# Economic History
2025 Spring

# Lecture 1: Introduction
## **1.1 Q. Who Drives Economic Growth?**
### *Institution vs. Capital vs. Culture*
* **Intellectuals** → Influence **persists long after** their time.
* **Scientists** → Introduce **deterministic ideas & discoveries**.
* **Politicians** → Shape **economic policies** and influence **culture**.
* **Entrepreneurs** → Have a **limited** effect on national economies.
* **Inventors** → Innovations are often **not unique**.
## **1.2 World Economy Overview**
### **Population**
* Total Population:
* **Surge after WWII**.
* Population Growth Rate:
* Before **1955**, population growth was **steady** (*1855-65: Taiping Rebellion*).
* **Baby boom** + **Declining death rates** (*Penicillin, DDT*).
* **Gradual decrease** → Due to **lower birth rates**.
* **19th to early 20th century** → Population grew in the **West**, declined in the **East**.

### **GDP**
* **Growth Rate** → High in the **West** during the *19th – early 20th century*.
* **Time of Trouble (WWI)** → Western economies **declined**, while **Africa** grew due to **colonialism**.
* **Important Note** → GDP **is not the only indicator** (*e.g., colonialism effects*); also consider **consumption**.
* **Post-WWII Boom (1950 - 1973)** → Golden age, recovery **surpassed pre-war trends**.
* after 1973, the West slowed down but Asia kept growing
* **Late 20th Century** → **China & India opened up**, sustaining **high growth**, while the **West slowed down**.

### **GDP per Capita**
* Since the **1950s**, the **West has become richer**.
* **Asia vs. Africa** → Economic **divergence since the 1980s**.
* **Asia** → Higher **GDP growth** & **GDP per capita** growth.

### **Q. Does Fast Population Growth Hurt the Economy?**
* **Not necessarily.**
* **Agricultural Economy** → *May be harmful* due to **resource constraints**.
* **Manufacturing Economy** → *No*, since **capital** can **increase productivity**.
* **Service Economy** → *No*, labor **is adaptable**.

### **Asia's Economy**
* **China & India**
* Large population scale and fast growth.
* **China's GDP growth**
* Took off **in the 1980s** open up.
* Surge after 2000s.
* **India’s GDP growth**
* Accelerated **since 1998**
* **Southeast Asia** suffered from the *1997 financial crisis*.
* **Northeast Asia** → Significantly **higher GDP per capita**.

### **Q. Is GDP a Reliable Metric?**
* **Government spending** → Doesn’t always **boost the economy** (*e.g., military expenses*).
* **Investment** → Involves **predicting future returns**.
* **Service Economy Measurement** → Hard to **evaluate real GDP accurately**.

## **1.3 Second Industrial Revolution**

### **First Industrial Revolution**
* **1760 - 1840**
* **Iron** → Enabled cheap production of equipment, machinery, and buildings.
* **Steam Engine** → Primarily used in **coal mining**.
* **Factory** → A new form of **organization**, leading to **big cities**.
* **Textiles** → Primarily **female labor**.

### **Age of Railroads**
* **1840 - 1870**
* **Cheap coal**, **iron**, and **steam engines** became widely available.
* **Shipping** goods and **people** became faster and more efficient.
* Also, the **steamship** (faster travel) and **telegraph** (news & business) were invented.

### **Second Industrial Revolution**
* **1870 - 1914**
* **Steel** → Cheaper, stronger, and lighter than **iron**.
* **Inventions**: bicycles, cars, airplanes, **skyscrapers**.
* **Electricity** → **Large power plants** generated electricity far from factories.
* **Inventions**: **light bulbs**, **elevators**.
* **Corporations** → Emergence of **large organizations**.
* Examples: **railroads**, **coal**, **steel** industries.
* **Chemicals** → Advances in **medicine**, **fertilizers**, **insecticides**, and **plastics**.

### **Industrial Countries**
* **Germany** → A **science** and **technology giant**.
* Germany rose as a leader by combining **science** and **manufacturing**.
* **The US** → Focused on **scale economies**.
* Example: A large **car market** fostered the growth of the local **car industry**.

### **High Imperialism**
* **Colonial Expansion** → Increased connectivity with colonies via **telegraph** and **railroads**.
* **Stronger weapons** → Steamboats equipped with **machine guns**.
* **Enclave economy** → Investment in colonies.
* Example: **Japan's sugar industry** in **Taiwan**.

### **Bureaucracy**
* Increasing scale:
* **Railroads** → Led to increased **government control**.
* **Increased competition** between countries.
* The West diverged from Asia.

# Lecture 2: The West I
## **2.1 Time of Troubles**
### WWI
* The war began due to a combination of political tensions (**"powder keg"**) and technological advancements (***machine guns***).
* **Casualties:** *15-20 million* died in the war; *15-50 million* died from the ***influenza pandemic***.
* **Capital decline:** Significant economic losses in *Europe*.
* **Misinvestment:** Resources were inefficiently allocated due to ***protectionism***.
* e.g. The U.S. heavily invested in ***domestic chemical industries*** instead of importing from *Germany*.
* **Shifting attitudes:**
* Two competing moral frameworks emerged—***commercial vs. social***.
* ***Social Darwinism*** promoted the idea that only the strongest survive.
* ***Individualism and socialism faded*** in influence.
* **Political changes:**
* Governments became ***larger and more centralized***.
* ***New nations*** were established.
* Ethnic problem + hyperinflation
* Rise of ideological movements: ***Communism, Fascism, and Nazism***.
* **Money & debt:**
* Governments **printed excessive money** and issued ***debt***, severing the ***money-gold link***, leading to ***inflation***.
* Countries:
* ***London lost its status*** as the world’s financial center.
* the US reqired paid back
* the Germans were hit by reparation
* Governments aimed to ***deflate their economies*** after the war to maintain debt stability, but this often led to ***recessions***.

