby this censuswas sulhcientlylargeto
enablestudying the variation of the skill premium in constructionon
a globalscale.Freemanand Oostendorp(2001),analysingthosedata
for a more recentperiod, found a strong negativecorrelationbetween
GDP per capita and various measuresof the extent of variation in
wages(or wagerates).A similar relationshipbetweenGDP and skill
premium is evidentfrom Figure 11,which only usesthe information
on the skill prernium in construction,rather than the much broader
sampleof industrial wagesusedby Freemanand Oostendorp.It shows
in Ethiopia
that in 1950the skill premium rangedfrom almost400o/o
(GDP per capitalessthan $400)to 6% in Denmarkand Norway (GDP
per capita about $6000).This suggeststhat the very partial measureof
the skill premium used in this paper - the differencebetweenskilled
and unskilled wagesin construction- reflectsthe samekind of forces
as the more complex, integral measuresof wage dispersionanalyzed
by Freemanand Oostendorp(2001).
Figure 1l alsoincludestrend lines for variousregions.Theseshow
that the relationshipbetweenGDP per capitaand skill premium is not
152
CHAPTER FIVE
THE HUMAN
a
**tr
t
WORKMEN
r53
for economic growth, a result that has also been confirmed by Davin
Chor (2005),who studiedthe associationbetweenreal wages,the quality
of institutions,and the skill premium in early modern Europe.
WesternEuropearound 1950seemsto be a bit of an outlier,however. It is unlikely that levelsof human capital fbrmation in the US
and Canada,for example,were lower than in WesternEurope;the data
about levelsof schoolingsuggestthe opposite(Barro and Lee,2000).
Institutions,inciuding perhapsthe higher levelsof unionization in
Europe,may explain the fact that the skill premium becamerelatively
low there. It is, however,to the historical roots of this very low skill
premium that we now turn.
X ea
"-.to
* *
*
Eoa
E
CAPITAL OF COMMON
\.'
Europe1300-1914
100
1000
10000
GDP/capitain 1950,in 1990internationaldollars
a
-
a
Europe
Log.(Europe)
-
Asia
L o g .( A s i a )
-
tr Americas
x
Log.(Americas) -
Africa
L o g .( A f r i c a )
Source:seethe text
Figure
11'rherelationshipffiff:lf#.li:.'ii;r)*d theskillpremium
exactlythe samefor all regions.Wageinequalityin the Americas(there
was no differencein this respectbetweennorth and south), Asia, and
Africa is higher than in Europe.Regressions
with the data,where skill
premium is the dependentvariableand GDP per capitathe independent variable,confirm this picture: dummies for Europe consistently
have a negativesign (and are highly significant),whereasdummies
for the other continentshave a positive sign. This showsthat the skill
premium was lower in Europethan in the rest of the world, even than
North America; for example,the skill premium for the United States,
the country with the highestGDP per capita,was still 7170.
The standardexplanationfor the negativelink betweenwageinequality and level of economic developmentis that the supply of human
capital increasedmore rapidly than did demand for it in the process
of moderneconomicgrowth,aswould be expectedon the basisof new
growth theory. The evidencesuggeststhat a low skill premium is good
The work by Allen (2001)and Ozmucur and Pamuk (2002)on wages
for constructionworkers in Europeancities over the long term makes
it relativelyeasyto constructtime seriesfor the skill premium in this
industryfrom 1300to 1914.The serieshavebeenciusteredin several
groupsthat representdifferent regionsand patterns.Table 6 showsthe
estimatesfor individual cities,while Figure l2 presentsthe averageskill
premium for three such regions:Western Europe (Ghent/Antwerp,
Amsterdam,Oxford, London,and Paris),SouthernEurope(Florence,
Milan, Naples,Valencia,Saragossa/Madrid,
and Istanbul),and Eastern
Europe (Danzig,Cracow,and Warsaw).The regionsnot presentedin
Figure 12 areNorthern Europe(seriesfor Scotlandand Sweden,both
starting in the sixteenthcentury) and Central Europe (Strasbourg,
Augsburg,Leipzig,and Vienna).The clusteringof the seriesis somewhat
ad hoc - other classifications
are possibleas well (for example,Leipzig
also fits in the EasternEuropeangroup) - but it generallyreflectsthe
different patterns than can be fbund. Moreover, all observationsare
subjectto some margin of error and not completelyfree from biases.
Although labourersand carpentersare relativelystandardprofessions,
somevariation doesoccur. SometimesAllen usesthe wagesof masons
or other craftsmen,and there is probably some regional variation in
the Qpe of unskilled labourersincluded in the data: are they masons'
assistantsor unskilled labourers?As the data from severalcities show,
the structure of summer wagesmay be slightly different from that of
winter wages.By clusteringobservations
from a number of citiesin a
particularregion,part of the variationresultingfrom thesemeasurement
V
t54
THE HUMAN
CHAPTER FIVE
CAPITAL
OF COMMON
155
WORKMEN
Table 6. The skill premium of constructionworkers in Europe, 1300-1800
(averagesPer fiftY-YearPeriod)*
200
180
1300-49 1350-99 1400-49 r4s0-99 1500-49 rs50-99 1600-49 16s0-99 1700-49 1750-99
160
London
Oxford
Ghent/AnwerP
Holland/
Amsterdam
Paris
Western EuroPe
t40
o- r )n
fi roo
tso
Strasbourg
Augsburg
LeiPzig
Vienna
Central EuroPe
60
40
0
I300
-
1350 1400 1450 1500 1550 1600 t6s0
1700 1750 1800 1850 1900
WesternEurope
-
q^,,thprn
Poly. (WesternEurope)
----
P o l y .( S o u t h e r nE u r o p e )
Fr,,nne
----
Centrel
F,rr,rnp
Sources:seeTable 6
Figure
r2.rheski'o*ffi
southern
inwestern,
T;fiii'J#.:",.r"rt'1il;1""
problemscan be disregarded,but not all. For example,it is striking that
the lowest skill premiums are found not only in Western and Central
Europe,but alsoin Valenciaand Naples;I havenot yet beenableto find
good explanationsfor the low skill premiums there (seeTable 6).
An additionalproblem is that the time seriesfor differentcitiesdo
not alwayscover the sameperiod. For the fourteenthcentury no series
for Central,Eastern,and Northern Europe are available;for Southern
Europe in the fourteenth century we have only data on Florenceand
Saragossa.
But from the fifteenth century onwards data becomenore
abundant,and we are on lirmer ground, althoughthere continue to be
gapsin individual series(Table 6 givesan overviewof the availability
of the seriesfor the different cities per .50-yearperiod).