### The Great Depression
* ***Deflation effects:***
* ***Stock market crashes***.
* ***Decreased investments***.
* *Falling wages* and ***rising unemployment***.
* ***Cheaper consumer goods***, but demand remained low.
* **Government responses:**
* ***Increased tariffs*** → ***global trade collapsed***.
* ***Cartels formed*** → reduced supply to artificially raise prices and prevent further deflation.
* Strengthening ***labor unions***.
* **Currency devaluation:**
* Lowering ***currency value*** raised domestic ***prices***, counteracting ***deflation***.
* **Economic recovery:**
* Many countries ***abandoned the gold standard***, allowing ***monetary policy flexibility***.
* True recovery should wait until post-WWII.

### WWII
* ***Comparison with WWI:***
* ***Similarity:*** Both wars caused ***mass casualties and widespread destruction***.
* ***Difference:*** Post-war policies treated defeated nations (***Japan, Germany***) *more fairly*, preventing ***deflation***.
* **Asian involvement:** The war expanded beyond Europe.
* ***New weapons:*** The development and use of ***nuclear bombs*** changed warfare permanently.
* ***Aftermath:*** Led directly to the ***Cold War***.

### Economic and Political Consequences
* ***Economic growth*** continued despite political turmoil (*and sometimes instability itself fueled growth*).
* e.g. When ***emerging economies*** gained wealth, ***existing powers*** often resisted change, creating tensions.
* ***The rise of large-scale economies:***
* ***Large corporations and governments*** expanded their capabilities significantly.
* ***Asia’s economic transformation:***
* ***Trade disruptions*** (low product prices) forced many regions to rely on ***agriculture***.
* ***Import substitution*** strategies led to the growth of ***domestic manufacturing industries***.
* ***Wartime demand*** resulted in ***higher taxes*** and increased ***military spending***.
* ***Decolonization*** reshaped ***economic structures*** and ***trade relationships***.

## **2.2 Recovery and Slowdown**

### **Statistics**
* **GDP per capita**
* *1950:* After wars, both the **West** and **East** experienced **slow growth**.
* *1973:* **Western Europe** grew as it recovered from the war, while **Asia** grew through **development**.
* *After 1981:* **Asia accelerated**, while the **West slowed down**.

### **Europe**
* **Marshall Plan:**
* Aids to western Europe for free trade, FDI
* Aimed to prevent USSR to expand.
* Led to the form of OECD and European Coal & Steel Community (later EU)
* **Countries' Situation:**
* **Germany:** *Social market economy* (**free market** + **welfare**).
* **France:** *Indicative planning* (**5-year plans** guiding the economy and development).
* **UK:** *Labor unions* & **nationalized** private companies.
* **Italy:** *Limited reforms*.
* **Spain:** Didn't **opened up** until 1960s.
#### Comment: Seems like after the war, any economic policy works.

### **The U.S.**
* **New U.S. Economy**
* **Interstate highways** transformed transportation.
* **Suburban expansion** increased city scale.
* **Strip malls** emerged.
* **Franchises & chains** replaced small businesses.
* **Big Business**
* **Wall Street** → Took over **London’s financial dominance** after WWII.
* **General Motors** → Dominated **automobile manufacturing**.
* **U.S. Steel** → Key player in **heavy industry**.
* **IBM** → Led in **computing & technology**.
* **Galbraithian Economy**
* Small business merged to **Cartels**.
* Government took controll of the markets.
* Increasing calls for **government intervention** (*e.g., providing public goods*).
* Proof: Government spending **steadily grew** from *1945 to the 1990s*.

### **Problems**
* **1970s’ Economic Issues**
* **Vietnam War** + **Middle East conflicts** + **oil crises**
* **Inflation**, **price freezes**.
* **Counter-Culture Shift**
* Business suits → *Hippies* (*a rejection of traditional corporate culture*).
* US precede slow down.
* **"Small is Beautiful"**
* Give value on small village than big city.
* Regard bigness from success to oppress.
* Worship corporate ladder than entrepreneurship.
* **Large organizations** became **conservative**, **bureaucratic**, **inefficient**.

### **Effects on Asia**

* **Retail Revolution**
* **Transportation improvements** → Led to **large wholesalers** and **chained retailers** entering the **international market**.
* **Key innovations**: **Telephone**, **trucking**, **airplane**, **container ship**.
* **Shift in commodities**:
* From **coal, sugar, grain, oil** → To **clothes, toys, electronic devices**.

* **Foreign Direct Investment (FDI)**
* **Western businesses** began **investing in Asia**.
* **Asian perspective** → A mix of **opportunity** and concerns over **neo-imperialism**.
* **Western perspective** → Viewed Asia as both a **last resort** and a **golden opportunity**.

* **New Attitudes**
* **1950s-60s** → Asia was **not considered a threat**.
* **1970s** → Asia was seen as both a **partner** and a **rival**.

## **2.3 Scale Economies**

### **Transaction Costs**
* **Bargaining & Decision-Making**
* *Example:* **Mining companies** and **railroads** have different owners, leading to negotiation challenges.
* **Information & Search**
* **Labor market:** Employers and employees **lack complete information** about each other.
* **Food market:** Consumers face **uncertainty about product quality**.
* **Enforcement & Policing**
* **Lending market:** Lenders **cannot be sure** borrowers will repay, requiring **contract enforcement**.
* **Asset protection:** Ensuring **ownership rights** and preventing theft.
* **Transaction Sector (Jobs That Reduce Transaction Costs)**
* **More than half of GDP** is in **transactions rather than production**.
* Transactions **enhance the division of labor**.
* *Examples:*
* **Retail vs. wholesale**
* **Law** → Facilitates transactions
* **Finance**
* **Real estate agents**
* **Advertising** → Drives transactions
* **Middle management**

### **Scale**
* **External vs. Internal (Agency) Transaction Costs**
* *Example:* Hiring a **lawyer externally** vs. forming an **in-house legal department**.
* **Public Scale (Government)**
* **Monopoly on violence** → *Police & military* ensure stability.
* **Bureaucracy** → Can help governance but may also **lead to inefficiencies** (*tax avoidance, agency problems*).
* **Feudalism** → *Decentralized power* to local governments to prevent excessive centralization.