Figure 12 showsthat during the first half of fourteenth century the
skill premium in parts of Europewas relativelyhigh, from 100to 150%
of the wage of an unskilled labourer. From the evidenceavailablefor
England,it appearsthere may havebeenan increasein wageinequality
Florence
Milan
Naples
Valencia
Saragossai
Madrid
Istanbul
Southern Europe
Gdansk
Cracow
Warsaw
Eastern Europe
Edinburgh
Stockholm
Northern Europe
r23
109
210
100
r 0.l
92
93
88
62
52
60
52
73
48
50
44
76
5l
58
.18
70
60
50
69
66
100
r28
60
88
60
64
60
6l
59
63
5d
J /
-6663
,uu
-6664
r15
59
12
41
62
61
37
76
53
47
l l
40
52
]J
53
86
99
95
55
58
3l
100
2r9
,r;36
s3
67
18
167
50
47
70
44
80
79
70
72
to
56
82
100
t24
80
56
82
90
67
67
40
47
67
31
55
52
67
29
6t
56
60
53
59
49
64
53
36
7l
28
M
103
36
82
48
67
5l
45
68
53
54
s6
46
62
6t)
58
t12
84
97
23
19
91
45
49
100
89
48
19
100
55
68
83
74
79
4l
180
to2
I 16
6t
67
ta
)L
f4
63
67
84
78
25
80
6l
82
44
64
63
133
103
118
llb
195
151
+-l
-
51
50
67
40
lll
lrl
l3l
74
103
8.1
t:
50
* definedas the differencebenueenthe waqe of a skilled labourer (mostly a carpenter)and an unskilledlabourer,
d i v r d e db y t h e w a g eo f t h c u n r k t l l e dl a b o u r - e rF. o r e x a m p l e ,1 0 0m e a n st h a t t h e ' c r r p e n r eer a n r b( w i c el h e r v , t g co [
the unskilled labourer.
Sources:Allen (2001),which gives a seriesoi unskilled and skilled construction workers. I used the underlying
seriesavailableon http://m-w.economics.ox.ac.uUMembers/robert.allen/WagesPrices.htm,
and made a few correctionsfor the I 540s(England)and the 1620s(German,v),when in periods of currencydevaluationAllen did not
alwaysdeal with the two seriesoflabourers and craftsmenin a consistentrvay.Similar serieswere constructedfor
Istanbul:Ozmucur and Pamuk (2002);Holland from I347 to 1500:Van Baveland Van Zanden (2004);Saragossa
in
the fourteenthand fifteenthcenturies:Palacios(1994,pp. 362 3); Scotland/Edinburgh:Gibson and Smout (1995);
Sweden/Stockholm
f a:n s s o ne t a l . ( 1 9 9 1 ) .
156
CHAPTER FIVE
in the first decadesof the fourteenth century, and that in the 1330s
(afterthe greatEuropeanfamine of 1315-1322)there was a decline.2
The Saragossa
seriespeaksin the l3l0s, but in Florenceand the Low
Countriesthe declineof the skill premium beginsafter 1348.It then
declineduntil the middle of the fifteenthcentury,when a levelof about
50 to 6070was reached.
This declinefrom 1348to 1450is one of the most striking development that needsto be explained,especiallysince in large parts of
Europe- in the Westernand Central regions- there followed a period
of more than 450yearsin which the skill premium remainedremarkably
stable.3In the other parts of Europe - in the South and Poland - there
was a tendencyfor the skill premium to slowly rise again,however.To
'peripheral
areas'seemedto
some extent the skill premium in these
changewith the rhythm of population growth, increasingduring the
sixteenthcerltury,stabilizingin the seventeenthcentury, and increasing again in the eighteenthand nineteenthcenturies(I discussthis
'little
divergence'betweennorthwesternEurope
in detail below). The
and the restof the subcontinentthat startsin the earlymodernperiod
according
can still be found in the twentieth century data:in 1936137,
and
carpenters
between
the
wages
of
to the ILO data, the difference
in six EastEuropeancountries
unskilledlabourerswason average560/o
(range:28 and 95%o),45%o
in threeSouthernEuropeancountries(25 to
640/o),and only 22o/oin four Western Europeancountries(12 to 28o/o)
(calculatedfrom ILO Yearbook,1938).
Central Europe, for which no data for the period before 1400 are
available,fbllowsthe santepatternasWesterrtEurope:the skill premium
A radicallydifferent pattern
stabilizesthere at low levelsof 40 to 600/o.
Therethe first data are
and
Sweden.
is found in the North, in Scotland
for the middle of the sixteenthcentury;they show a skill premium that
is much higher than in the rest of the continent and fluctuateswildly,
from 100 to I25o/oin both Edinburgh and Stockholm.This pattern
remainsunchangeduntil the secondhalf of the eighteenthcentury:
in the 1750sthe skill premium in Edinburghwas about 100%,atter
in the 1770sand 1780s(Cullen,Smout and
which it declinedto 33o/o
' Clark (2005),for a slightly dill-erenttiming of the declineof the skill premium in
England;Phelps,Brorvnand Hopkins (198i, p.8) indicatethat the declineafter 1350
had alreadybeen noted by Beveridgeand Postan.
3 Phelps,Brown and Hopkins (1981,pp. 8-12); after 1914it declinedto an even
lower level.to about 25o/oin 1936:from the ILO Yearbook 1936.
THE HUMAN
CAPITAL OF COMMON WORKMEN
I57
Gibson,1988,p. 115);similarly,in Stockholmitwas still 100%in the
1700s,but Iessthan 40% after 1725.Northern Europe clearlv catches
up quickiy in the eighteenthcentury.
OutsideEurope
For other partsof Eurasia- India, fapan,Korea,China,and Indonesiait is also possibleto find similar data on the structure of wagesfor
constructionactivities,which are presentedin Figure13.For India the
datago back to the famousreport on the stateof the Moghul Empire
in 1595,Abul Fazl'sAin-i-Akbari,which providesa detailedlist of the
wagespaid to various groups of workers and showsa much higher
skill premium than in E,urope(which is confirrnedby other data for
seventeenthand eighteenth-centuryIndia). The eighteenthand nineteenth-centuryobsen'ationsfor Indonesiaand Korea suggestsimilarly
high levels.Russiafits in the samepicture; the datapublishedby Hellie
(1999,pp. a3-7a) for the seventeenth
centurypoint to a 100%(car(mason/unskilledlabourer) skill
penter/unskilledlabourer)to 167o/o
premium. For the Middle East (EgJpt and Iraq) somewage data have
beenpublishedby Ashtor (1969,pp. 64,224-5),which go back to the
eighth-thirteenthcenturies,all indicating a skill premium of about
100%.The oldestis from Baghdadin 762-766,where a day labourer
earned2 to 3 habbasand a mastermason5.
The generalpicture appearsto be that outside Western Europe the
skill premium measuredin this way was much higher than around the
shoresof the North Sea,but thereare a fen' important exceptions.fapan
is a difficult case.A few observationscan be derivedfrom Saito'sstudy
of wagesand economicdevelopment.Thesepoint to a fairly high level:
a tJpical observationis that in 1802104
a day labourerin Kyoto earned
0.92 monme per day, while the wageof a carpenterin the countryside
(in Kami-Kawarabayashi)
was 2.6 monme and that of an Osakacarpenter4.3 monme per day (Saito,1978).4
But recordsfrom the Dutch
East India Company ships that visited Nagasakiin the seventeenth
and eighteenthcenturiesshow a smallerskill premium of slightlyless
I Nishikawa(1978,pp. 80-l) pror.ideswagesfor skilledand unskilledworkersin salt
making in Choshu in the 1840s,which indicate a similar skill premium (4.6 monme
for a skilled workers asainst 1.6 monme for an unskilled worker and .8 monme for
an unskilled femalelab-ourer).
158
THE HUMAN
CHAPTER FIVE
350
E 250
a
E 200
=
',
l5L,
100
0
I 300 1350 1400 1450 ls00
?l
ry
1550 1600 t650 1700 1750 1800 1850 1900
Sources:
Broadberryand Gupta (2006):for India; Van Zanden(2003):for Indonesia;
Van Leeuwen(2007):nineteenth-century
India and Indonesia;fun and Lewis(2007):tbr
Korea;the underlying data are availableon http://wvrv.iisg.nl/hpw/data.php#k6193
Figure 13. The skill premium of craftsmen in construction in Western Europe,
India, Javaand Korea, 1300-1914
than 10070.s
Moreover,in the 1870sand 1880s,when nationalstatistics
becomeavailable,the skill premium is relativelylow and comparable
to levelsin WesternEurope(Van Leeuwen,2007,
appendixon wages
and prices).
The most significantexceptionto the rule that the skill premium
was quite high outsideWesternEurope,was southernChina.A set of
governmentregulationsfor wagesof unskilledand skilled labourersrn
the north, in Beijing,in the seventeenth
and eighteenthcenturiespoint
to a skill premium of 100%,similar to what was found in other parts
of Asia (Moll-Murata,2005;Moll-Murata,2004).6The most detailed,
empire-wide regulation of wagesand prices for public works, dated
from 1769,the \{uliao jiazhi zeli, showsthat there existedsignifi5 Archive EastIndia Company,NationalArchive The Hague,no. 756, 1306-1354;the
datasetsof prices and wagesin Nagasakiwill be made availableon www.iisg.nl/hpw.
o Moll-Mui'ata (2004);this latter paper presentsregulationsof rvagesof construction workers in Beijing for 1659,1665,1723,and 1736,all showing the sameskill
premium of loo%.
CAPITAL OF COMMON WORKMEN
159
cant regionalvariations in the skill premium: in the North the 100%
skill premium is confirmed, but in the South the skill premium was
comparableto Western Europe (25-67%o)(seeAllen et al., 2005 for a
detailedanalysisof thesewage data). The countrywide averageof less
than 40% was largelyinfluencedby the much more denselypopulated
south (Table7). Although this sourceis not without problems,the skill
premium that can be derivedis probablyfairly accurate;it is confirmed
by other data basedon actualwagepayments,suchas thoseof the East
India Company ships entering the port of Canton (Allen et al., 2005;
Van Dyke, 2005).Therefore,the South of China appearsto be the only
region outsideWestern Europe with a very low skill premium, which
points to high levelsof human capitalformation there.
Human Capitalas an Investmentand its Link to
Explanations:
Interest Rates
Thesedata raisea number of questionsabout the remunerationfbr
human capital in different parts of the world. The first and perhaps
most striking developmentis the sudden,spectaculardeclinein the
skill premium in the century following the BlackDeath.The resultwas
- frorn 1400to 1550- the skill premium
that during the Renaissance
was exceptionallylow. The stability of the skill premiunt in Western
Europefrom 1450to 1914is the secondstriking phenomenon:how
is it possiblethat in thosefour-and-a-halfcenturiesthe relativepay of
'frozen'
craftsmenwas
at such a low level?The divergenceof the south
and the eastin the centuriesafter i650 (or perhaps1450?)is perhaps
the third remarkabledevelopment.What are the connectionshere to
'little
the developmentof real wagesand the
divergence'that were
analyzedin Part II? Finally, why was the skill premium in Western
Europe so much lower than elsewhere,with the significantexception
of southernChina?
Accordingto standardeconomictheory, the skill premium is the
remuneration from investmentin human capital,for not earning an
incomeduring the period in which an apprenticewasbeingtrained and
for payingthe feesto the mastercraftsmanwho trained the apprentice.
Therefore,one possibleapproachis to argue that the skill premium is
in the long term determinedby: (1) the cost of the training, such as
number of yearsneededfor acquiring the specificskills (the unearned
wage income during theseyears,the feespaid etc.), (2) the interest
160
cHAprERFrvE
rate linking higher future earningsto the present,and (3) the likelihood of earninga higher income after completingthe training period,
along with the number of yearsthe skill premium can be expectedto
last (which may be related to life expectancy).This may seema very
modern idea,and the approachmay perhapsbe slightly anachronistic,
but it can alreadybe found in Adam Smith (asso often), who wrote of
'the
work which he learnsto perform. . . must
the skilledlabourer that
be expected,over and abovethe usuai wagesof common labour, will
replaceto him the whole expenseof his education,with at least the
ordinary profit of an equallyvaluablecapital.. . . The differencebetween
the wagesof skilled labour and those of common labour is founded
pp.2$-a).
upon this principle'(Smith, 17761I976,
The outlinesof the apprenticeshipsystemin Europeare rvellkno'vvn,
and seemnot to have changedfundamentallythroughout the period
under study(Epstein,1991;Humphries,2003).Therefore,it is possible
'equilibrium'
skill
to roughly simulatethe relationshipbetweenthe
premium and the return on human capital,which will be relatedto the
interestrate.The followingassumptionsare usedin this simulation:
THE HUMAN
o
Threevariantshavebeencalculated:the lirst is basedon the assumption that an apprenticehasa 100%likelihoodof becominga craftsman
afterfinishinghis sevenyearsof training;the secondvariant assumes
; Also Epstein(1991,p. 142),ivho givesa 7-yearapprenticeship
period for carpenters
in thirteenth centlrry Genoa,but shorter periods for nrasons(5 or 6 years).