### **Increasing Scale**
#### *Modernization is about increasing the scale.*
* **Larger Organizations Dominate** → Government, military, business, unions.
* **Why?** **Intense competition**.
* **Rising external transaction costs** → Large organizations **form to manage complexity**.
* **Falling internal transaction costs** → Easier to centralize operations (*e.g., railroads improved logistics*).
* **Asia vs. the West**
* Historically, **Asia relied on small-scale technology** and specialization.
* After **colonization**, large-scale organizations **began to emerge**.
* **Manufacturing protection policies** further **supported large firms**.

### **Planned vs. Market Economy**
#### *Q: Does the rise of scale economies lead to a planned economy?*
* **Attitudes Toward Scale:**
* **Karl Marx** → Advocated **centralized economic planning**.
* **Fabian Socialists** → Favored **gradual government intervention**.
* **Entrepreneurs** → *J.P. Morgan, Rockefeller* built **massive business empires**.
* **Capitalism’s Adaptation**
* **Falling external transaction costs** → Large corporations **eventually break up**.
* **Specific Knowledge**
* **General knowledge** → *Textbook knowledge*.
* **Specific knowledge** → *Gained through individual experience*.
* **Lack of Competition Leads to Conservatism**
* Organizations that **remain unchallenged** become **less innovative and more rigid**.

# Lecture 3: The West II
## **3.1 Recent Growth (The US)**
#### since 1980s to present
### **Problem: Separated Corporate Ownership**
* **Stockholders** can't directly control the company.
* **CEOs** often **fail** to maximize **efficiency** and **shareholder profits**.
* **Corporate restructuring** requires **capital**.

### **Solution: Junk Bonds**
* **Corporate raiders** identify **undervalued**/**bad managed** companies.
* **Issue junk bonds** to **raise capital**.
* **Buy stocks** and **take control** of corporations.
* **Increase stock value**, then **sell shares** to repay debt.

### **Result: CEOs Under Pressure**
* **Greenmail** → Paying off raiders to avoid hostile takeovers.
* **Golden parachute** → CEOs receive **high severance packages**.
* **Conglomerates** (large enterprise) emerge.
* **Junk bonds did not spread to Europe** due to a **stronger banking system**.

### **Venture Capital & Silicon Valley**
* **1980s** → **PC revolution** beats IBM, **Silicon Valley** drives growth.
* **1990s** → **Venture capital** booms; high risk, high reward.
* **2000s** → **Dot-com bubble** and rise of the **World Wide Web (WWW)**.
* **Empowers individuals** to compete with large corporations.
* **Big companies still dominate** → Small firms are often **acquired**.

### **Finance Stumble**
* **2007-2009 Financial Crisis**.
* **Derivatives** → Mortgage-backed securities **spread financial risk**.
* **Moral hazard** → Institutions ignored risks due to:
* **Poor government policies**.
* **Profit-driven credit agencies**.
* **Too big to fail** → Should struggling firms be **bailed out**?
* **Quantitative Easing (QE)** → Government **buys assets** to inject **money into the market**.

### **Now**
* **Pension funds** replace **junk bonds**.
* **Private equity firms** replace **corporate raiders**.
* **Top-down globalization** → Growth driven by **free trade agreements**.
* Less GDP share distributed to labors.
* 64% -> 60%

## **3.2 Service Economy**

### **Agriculture**
* **China & Physiocrats** → Viewed **agriculture** as the foundation of the economy.
* Essential for **food** and **clothing** (basic survival needs).
* **Malthusian Problem** → Population growth **outpaces** food production.
* **Development Overcomes Malthusian Problem**
* **Agricultural Revolution** → Improved farming techniques.
* **Industrial Revolution** → **Fertilizers** boost productivity.

### **Manufacturing**
* **Adam Smith & Karl Marx** → Saw **manufacturing** as the foundation of economic growth.
* Food concerns **shift** to **food price fluctuations** rather than scarcity.
* **Industrialization drives economic development**
* Growth is **concentrated in modernized areas**.
* **Shift from farming to industry** → Nations **import food** instead.
* **Examples**:
* **Denmark** → Supplied **food** to the **UK**, received **industrial goods** in return.
* **Japan & Taiwan** → Developed **heavy industry** while maintaining **agricultural production** (e.g., sugar mills, textiles).

#### **Urbanization is more important than industrialization in the long run.**

### **Service Economy**
* **Mutual services** now dominate economies (**more than half of GDP**).
* **Manufacturing may decline** like agriculture.
* **Examples**:
* **The Netherlands** → Lacked coal for industrialization → Became rich through **shipping services**.
* **Hong Kong** → Shifted from **manufacturing** (which moved to China) to **finance & transportation**.

### **Challenges in the Service Economy**
#### **1. Measurement Issues**
* **Hard to quantify value** in services.
* **Examples**: Entertainment, consulting, financial & legal services.

#### **2. Intermediate Services**
* Some services exist **not to increase utility**, but **due to regulation**.
* **Examples**: Law, accounting, banking.

#### **3. Market Concentration**
* Many services are **non-rival** and benefit from **economies of scale**.
* **Examples**: Finance, internet services.
* Causes wealth concentration and inequility.