' Theserough estirnates
are basedon two sources:Scholliers(1959)and Impens
(1965),who give the wage prolile of printers in Antrverp (Plantin) in the sixteentheighteenthceirturies;Johnson(2003)givesthe ageprofile oftextile workersin Eneland
in the first half of the nineteenthcentury.
o Relaxingthe assumptionof a working life of +5 yearsdoes not affectthe experiment much, aslater yearshardly haveany effecton the return on investmentin human
capital,in particular not when interestratesare high
OF COMMON
WORKMEN
I6l
ru
q-
a f t e r1 3 5 0
Skill premium
t
1009'0
759/0
plus up front
_-
period - the standardin Englishcontracts
a 7 year-apprenticeship
- from 14 to 2l yearsold (Humphries,2003,p. 75);'
of the
the unearnedincome tbr an apprenticeis estimatedat 20o/o
annual wagesof an unskilledlabourer at age 14, increasingfrom
(17), 8096( 18),90o (19),
(16 years),70o/o
(at 15 years),to 600/o
40o/o
to 100%o
at 20;8
skilled craftsmenrvill earn the
after completingan apprenticeship,
higherwagefor a period of 45 years,fiom 21 to 65;e
CAPITAL
Po\:(l00oro)
-
z
I
----
75o/o
interestratesand skill premium
Poly.(7596)
Poly (75?oplus up-front)
Sources:
seethetext
Figure14. Modelledrelationship
between
skillpremiumandreturnof human
capital;threevariations
this likelihood to be 75o/oand that there is a25o/ochancehe will only
earn the income of an unskilledlabourer;the third variant additionally assumesthat the apprenticehas to pay a premium of 5070of the
annual wage of an unskilled labourer up front. Figure 14 shows the
relationships
betweenskill premium and return on capitalinvestedin
training derivedfrom theseassumptions.It shows,fbr example,that a
(in 1450)would
declinein skill premium from 135%(in 1325)to 600/o
be consistentwith a declinein the return on hunan capitalfrom l9o/o
to l0% in the first variant, from about 15.5o/o
to 8% in the secondvariant, and from almost L4o/o
to 7o/oin the third. Also added to Figure 4
are the very rough estimatesof interest rates and skill premiums for
severalcountries for the early modern period (explainedin detail in
Chapter1).
Given the fact that carpentersor masonsacquired the same skills
beforeand after the BlackDeath,the most straightforwardexplanation
r62
CHAPTER FIVE
for the post 1350declinein the skill premium for constructionis that
interest rates in Europe declined greatly in this period. This induced
householdsto increasetheir investmentin human capital,which led to
the changeobservedin the skill premium. The fall in the skill premium
occurredin variousparts of the continent,which is consistentwith the
fact that throughout Europe interest rates seemto have halved in the
century or so after the Black Death (seeChapter 1).
The returns on investmentin human capitai estimatedin this way
are somewhathigher than the interest rates on capital; the latter are
related to the segmentsof the capital market in which land was (or
could be) used as collateral.Obviously,investmentin human capital
was riskier than investmentin land, but this risk premium was - if we
are to believethesecalculations- surprisinglylow in early modern
Europe.Significantly,McCloskeyand Nash (1984) also found a more
radical declinein interestrateson rural capital marketsin their study
of the seasonalvariationin grain prices.The evidencepresentedhere
and in their study perhapsindicatesthat the spreadof interestrates
'formal'and'informal'
between
capitalmarketswas also decliningin
the centuryafter 1350.
What is also striking is that in Western Europe both interest rates
and the skill premium remained roughly constant after 1450,and
certainlydid not rise againto the pre-1350level,in spiteof a strong
growth in population and a subsequentdeclinein the land/man ratio
in the centuriesafter 1450.In fact, population growth after 1450was
particularly rapid in the Netherlancisand England,where the skill
premium remained frozen at the 50-600/olevel. This means that the
explanationfor the fall in interestratesand the associated
skill prernium
that focuseson the decline in population after 1348 as the determin'fhe
ing factor must be incomplete.
evidencesuggeststhat at the same
time changesin the institutionalsettingof capitalmarketsand/or in
the savingsbehaviourof householdsoccurredresultingin a long-term
increasein the supply of savingsand a stabilizationof interest rates
in the very long run. In Chapter 4 a possibleexplanationhas already
been suggested:it was the rise in the EuropeanMarriage Pattern that
causedthesequalitativechangesin institutionalsetting and savings
behaviour.Further proof of this is that in the North Seaareain the
centuriesafter 1450,interestratesand skill premiums did not increase
againbut continuedto be low and perhapsevendeclinedslightlyduring
the eighteenthand nineteenthcenturies,distinguishingthis regionfrom
THE HUMAN
CAPITAL OF COMMON
WORKMEN
r63
'peripheral'
the more
parts of the continent.roThat the demographic
downturn after 1348was perhapsof secondaryimportance- and only
helpedto attain a new equilibrium in the capitalmarket characterized
by low transactionscosts,high savings,and low interestrates- can also
be arguedon the basisof the Netherlands,wherea long-term expansion
in the (urban) population from 1350to 1500coincidedwith a decline
of the skill premium (from about 100%in the 1340sto 40 to 507oin
the early 1500s)and a similar fall in interestrates(Van Baveland Van
Zanden, 2004; Zuljder dijn, 2007).
The questionremains,of course,why the Dutch Golden Age, or
the Industrial Revolutiondid not lead to a strong increasein this particular skill premium? Part of the answer is that the skill premiums
may indeed have gone up, but it was in other segmentsof the labour
market. De Vries and Van der Woude (1997,pp. 632-4),Yan Zanden
(1995),and Williamson(1985)found evidenceof increases
in the skill
premium in other sectorsof the labour market,especiallywith respect
to highly skilled employees.Thesereflectedbottlenecksin the supply
of skilled labour, the result of accelerationsin economic growth, and
the transformationof economicstructures.