## **3.3 Russia & Revolution**
### **Why is Russia Important?**
* **Consistent national income growth** (despite disruptions).
* Three major downturns:
1. **1920s Civil War**
2. **World War II** (WWI had less impact).
3. **Collapse of the Soviet Union**.
* **Political impact**
* **Communist revolution** inspired by overthrowing the government.
* Opposition to **Western capitalist imperialism**.
* **Economic development model**
* **Scale economy & industrial growth** → Did not follow Western path.
* **Market economy** → Requires infrastructure & foreign capital.
* **Planned economy** → More direct but **relies on elite decision-making**.
* **Lessons in liberalization** → Provided insights for **China’s reforms**.

### **Social Structure**
#### **Similarities to Contemporary Asian Economies (e.g., India, SE Asia)**
* **The Rich**
* **1%** Aristocracy
* **1.5%** Military officers
* **0.5%** Clergy
* **The Townspeople**
* **12% of the population**
* **Ethnically diverse** (e.g., Germans, Jews).
* **The Peasants**
* Originally **serfs (slaves)** → Freed in the **1860s**.
* Formed **communal villages**.
* **High labor demand** due to vast available land → Well-paid unlike China.

### **Industrialization**
* **Consumer goods industry** (import substitution) → Hired peasants from rural areas.
* **Foreign Direct Investment (FDI)** → Focused on **heavy industry & natural resources** (e.g., **oil fields**).
* **WWI** → Boosted **weapon manufacturing**.

### **Revolution**
#### **1905: Russo-Japanese War Loss**
* Led to **limited reforms** → Created a **legislature (with no real power)**.

#### **1917: Russian Revolution**
* Background:
* **Defeats in WWI** → Increased dissatisfaction.
* **Government price controls** hurt **85% farming population**.
* Wartime rationing.
* **Public outrage**: Government **was not democratic** & kept losing wars.
* **Not a typical Marxist revolution**
* Marx predicted **revolutions in industrialized areas**, not agrarian societies.
* opportunitists seized the power.
* **Timeline**
* February: opportunist took control
* October: Soviet took control -> Lenin, Stalin

#### **The Civil war**
* 1918-1922
* the white (anti-communism) vs. the red (Soviet)
* anti-nationalist revolution
* destruction and casualty worse than WWI
* **war-communism**: no real plan, no market, low production in the end.

### **How Do Revolutions Happen?**
#### **“First slowly, then all of a sudden.”**
1. **Delegitimization** of the ruling power.
2. **Crisis** weakens the system.
3. **Radical action** (ruthless execution of change).

# Lecture 4: Russia
## 4.1 Soviet Union

### Background
* **Preceding the War Communism** – Complete failure:
* Government controlled trade and finance.
* Factory workers couldn't change jobs.
* Government seized food and drafted labor.
* Limited planning and use of money.

* **New Economic Policy (NEP)** – Addressing issues caused by War Communism:
* Nationalized finance and large firms.
* Leased small nationalized firms.
* Allowed food requisition as tax.
* Continued price control and inflation – harmed rural areas, causing food shortages.
* Slow recovery to pre-war conditions.

* **The Right (Moderates)**
* Supported peasants, emphasizing food processing.
* Agricultural surplus used to aid industrialization.

* **The Left (Idealists)**
* Advocated immediate industrialization by squeezing the peasants.
* Idea: Low food prices would drive farmers to the city for better earnings.
* **Internal Colony**: Targeted agricultural areas like Ukraine and Central Asia.

### First Five-Year Plan (1928 - 1932)
* **Goals:** Setting basic economic targets.
* **Central Planning Committee:** Ministries made plans to fulfill goals.
* **Material Balance:** Controlled production and resource demand.
* **Fixers in Informal Markets:** Assisted in plan implementation.
* **Modern Technology:**
* **Communism = Soviet Power + Electrification** – e.g. radio.
* Established technical schools.
* **Industrial Thinking:**
* *Fordism:* Large-scale production, production lines.
* *Taylorism:* Productivity calculations; good workers followed regulations.
* Emphasis on growth: "Bigger is better, unlimited growth."

* **Stakhanovite Movement:** Encouraged workers to exceed targets.

* **Successes:**
* **Magnitogorsk:**
* Iron industry-driven city development.
* Steel -> City -> Railroad: Production created demand.
* **Albert Kahn:**
* American architect who trained Soviet architects to build factories.

* **Failures:**
* Example: **White Sea Canal** – Poor planning resulted in a canal that was too shallow.

### Agricultural Commune
* Reduced the power of **kulaks** (wealthy village leaders).
* Established **village communes** for control and achieving scale economy.
* Resulted in a **great famine**.

### Growing Pattern
* **Real Wage Trends:**
* Russia resembled Asia in real wage patterns.
* Under NEP, real wages increased.
* After the first Five-Year Plan, wages decreased:
* Wages were reduced to maximize available money for investment.
* The overall economy appeared to be performing well.

* **GDP Growth:**
* Long-term growth was the trend.
* During the revolution, there was a significant drop.
* Increased labor during the Five-Year Plan boosted growth.
* WWII had a minimal negative impact, with extra growth afterward.

### Stagnation
* **Declining GDP & Consumption:**
* High military costs due to the Cold War.
* Costs of controlling Eastern Europe.
* Reduced terror meant less ability to force labor.
* Forced savings led to diminishing returns.
* Monopoly structures became conservative.

## 4.2 Economic Planning

### Problem with Competition
* **Adam Smith:** Guided competition toward the right direction.
* **Goal:** Benefit consumers.
* **Transactions are costly.**
* **Competitors don't always get what they deserve:**
* Sometimes supply exists but demand doesn't.
* Depends on whether economies of scale exist.
* **Exploitation:**
* Surplus value is exploited by capitalists.
* Competition limits exploitation.
* **Selfishness:**
* **Compete to cooperate:** Competing for opportunities to collaborate with suppliers.
* **Cooperate to compete:** Collaborating with suppliers to outcompete others.
* **Types of motivation:**
* Greed (with motivation), laziness (driving new inventions), desire for fame/power/honor.
* **Individualism vs. Groupism.**

### Problem with Planning
* **Planning causes monopoly.**
* **Calculation Debate:**
* **General Equilibrium Idea.**
* **Austrian School:** Calculating the best production combination.
* **Lange-Lerner Model:** Trial and error approach.
* **Schumpeter:** Big entrepreneurs drive economic change.
* **Democratic Planning:** Leads to bureaucracy and dictatorship.

### Problems in the USSR
* **Unusable Inventory:**
* Caused by incorrect planning.
* **Underpricing of Necessities:**
* Led to shortages.
* **Hidden Costs & Bloated Quality:**
* Created negotiation problems.
* **Ignoring Rent and Interest.**
* **Lack of Service:**
* Overemphasis on manufacturing.
* **Lack of Long-Term Planning:**
* Firms focused only on the present goal.
* **Forced Saving:**
* Contributed to GDP growth?
* Cutting all consumption is not beneficial.
* Savings could lead to misguided investments.
* Resulted in an **enclave economy**.

### Indicative Planning
* **Timeline:** 1820s, 1830s.
* **Purpose:** Pointing out economic development directions to the public.
* Example: Policy changes or government investments.
* Negotiation with Cartels or associations.
* Loose enforcement.
* **Taiwan's Case (Post-WWII):**
* Driven by U.S. aid.
* Implemented **Four-Year Plans**, managed by government banks.
* Informal credit markets promoted **SME exports**.

## 4.3 Collapse and Recovery

#### Russia demonstrated to Asian countries the challenges of transitioning from a planned economy to a market economy.

### **Perestroika**
* **Since 1958**
* **1970s Oil Price Increase**
* Oil prices had a significant impact on the Russian economy.
* Calculations showed that exporting all resources generated more revenue than domestic manufacturing.
* *Economics drove politics.*
* **Gorbachev**
* Part of the post-Stalin generation
* A **utopian socialist** → Allowed reforms and openness
* Introduced some **political and economic freedoms** + democracy
* No privatization, but allowed **job mobility**
* **Results**
* The mixed system **did not work**
* After meeting planned production targets, producers could keep the surplus output.
* **Price controls remained in place.**
* **Managers lacked commitment to production goals.**
* **Soft budget constraint**
* Even when costs exceeded revenue, the government covered deficits instead of shutting down inefficient enterprises, leading to **inefficiency and corruption**.
* **Few new private companies emerged**
* Fear of nationalization discouraged entrepreneurship.
* **Declining tax revenue**
* **Nationalism:** Local governments withheld taxes from the central government.
* **Prohibition of alcohol** reduced government revenue.

### **Chaos**
* **Yeltsin**
* Allied with Baltic countries to overthrow the USSR → **Rapid reforms**
* Took control only of **Russia**
* Goal: **Destroy the Communist Party** to prevent its return
* **Naïve economic policies** → Served as a model
* **Shock Therapy**
* **Price liberalization** → Led to **inflation**
* **Privatization** → Implemented via **vouchers**
* **Insecure property rights** → Resulted in **looting**
* **Inherited monopolies** → The USSR overemphasized economies of scale.
* **Inflationary finance** → Worsened economic instability
* **Weak government** → Enabled **gangster rule**
* **Crony capitalism** flourished
* The final **niche in the long-term GDP trend**
* **1998 Russian Ruble Collapse** → Government **defaulted on debt**

### **Return**
* **Putin**
* A **nationalist**
* Initially followed Yeltsin’s policies
* **Rising oil prices** → Increased **government revenue & power**
* The government **took control of the cronies** instead of eliminating them.
* **Starting Over** → Returning to a **pre-revolutionary** economic model
* **Exports:** Shifted from agriculture → **Natural resources**
* Led to **economic recovery**
* **Power Structure:** Shifted from nobility → **Crony elites**
* **Local governments became involved in business.**
* **Soviet mindset remained strong.**
* Public opinion **remained skeptical of capitalism.**
* **Service sector**
* More **competitive** and less **controlled by cronies**

# Lecture 5: Japan I
## **5.1 Early Success**

### **Head Start**
* **Traditional Economy**
* **Capital-intensive agriculture**
* **Industrious revolution** → Led to growth in **light industry**
* **Merchant community** → Centered in **Tokyo**
* **1850s Success**
* Performed **better** than neighboring nations
* **High productivity**
* **Efficient transportation** → Merchants traveled frequently
* **Well-developed education system** → Led to **high literacy rates**
* **Financial markets** → Developed **rice futures trading**
* **Feudal System**
* Established **laws and bureaucracy**
* Local governments operated as **semi-independent organizations**
* Similar in structure to Western systems
* **Tokyo**
* A **consumer city**
* A **major business capital**
* Despite this, most people were still **farmers**

### **Opening and Chaos**
* **Closed to foreign trade since 1635**
* **Forced to open by the U.S. in 1854**
* **Unequal treaties**
* Impacted Japan **more severely** than China
* **Low tariffs**
* **Extraterritoriality** → Foreigners had legal immunity
* Led to **a strong central government and the weakening of feudalism** to enforce treaties
* **High silver prices** → Led to **gold-silver trade imbalance** → **Inflation**
* **Government legitimacy crisis**
* Nationalist movements + Civil war
* Slogan: *Expel the barbarians!*
* **Little economic growth for 25 years**