Should we conclude then that the stability in the skill premium of
carpentersand masonswas exceptional?To test the hypothesisthat
the low skill premium for constructionworkers reflectedthe much
broader phenomenonof a relativelyflexible supply of skilled labour, I
also collectedwagedata on another group of highly skilled craftsmen,
the compositorsand printers working in the printing industry following the invention of movabletlpe in the 1450s.Theseprinters can be
seenas the ICT workers of the late medievaland early modern period,
operatingand developingthe new techniquesof massproduction of
information. Book production grew dramaticallyin Europe from the
1470sonwards,and the demandfor their skillsmust havebeenincreas'excessive'wage
ing very rapidly.But this did not leadto
levels.Thevery
detailedwagedata availablefor the large Plantijn firm in Antwerp for
the period I 560-1800showthat in this boonringcentreof the printing
industry,wagesfor thesehighly skilledand literateworkerswere at best
at the samelevel as those of skilled construction workers, and often
r" F-pstein(2000,pp. 60-63); and Clark (2007,pp 167-175)speculateabout these
changesbut do not give adequateexplanations.
r64
CHAPTER FIVE
THE HUMAN
CAPITAL OF COMMON WORKMEN
165
the notable exception of China, where interest rates were high but the
skill premium was lower than in the rest of East and South Asia, the
efficiency of capital market institutions seems to explain the price of
human capital. The case of Japan, where both the interest rate and
the skill premium probably declined in the eighteenth and nineteenth
century, also fits well in such an interpretation.
160
140
t20
100
TheEfltciencyof T'rainingInstitutions
0
-20
156,3
r583
I 603
r643
I 663
compo)ilor -printer
I 683
17 0 3
t743
I 763
-c.Irpenter
1959;
1965;
Scholliers,
Impens,
Allen,2001
database
Sources:
in Antwerp
Figure15. Skillpremiumof printers,compositors
andcarpenters
(Plantijn),
rs63-r766
lower (Figurel5).1IBecause
many printerswererecruited
substantially
from abroad,especiallyfrom Germany,this must havebeen indicative
This again points to the relativeflexibility
of wage trends elsewhere.rz
of the supply of skilledlabourersin early modern Europeand suggests
that the low skill premium in the constructionindustry may be indicative of the efficiencyof the training systemin general.
Can interestrate differentialsalsoexplainthe gap in wageinequaliry
betweenEurope and the rest of Eurasia?Evidencethat interest rates
in Europe were lower than elsewhereon the Eurasiancontinent is
fragmentary,but as we saw in Chapter l, the generaltendencyfrorn
the late Middle Agesonwardswas that capitalmarketsin Europewere
more elficientthan elsewhere,
with the possibleexceptionof eighteenth
and nineteenth-centuryfapan.Figure l4 showsthat, assumingthe costs
of training young apprenticeswere similar everywhere,the large differencesin skill premiumsbetweenthe rest of Eurasiaand post-1348
Western Europe can be explainedby this gap in interest rates.With
" Seealsothe classicstudy ol the managementand the labour relationsat this printing firm, Yoet(1972,p. a31),who concludedthat the wageof the Plantin workmerr
'approached
and often even exceededthose of rnastercratfsmen'.
12Printers and carpenterswere paid a daily or weekly wage,compositorsa prece
wage,which explainsthe differencesin behaviourof theseseries.
Interestratesare only part of the explanation,however.The efficiency
of institutions regulatingthe training of apprenticesalso plays a role.
We can distinguish two different ways to organize such training: in
largeparts of the world the family or the clan playeda centralrole, and
skills were transferredfrom fathersto sotls or other members of the
(extended)family. In fact,in partsof Asia,beinga craftsmanwaslargely
hereditary.In the countrysidesurroundingPune (in southernIndia)'
'balutedars
worked as hereditary
for example,the villagecraftsmenor
'rendered
servillageservants',who, in return for a sharein the harvest,
(Divekar,
pp.
44-45).
1989,
year'
the
throughout
vice to the cultivators
In Song and Yuan (and Ming) China the statedefined craftsmenas a
separatesocialclass,which was taxed separately,often in the fbrm of
regulatedlabour services(of a couple of yearsor months in Beijing'
working for the imperial household).This tax burden was hereditary,
and basedon the assumptionthat the father would be succeededby
anotherfamily member after his de'ath.This systemchangedunder the
Qing: they abolishedthe hereditarycorv6edutiesfor artisans,who from
1661onwardswere includedas ordinary householdsin the land tax
'meant
that their occupationwasno longerhereditaryby
registers.This
legalobligation'(Moll-Murata,2005,p. l4) The long tradition of forced
labour by craftsmenunder the Song,Yuan, and Ming, however,and
the strongclaimsthe statehad on the work of thesecraftsmen'nrakes
it more difficult to interpret the low skill premium found in parts of
China during the Qing, however.
In contrastto theserelativelyclosedsystemsin which the family
playeda centralrole,WesternEuropehad a formal systemof apprenticeship- organizedby guilds or similar institutions - and in principle
open to all. Guilds or guild-likeinstitutionsexistedin other parts of
Eurasiaas well, especiallyin the Middte East,but alsoin Qing China
after the stateceasedto regulatethe supply of skilledlabour in the late
r66
CHAPTER FIVE
seventeenthcentury. But it wasonly in the nineteenthcentury that those
guildsbeganto play a role comparableto someEuropeanguilds;in the
eighteenthcenturymost guildswere setup by merchantsfrom a certain
province trading in a distant city (seeMoll Murata,2006). Similarly,
guild-like structuresappearedin Tokugawafapan,but their effectson
the training of apprenticeswereprobablyratherlimited (Nagata,2006).
Still,it is striking that in the threeregionsthat (probably)had the lowest
skill prernium, institutions such as guilds existed(or appeared)which
regulatedthe training of apprentices.
This suggeststhat having a guild systemin place may have had
advantages.The contract between an apprenticeand his master was
complex,involving variousremunerationsfor servicesover a long time
Epstein,2001).Apprenticesmay havefeared
period(Humphries,2003;
that paying for training up front would not ensurethe quantity and
to becomea skilledworker or an indepenquality of training necessary
dent craftsman.Mastersmay have fearedthat after an apprenticehad
been a net liability for his householdin the first yearsof the contract,
he would leavebeforebecominga net sourceof incomein the second
tralf of his term.l3Sincethe mastercontrolledaccessto the ranks of
skilled craftsmen,apprenticesmay have also fearedhe would renege
on his promises(Humphries,2003,pp. 8I-2). By definition,these
'incomplete'
contractsmay thereforehaveresultedin underinvestment
in human capital.Elficient levelsof human capital formation required
a certain amount of reciprocity and trust betweenboth partiesand/or
third-party involvement,i.e. institutions to guaranteefair executionof
contract.
the apprentice
In Europe guilds traditionally regulatedthe training of apprentices;
(from 1563
in Englandthe statealsobeganto regulateapprenticeship
or,*"idr), but this was entirely basedon the rules alreadyappliedby
the craft guilds (Humphries,2003).This meantthat guildsoperatedasa
third pariy monitoring the apprenticeshipcontracts.The exceptionally
low skill premium of post-f +SOEurope ii thereforea testimonyto the
efficiencyof the guilds (and, in England,of the additional institutional
guaranteesprouid.d by the national organization for the apprentice
Iontract). If the guilds had been lessefficient,if they had.functioned
of
as cartelsof skilled labour effectivelyrestricting entry to the ranks
rr SeeEpstein (I99I, pp. 102 11.):almost all contractscontainedclausesforbidding
the appreniiceto leavebefore the contract expired.