### **Reforms**
* **Abolition of Feudalism**
* No **job regulations** (including for samurai)
* No **internal tariffs**
* Allowed **migration** → Led to **urbanization**
* **Creation of New Laws**
* **Banking regulations**
* **Incorporation laws**
* **Eminent domain policies**
* **Government Investments**
* **Infrastructure development**
* **Education** → Established **technical schools**
* **Public factories** → Many failed after WWII
* **Subsidies** for shipping & mining industries
* **Increased military spending**
* **Railroads**
* Built by **both the government and private sector**
* Later **nationalized** → Poor management → **Financial losses**

### **Female Labor and Export Industry**
* **Women played a key role in exports**
* **Family Structures**
* **Japan:** *Stem family* → Oldest son had obligations
* **Asia:** *Joint family* → All members lived together
* **West:** *Nuclear family* → No horizontal obligations
* **Major Export Goods** → *Tea & Silk*
* Produced primarily by **female labor**
* Shifted from **tea** (replaced by British India) to **cotton textile**.
* **Silk Industry**
* 90% female labor
* Shifted from **home-based production to factory-based industry**
* Dominate China by quality control
* **Cotton Textile Industry**
* **Government factories failed**
* Aimed to **protect local farmers** but incurred **high costs**
* **Private factories succeeded**
* **Trading companies** gathered market information and imported raw materials
* Recruited **rural girls** moving to cities
* Produced **affordable goods** suited for Asian consumers, unlike **British luxury textiles**

### **Zaibatsu**
* **Large private corporations**
* Maintained **strong ties with the government**
* Had **organizational structures similar to Western conglomerates**
* Included **banks and trading companies**
* the big four:
* mitsui 三井, mitsubishi 三菱, sumitomo 住友, yasuda 安田

### **Growth**
* **Rapid economic growth since the 1880s**
* Possible reasons:
* **Free trade policies**
* **Corporatization of businesses**
* **Female labor force participation**

## **5.2 Showa Mutation**
### **From a Market Economy to a Controlled Economy During and After WWI**

### **Managed Economy**
* **1920s War Bubble**
* Demand for industrial products from **Asian colonies** shifted from Europe to Japan
* **Money influx** led to **inflation**
* **Overseas lending and deposits** (e.g., to China)
* **Speculation boom** → Borrowed money flooded the stock market → Led to the rise of *Narikin* (new rich elites)
* **1918 Rice Riot** → Inflation caused a **surge in rice prices**
* **Growing Skepticism Toward Capitalism and Market Economy**
* **Post-War Economic Challenges**
* **Deflation & decline in investments**
* **Increased government spending**
* **"Zombie Zaibatsu"** → Large firms like **Suzuki** struggled to survive
* **Small banks collapsed**, and the government **merged the remaining ones into large banks**
* **Increase in cartels**
* Forced by the government after the **1929 Great Depression**
* **Rise of New Zaibatsu**
* Old zaibatsu **faced public opposition**
* New zaibatsu were **mainly high-tech companies**
* Played a role in **colonial rule** (*e.g., Manchukuo 滿州國*)
* Served as **national policy corporations**

### **Fascism**
* **Anti-Individualism**
* Individuals viewed as **cells of the nation**
* **Against Capitalism**
* **Criticized capitalism for:**
* Encouraging **individualism**
* Promoting **luxury consumption**
* **Destroying the middle class**
* Creating an **unhealthy proletariat**, leading to **communism**
* **Excessive focus on finance and industry**
* **Fascist vs. Communist Rivalry**
* **Similarities:**
* Both advocated **violent struggle**
* Against individualism and capitalism
* **Differences:**
* View on **social classes**
* **Rationality (Communism) vs. Willpower (Fascism)**
* **Degree of equality**
* **In Practice (Fascism and Communism Became Similar)**
* **Nationalism** united the nation
* **Inequality was seen as necessary**
* **Emphasized rational economic planning**
* **Blamed external enemies for national problems**
* **Planned Economy vs. Controlled Economy**
* The government **did not plan everything**
* Allowed a **certain degree of market activity**

### **Wartime Economy**
#### *Typically inefficient*
* **Reforming the Bureaucracy**
* **Military influence expanded** through fear and terror
* **Political ideology shifted further to the right**
* **Legislature lost power to military and bureaucrats**
* **Control Associations**
* Government-formed associations to **regulate industries**
* However, **companies controlled information**, allowing them to **remain profitable**
* **Agriculture**
* Still played a **crucial role**
* **Government set rent levels**
* **Restricted land transactions**
* **Controlled crop prices and import prices**
* Led to **widespread hunger**

### **Destruction**
* **Collapse of trade** → Less shipping activity
* **Urban destruction** → Cities devastated
* **GDP Trends**
* **Pre-War:** Growth rate remained steady
* **Post-War:** Sharp economic **decline**
* **Recovery:** Slow growth at first, followed by **rapid expansion**
* **Pre-Cold War U.S. Policy Toward Japan**
* **U.S. did not initially aim to rebuild Japan** → Minimal investment
* **Dismantling of Zaibatsu**
* Led to **uncertainty in property rights**
* **Rise of labor unions**
* **Implementation of land reforms**

# Lecture 6: Japan II
## 6.1 High-Speed Growth

### **GDP Trend**
* **Stable growth** since the **1880s**
* **Wartime inflation understated** (actual prices higher in the black market)
* **Economic collapse** during **WWII**
* **Surge in growth post-1950** (Korean War boost)
* **Surpassed long-term trend after 1960**
* **Slowed down after 1970**

### **Economic Planning**
* Under **indicative planning**, the government **did not anticipate high-speed growth**
* **After 1950**, economic performance **exceeded expectations**
* **After 1970**, economic slowdown led to **real growth falling behind projections**
* Economic plans often required **adjustments as reality deviated from projections**

### **Japan vs. the U.S.**
* GDP per capita comparison:
* **1920:** Japan at **30%** of U.S. GDP per capita
* **Post-WWII:** Dropped to **20%**
* **1970:** Surged to **70–80%**
* Japan regarded the **U.S. as the technological frontier**