THE HUMAN
CAPITAL
OF COMMON
WORKMEN
r67
would have been much higher (or' for
..1ft5fl1€ri,the skill premium
th€ gap betweenthe return on human capitaland the interffi;;14,
There
on the capital market would have been much higher).
"rir"r"
regionalvariations in the power of guilds, however;their
;;;*,
in Elgland, for example,seemsto have declinedduring the
ffi;;
also becausethe state took over part of
linfrt""rrtt century' perhaps
quite important in the Low Countries.
,rro"Jror., but they remained
a global scaleit appearsthat guilds and low skill premiums
;;;r,
the ongoing debateabout the relai"i".ia"a,l conclusionrelevantfor
of the guilds in early modern Europe.Although in the
ii.-"m.t"".y
recent
past the literature was very critical of the role of guilds' more
in
especially
positive,
more
much
Lr""..t suggeststhat their role was
Prak'
2008)'
and
of training (Epstein, 1998;Epstein
tfr. otg""i;ion
of the skill premium suggeststhat there may
comparison
fhis giobut
of the guild system'
be soinetruth in a reassessment
TheLink to Agricultural Labour Markets
The existenceof guilds could not guaranteethe long-term stability of
the skill premium at the 50 to 600/olevel that was tlpical of fifteenthcentury Lorop", however. The example of Italy, where guilds were
relatively powerful (Mocarelli, 2006),demonstratesthis clearly (see
Figure l2)-. More generally,in Southern and EasternEurope, where
guildsoften did regulatelabour markets,the skill premium appearsto
havebeen more flexible than in the northwesternpart of the subcontinent. Long-term trends in the skill premium in the South and East
point to an associationwith population growth: the skill premium
increased,in the sixteenth century, followed by convergenceto the
which
Western Europeanaveragein the seventeenth-century'crisis',
was againfollowed by an increaseof skill premiums in the South and
Eastin the eighteenthand nineteenthcenturies(Figurel2)'
The two different patternscan best be observedin the two regions
for which we havethe longesttime series:Englandand northern Italy
(Florencebefore1618,Milan afterwards).
As Figure16shows,in England
the relationshipbetweenpopulation and skill premium fundamentally
in populationand
changedin the fifteenthcentury;whereasthe decrease
the declinein skill premium operatedapproximatelyin tandem before
1450,a clear'de-linking'occurredthereafter.In (northern)Italy no such
de-linkingoccurred(Figure 17):the situationin 1600showsalmostthe
168
FrvE
cHApTER
Y
exactsamepattern as in 1350.The Florentine skill premium returned
to more than 100%,and the Italian population also increasedto the
pre-BlackDeath level of about 12.5million. After 1620a stagnationin
population growth (which stabilizedat slightly more than t3 million)
was accompaniedby a small decline in the skill premium (to about
8070);the real de-linking seemsto haveoccurredin the eighteenthcentury, when rapid population growth no longer led to a further increase
in the skill premium (of Milaneseworkers).
Why wasthe Italian skill premium so sensitiveto populationgrowth?
Part of the explanationmay be that the wagesof unskilled labourers
were linked to agriculturallabour productivity, which tended to correlate with the size of the population. Such a link betweenrural and
urban labour markets for unskilled labourersis a well-known theme
in the literature on pre-industriallabour markets.In )apan, India,
and Indonesia,unskilled labourerswere basicallyagricultural labour'coolies'
ers was the term usedin southeastAsia - who engagedin
constructionand other urban activitieson a part-time basis.In the
labour marketthe links betweenthe urban marketfor unskilled
/apanese
labourersand the situation in agriculturewere also strong: unskilled
labourersin cities earnedabout the samewage as 'male springtinre
farm workers'; the urban-rural wage gap was relativelysmall, at least
for unskilledlabourers(Saito,1978,p.88; Saito,2005b).
The sameiink betweenthe wagesof agricultural workers and unskilled workers in the construction industry can be found in Western
Europe.In the sixteenthand seventeenthcenturiesagriculturalwages
in Holland were roughly on a par with those of unskilled workers in
the building industry (Van Zanden, 2002a).Similarly, frorn 1300 to
1700,nominal wagesin English agriculturewere at the samelevel as
the wagesof unskilled labourersin construction (Clark, 2005).
'Ihe
connectionbetweenpopulation growth and the skill premium
can to someextentbe explainedin this way:wagesof unskilledworkers
reflectedlabour productivity in agriculture,which in the lcng run was
linked to population growth. The rapid demographicexpansionin the
sixteenthcentury triggereda strong declinein rural real wages,but the
urban sectorcould to someextentprotect itself againstthesetrends.In
the North Searegion real wagesin agriculturedid not declineasmuch
as in Southernand EasternEuropebecauseof gronth in agricultural
productivity. Moreover,labour marketswere better integrated,and
wagesin agricultureparalleledthe wagesof craftsmenin the construction industry. The de-linking of population growth and the skill
THE HUMAN
CAPITAL OF COMMON
^r
I
1
160
140
169
WORKMEN
tr?ro-l
tr4sol
120
100
0i2345678910
Population
Sources: see Table 6
Figure 16. Skill premium (nine-yearmoving average)and estimatesof English
population(in milliotis),1300-1800
t60
t40
E l t1f]6lo1
ri-v
t20
J
ruv
980
N/
lou
40
20
ll
-l-
trsoo-l
ffiry
0
681012161820
Population
Sources: see Table 6 and lvlalanima (1998)
in Florence/Milanand
moving average)
Figure17. Skillpremium (nine-years
estimatesof the populationof Italy (in millions)' 1326-1800
*
t70
CHAPTER FIVE
premium' therefore,points to fundamentalchangesin the economies
of
northwesternEurope,and showsthat labour marketsthere werebetter
integratedand lesssegmentedthan in the southern and Eastern
parts
of the subcontinent.Thus,the skill premium alsoappearsto reflect
the
extentof segmentationof the labour market:in a very fragmented
system, where craftsmenare able to monopolizelocal laLouimarkets
and
the wagegap betweencountrysideand town is large,there is generalry
a high skill premium,.but i' highly integratedlabour mark-.ts*ug"
inequality will tend to be relativelylow.
This canbe illustratedby an extremeexampleof a labour marketwith
a low level of integration,eighteenthand nineteenth-centuryIreland.