### **Growth Driven by Exports**
* **Korean War (1950s) Boost**
* Created **export demand** for Japan
* Examples: **Textiles, labor-intensive goods**
* **Consumer Goods Boom**
* **Small electronics industry growth**
* **U.S. engineers focused on military tech**
* **U.S. monopoly licensed Japan** for manufacturing
* **Key companies:**
* *Sony:* Transistor radio, Walkman
* *Sharp:* Radio, TV, calculator
* Expansion into **heavy industry**
* **Zaibatsu → Keiretsu 經連會**
* **Zaibatsu dismantled** by the **U.S. government**
* **Reorganized as keiretsu**, maintaining **stockholding relationships**
* Keiretsu holds each other's stock
* Keiretsu structured as **vertical or horizontal conglomerates**
* Vertical: **bank-certered**, wide investment *e.g. Sumimoto, Mitsubishi, Mitsui*
* Horizontal: **supply-chain-centered**, manufacturing *e.g. Toyota, Nissan, Honda, Hitachi*
* **Labor Unions**
* **Formed under U.S. influence**
* Led to **several major strikes**
* Established **lifetime employment systems**
* **Dual Economy**
* **Export prices declined faster than the GDP deflator**

### **Government Role**
#### *Q: Was government policy independent or exogenous?*
* **Applied indicative planning** to the economy
* **Early economic policies:**
* **Foreign exchange control**
* **Loans to heavy industry**
* **Trade protection**
* **Infrastructure investment**
* **Contradictory investment policy** → Aimed to **prevent economic concentration**
* Investments allocated **based on market share**
* **Targeted different types of companies**
* **Successes:**
* **Shipbuilding, steel, and chemical industries**
* **Government support in financing and regulation**
* **Failures:**
* **Fifth-generation computers** (outpaced by **PCs**)
* **HDTV development**

### **Factors Behind Japan's High Growth**
* **Global economic growth trend**
* **Post-WWII openness to innovation**
* **High savings rate**
* *Why was the savings rate so high?*
* **Possibly linked to rapid economic growth**
* **Greenfield Advantage**
* Rebuilding from **scratch after wartime destruction**
* Allowed **adoption of modern technologies**, boosting **productivity**
* Example: **Steel industry (rebuilt after war bombings)**

## 6.2 Miracle’s End (Japan’s Slowdown)

### **GDP Trend**
* **Signs of slowdown emerged in the 1970s**
* Often blamed on the **oil crisis**
* **Late 1980s → Economic bubble**
* **1990 → Bubble burst, leading to a prolonged slowdown**
* **The Lost Decade:** Economy stagnated, remaining at the **1970s level**

### **Reasons for the Slowdown**
* **Total Factor Productivity (TFP)**
* Initially grew but **began declining even before the bubble burst**
* **Government Policies**
* **Rescuing declining industries (sunset cartels)**
* **Restrictions on the service industry**
* Example: **Retail sector regulations**
* Shift from **heavy industry to high-tech**, but **poor policy decisions** hindered progress
* **Rising Competition**
* **South Korea and Taiwan** emerged as major competitors
* Both had a **greenfield advantage** and had maintained **close ties with Japan** in the past

### **The Economic Bubble**
#### **Nixon Shock (Early 1970s)**
* US **printed more dollars** to finance the **Vietnam War**
* **Abandoned the gold standard** to prevent depreciation of the US dollar
* Japan responded by **stockpiling foreign reserves** (US dollars, US assets)
* **Hedge against exchange rate fluctuations and future oil crises**

#### **Plaza Accords (1985)**
* US pressured **Japan and Taiwan** to **buy US goods** and **appreciate the yen and NTD**
* To **prevent rapid yen appreciation**, Japan **injected more money into the market and kept interest rates low**
* **Low interest rates fueled a stock market boom**
* Even **after yen appreciation stabilized, stock prices continued rising → forming a bubble**

### **Effects of the Bubble**
* **Corporate Speculation**
* Companies **shifted focus to stock and real estate speculation**
* **Zombie Firms**
* Over-leveraged companies **could not repay debts**
* **Land collateral lost value**, worsening their financial situation
* **Zombie Banks**
* **Continued lending to failing firms** just to **cover interest payments**
* **Trade Pattern Shift**
* After the **Plaza Accords** and the **bubble burst**, Japan’s **import/export share dropped relative to total US trade**
* **Reason:** Many **export companies relocated overseas**
* **Government Deficit**
* Increased **public spending** in an effort to **stimulate the economy**

### **The Lost Decade**
* **Years after the bubble burst, economic growth remained stagnant**
* **Transition in GDP per capita**
* From **30% of US GDP** to **70%**
* **Aging Population Challenges**
* Higher **consumer-to-labor ratio**
* **Economies of scale declined**
* **Potential solutions:**
* Increased **female workforce participation**
* **Later retirement age**
* **Immigration reforms**
* **Structural Issues**
* **Dual economy:**
* **Lifetime employment** policies **prevent younger workers from entering the labor market**
* **Living costs**
* **Previously a major issue** but **less severe today**

## 6.3 Capital

### **Long-Term Economic Development: Technology + Institutions + Capital**

### **Physical Capital**
* Includes **structures, machinery, tools, and inventory**
* **Time-dependent**
* Requires **time to produce** and is used **long-term**
* Necessitates **long-term planning** for capital accumulation
* **Roundabout Production**
* horizontal work distribution
* Capital allows for **more efficient production**
* **Infrastructure**
* Historically **scarce but crucial**
* **Facilitates fast communication**
* Risk of **overbuilding**
* **Working Capital**
* Refers to **money**
* **Not classified as capital in GDP**
* Typically sourced from **banks**
* Example: **Using cash to buy goods for resale**