Like much of the celtic fringe, Ireland had not fully participatedin the
big boom of the high Middle Ages; it did not undergo the thorough
restructuringin the institutionalframeworkof its economyand soci_
ety that occurred elsewhere(and to the extent such institutions were
introduced, they were largely restrictedto the English minority that
dominated the towns). In the eighteenthcentury *" find an extremely
high skill premium there,ranging from 100%in Dublin to 200%in
the countryside;by all standardsIreland is a clearoutlier, with a much
lower levelof human capitalformation than the restof western Europe.
which is confirmedby Mokyr's work on ageheapingthat showssirniiar
low levelsof numeracyand literacy(Mokyr, l9g5).n one of the factors
behind the enormousspreadin wagelevelswas the wagegap between
town and countryside,anotherfeatureof a poorly integratedeconomy:
in eighteenth-centuryDublin, for example,craftsmenea'red a wage
that was often double the wage of similar workers in rural Kilkenny,
and the urban-rural wagegap for unskilled and semi-skilledlabourers
was even larger (all Irish wage data are fiom Kennedy and Dowling
(1997)).what is even more striking is that the skill premium went
up between1700and 1850,whereasfor the sameperiod in Scotland
it declinedsignificantly,to convergeto the Englishlevel.In Dublin it
increasedfrom 100%from 1700to 1760to r40o/o
fiom 1g36to 1g50r
in rural Armagh it increasedfrom 155%in the 1740sto 200%o
in the
1840s.Theseare levelscomparableto thosein eastand southeastAsia
'' Mokyr (19.85);
there are many other signsthat the market econom),wasnot
functioning well: interest ratesjn the countryiide were very high, properti, rights to
land unclear,markets were performing poorly generally.
THE HUMAN
CAPITAL OF COMMON WORKMEN
17l
but very unlike the rest of Western Europe.rsThe analysispresented
that this pronouncedincreasein the skill premium, which
heresuggests
to
eighteenthand early nineteenth-centuryIreland, was
was unique
linked to a stagnant,or perhapsevendeclining,labour productivity in
agriculture,induced by strong population growth.16
Efectson EconomicGrowth
New growth theory postulatesthat human capital formation is one
of the determinantsof long-termeconomicgrowth. If this is correct,
the varying conditions for human capital formation, reflectedin the
differencesin the skill premium analyzedin this chapter,should have
affectedlong-term economicgrowth. I have alreadyreferredto the
that sucha link existed
paperby Davin Chor (2005),who demonstrates
institutions
resulting in
cities
with
efficient
in early modern Europe:
low skill premiums had higher levelsof real wages,a clearindicator of
'iittle
their relativesuccess.Thus, the skill premium helps explain the
divergence'thatoccurredin Europefrom 1400to 1800.
Do thesedifferencesin the price of human capitalalso help explain
'Great
Divergence'of the nineteenthcentury?We can test this in
the
two ways. Figure 18 showsthe relationshipbetweenthe averageskill
premium (in the capital city) in the period 1750-1820and the growth
of GDP per capitain the nineteenthcentury (the period 1820-1913)
Because
the 1820estimates
accordingto Maddison's(2001)estimates.
of levelsof GDP have been subjectto much debate- the revisionists
claiming that the gap betweenEurope and China was much smaller
than estimatedby Maddison - [ also compared the absolutelevel of
GDP per capitain 1913to the skill premium in the period 1750-1820
(Figure19).
In both caseswe find a clear relationshipbetweengrowth/level of
GDP and the skill premium, confirming the hypothesisthat a low
skill premium leads to rapid economic growth, or that the efficient
institutions reflectedin a low skill premium enhanceeconomicdevelopment.The link to the 1913levelof GDP per capitais closerthan it
rs Seealso Cullen,Smout and Gibson (l9SS,p. ll3), who find skill premiumsas
high as 300o/o
in rural lreland in this period, and Molar (1985,pp. 226-7).
16Similarly,the fact that the skill premium in late Tokugawa
|apan fell may alsobe
relatedto the almost stationarypopulation,but this is speculative.
F
t72
THE HUMAN
CHAPTER FIVE
1,500/o
CAPITAL
OF COMMON
t73
WORKMEN
1000
-J r;r".'J--l
t,300/o
1z'a
I, 10olo
oa
0,907o
E
o
0,700
y = - 0 , 0 0 3 8 l n ( x )+ 0 , 0 2 5 4
R 2= 0 . 3 1 0 7
o
0,50%
a
(,
Y
0,300/o
a
= 9684,7x0'62o8
R: = 0,5578
0,10o/o
100
- 0 , 10 9 6
IO
100
n)|
I china l/
I 000
10000
GDPpercapitain 1913
-0,300./o
Sources:SeeTables6and7, Figure13,Kennedyand Dowling, i997, andMaddison,200l
Skillpremium(log-scale)
Figure 19. The skill premium in 1750I 1820 and GDP per capita in I 9 13 (log-scale)
Sources:
SeeTables6 and7, FigureI-j, Kennedyand Dowling, 1997,and.Maddison,2001
Figure 18. The average skill premium of construction workers between 1750
and 1820 and GDP per capita growth in lg20-1913
slow becauseit startedfrom a high level.rTThe Dutch anomaly disappearsin Figure 19; China remains the most significantoutlier in the
latter 6gure.18
is to growth in the nineteenthcentury.Thereare a number of outliers
in Figure 18: China, the Netherlands,and Ireland, which reversedits
developmentpath following the famine of the 1840s,'explaining'why
its performancecannotbe predictedon the efficiencyof its institutions
in 1800.)apanalsohas a slightlyhigher rate of growth than might be
expectedon the basisof its skill premium in 1800,but I usedthe high
1804estimateof the skill premium by Saitohere,which is perhapsnot
representativeof the national average.China is the underperformerin
the nineteenthcentury by thesestandards.It is the only country with
a decliningGDP per capita,accordingto Maddison,in combination
with a relatively low skill premium; it continues to be an enigma. I
used the estimatesfor Beijing (of a 100%skill premium) rather than
the countrywide estimates,becausefor other countries we also used
data relatedto their capital cities.Using the much lower countrywide
estimatespresentedin Table 7 would make the underperformanceof
China even more dramatic. Growth in the Netherlandswas relatively
Conclusion
This chapter developsthe argument that the skill premium measured
in this relativelystraightforwardway - as the differencebetweenthe
wagesof carpentersand masonsand those of unskilled labourersin
construction- can be considereda good pro)ryof the quality of the
institutionalframeworkof an economy.That it exemplifiesinstitutional
efficiencyfollows from the analysisof the main factors determining
level and development:
t7 Cf. Van Zandenand Van Riel (200a)for an interpretationof its slow performance
in the nineteenthcentury.
16Fukaoet al. (2007);ChineseGDP per capitain l9l3 is perhapsunderestimated.
*
174
tr
CHAPTER FIVE
THE HUMAN
Table 7. Nominal wages of construction workers in'1769'according
zeli (in tael per day)
Unskilled Skilled Skill premium
Manchuria and Mongolia
Heilongjiang
lilin
Liaoning
Xinjiang
The North
.100
.095
.057
.097
.191
.160
.100
.ll0
9l
68
75
Rehe*
Beijing*
Tianjin/Baoding*
Hebei*
Gansu
Shanxi
Shaanxi
Shandong
Middle
.066
.077
.07r
.054
.044
.054
.044
.045
.120
.l4l
.tl2
.081
.054
.073
.050
.061
82
83
58
50
23
Henan
fiangsu
Zhejiang
Hunan
Sichuan
Yunnan
South
.037
,040
.040
.039
.048
.048
.039
.051
.060
.050
.062
.068
Fujian
Taiwan
Guangdong
.030
.030
.040
Average(unweighted)
Average(weightedby
population)
.0s3
.044
N =
2t6
6
13
3
I --)
to the Wuliao jiazhi
Population
( m i l l i o n si n 1 7 8 7 )
1.0**
?
7
1/1
23.0***
J-)
34
82
48
85
14
36
/+
50
8.4
22.6
5
28
50
28
29
15.2
r _1.i
106
63
63
l0
2l .0
31 . . 1
2t.7
t6.2
8.6
+L
84
3.s
.050
.050
.050
67
67
25
9
I
89
1 2 . 0".. .
.081
.060
53
36
* part of the
province of Zhili (there is a separateregulationfor Rehe)
** Manchuria
as a whole
*** Zhlli as a whole
*a** includingTaiwan
Source:Allen et al. (2005);population:Wang (197-3).
16.0
214
CAPITAL OF COMMON WORKMEN
175
The level of interestrates,as paid by or used as a shadow price by
(urban) households:it is generallyacceptedthat interest rates are
good indices of the quality of the institutional framework of an
economy,but they are difficult to measurein a standardway. We
found a strongcorrelationbetweenthe skill premium and the interest
rate,both acrosstime (in WesternEuropefrom 1300to 1914)and
acrossregions(comparingWesternEuropewith, for example,Korea,
India, and Indonesia)that is consistentwith standardhuman capital
theory. The south of China appearsto be exceptionalin this respect,
becauseinterest rateswere fairly high there, but the skill premium
of constructionworkers was perhapseven lower than in Western
Europe;fapan,whereboth interestratesand the skill premium probably declinedin the (late) eighteenthand nineteenthcenturies,does
seemto fit the generalpatterns,however.
Theeficiencyof instittttionsfor theformation of human capital, and
the absenceor presenceof formal or infbrmal barriersto entry in
theseprofessions:a high skill premium indicatesthat the efficiency
of theseinstitutions lvas not very high and/or that strong barriers
to entry existed.The data suggestthat skill premiums in Western
Europe were not inflated by conservativeguilds; on the contrary, it
appearsthat in regionswith guilds,the skill premium was lower on
averagethan elsewhere(it is perhapsno coincidencethat in China
and Japan,too, guildsbecameincreasinglyimportant in the eighteenth
and nineteenthcenturies).
The degreeof integrationof rural and urban labour markets(and
within the urban sector.of the markets for skilled and unskilled
workers): fragmentedlabour markets tended to result in large skill
premiums, and well integrated,elicient marketsin low levelsin the
skill premium.
Thus,a lon'skill premium reflectsthe fact that households
haveaccess
to relativelyefficientlabour and capitalmarkets,and that institutionsfor
the formation of human capitalare working well. A low skill premiunr
also seemsto point to relativelyhigh levelsof investment in human
capital,which according to endogenousgrowth theory, will result in
long-term economicgrowth. One of the links is possiblythat the skill
premium of carpentersand masons,becausethey are the designers
and makersof capitalgoods,affectsthe reiativeprice of thesecapital
goods.In addition,this link alsosuggests
that a low skill premium will
T76
CHAPTER FIVE
contribute to economic performance.The differential growth in the
economiesof early modern Europeappearsto confirm this hypothesis:
growth after 1450was especiallystrong in the North Searegion,where
the skill premium was permanentlylow. But even .'or" itrikirrg ur"
the strong correlationsbetweeninternational differencesin the skill
premium in 1800and growth in the nineteenthcentury.Therefore,the
skill premium is not only a measureof the quality of the institutional
framework of an economy,but alsoappearsto be a predictor of growh
in the long run.
CHAPTER SIX
THE PHILOSOPHERS
AND THE REVOLUTION OF
THE PRINTING PRESS
Introductiott
The price of the skills of common n'orkmen - prescriptiveknowledge
in Mokyr's terminology - was relativelylow in WesternEurope in the
centuriesbeforethe IndustrialRevolution.But would it also be possibleto measurethe price of the knowledgeof 'philosophersand men
of speculation',of Mokyr's propositionalknowledge?And what do
we know about the long-term developmentof literacy, which forms
a crucial link betweenthe two elementsof the knowledgeeconomy?
Economistslvho model the emergenceof the IndustrialRevolutionhave
identifiedthe growth and productivityof the sectorproducing'theoretical' knowledgeas one of the key elementsin generatinga cumulative
processof knowledgecreationand human capitalformation (Cervelatti
and Sunde,2005).Is it possibleto testtheseideasand measurethe cost
and production of this kind of knowledgein a way similar to the one
we used for pricing the skills of common workmen?
Chapters2 and 3 identifiedkey momentsin the history of the system
of knowledgeproduction in WesternEurope:the growth of the monastic movementand the establishmentof universitiesin the high Middle
Ages were crucial stepsin the developing'knowledgeeconomy'.In
combinationwith other developments,
suchasthe growing importance
of the written word in placeof memory as the most reliablesourcesof
information, this sparkeda very significantexpansionin the demand
and supplyof propositionalknowledge,ascan be seenfrom the growth
of book productionand consumptionduring the high Middle Ages.
Here we takeup the story of the growth and accumulationof knowledgeand try to measurethe output and costof propositionalknowledge,
focusingon book production.Booksand journals,which only started
to appearin the seventeenthcentury,were the most important carriers
of knowledgein the period before the Industrial Revolution- besides
the scholarswho wrote them. As in the previous chapter,where data
on the skill premium from different parts of Europe were analyzedin
l*