### **Human Capital**
* Includes **education and healthcare**
* **Basic needs (food, clothing, housing):**
* In **poor countries**, they may serve both **consumption and healthcare** purposes
* Raises the question: *Are all consumption expenses actually investments or misinvestments?*
* **Knowledge**
* **General knowledge:** Acquired from **books**
* **Specific knowledge:** Industry- or task-specific
* **Tacit knowledge:** Hard to explain, learned **through experience** (*learning by doing*)
* **FDI (Foreign Direct Investment)** introduces **specific & tacit knowledge**
* **Networks**
* Facilitate the **exchange of tacit knowledge and trust**
* Exist in **vertical and horizontal relationships**
* Education provides both **knowledge and networking opportunities**

### **Interest Rate**
* **What determines interest rates?**
* **Rate of time preference** (how much people value present consumption over future consumption)
* **Structure of Capital Access**
* **Multiple channels** for obtaining capital
* **Long-term financing** → For **fixed capital**
* **Short-term financing** → For **working capital**
* **Big vs. Small Businesses:**
* **Smaller businesses** and **individuals** face **higher borrowing costs** or limited access to loans
* **West vs. Asia (Early Modern Era)**
* **Lower interest rates** in **Northwest Europe**
* Influenced by **supply and demand** factors:
* Parents in Europe **saved for retirement/future**
* **Asian agriculture was capital-intensive**
* **Better borrowing institutions** in Europe

### **Fluctuations in Capital Markets**
* **Variation in saving, investment, and consumption**
* **Causes of major financial crises:**
* **Great Depression (1929):**
* Investment collapsed
* Prices remained **high**
* **East Asian Financial Crisis (1997):**
* **Foreign capital withdrew**
* Lack of domestic borrowing options
* **Japanese Asset Bubble (1990):**
* **Financial markets froze** due to over-speculation
* **Bubbles**
* Occur in **stock and real estate markets**
* Driven by **irrational exuberance**

# Lecture 7: Korea
## 7.1 Colonial Korea

### **Overview: GDP Per Capita Trend**
* **After WWI:** **10% of US GDP per capita**
* **During the Great Depression:** Rose to **20% of US GDP per capita**
* **Stagnation after WWII and the Korean War**
* **Rapid growth since the 1960s**
* **Eventually caught up with Japan in GDP per capita**

### **Before Colonization**
* **Similar to China** in political and economic structure
* **Weak central government**
* **Powerful aristocracy**
* **Struggling economy**
* **Declining population + famine**
* **Limited market integration**
* **Minimal manufacturing and commerce**
* **Comparison: Korea vs. Japan**
* Japan benefited from **feudalism, strong family institutions, and external influence (Black Ships incident)**

### **Colonial Economy (Since 1910)**
* **Inflow of Japanese merchants and landlords**
* **Strong bureaucracy and strict police control**
* **Trade Deficit**
* Driven by **Japanese investments in infrastructure**
* **Agriculture**
* **Land survey → taxation**
* Agricultural growth **lagged behind Taiwan**
* **Rice exports to Japan**
* **Stagnant agricultural wages**
* Due to **population growth outpacing urbanization**
* **Finance**
* **Enclave economy** with **business networks favoring Japanese firms**
* **Interest rate structure:**
* **Low for Japanese industries** → encouraged **capital-intensive production**
* **Higher for Japanese individuals**
* **Even higher for Koreans**
* **High transaction costs**
* **Manufacturing**
* **Surged in the 1930s**
* Japan invested heavily in **heavy industry for wartime production**
* **Mostly Japanese-owned and concentrated in the North**

### **WWII & Korean War**

#### **Wartime Economy**
* **Severe economic restrictions**
* **Government control over manufacturing**
* **Agricultural control measures:**
* **Fixed rent, price regulations, and crop restrictions**

#### **Post-War South Korea**
* **Under US administration**
* **US aid financed imports**
* **Land reform initiatives**
* **Population growth due to refugees from the North**
* **Severe destruction during the Korean War**
* **Hyperinflation**
* **Lower savings rate**

#### **Post-War North Korea**
* **Soviet-backed government established**
* **Retained Japanese economic policies**
* **Initially wealthier and more industrialized than the South**
* **But had less agricultural capacity** → depended on **USSR support**
* **Slowed growth until the Soviet Union's collapse in 1991**
* **Famine and prolonged economic stagnation followed**

## 7.2 Postwar South Korea

### **GDP Per Capita Trend**
* **1930s:** North Korea surpassed the South due to **Japanese investment in mining and heavy industry**
* **Post-WWII & Korean War:** South Korea's growth was **slower than Japan’s**
* **Takeoff in the 1970s**
* **Pattern similar to Taiwan**
* However, **Taiwan outperformed Korea** both as a **Japanese colony** and during postwar development

### **Stagnant Decade (Mid-1950s – Mid-1960s, Post-Korean War)**
* **US Aid**
* Invested in **education & healthcare** → improved **human capital**
* **Dutch Disease effect**
* US aid **crowded out** domestic exports
* **Economic centralization**
* **Agricultural Stagnation**
* **Land reform** → divided large estates into **small plots** → reduced productivity
* **Price controls & agricultural taxes** → subsidized manufacturing but hurt farming
* **Small but growing manufacturing sector**

### **The Takeoff (Late 1960s – 1970s)**
* **Growth accelerated after US aid ended**
* **Exports restarted to finance imports**
* **Currency depreciation** boosted export competitiveness
* **US retail expansion** increased demand for manufactured goods
* **Japanese trading companies** helped facilitate exports
* **Total trade as % of GDP surged from the 1960s**
* **Similar pattern to Taiwan, though on a smaller scale**
* **Intensified competition → Productivity improvements**

### **Chaebols (재벌, Large Conglomerates)**
* **Modeled after Japan’s Zaibatsu but without direct control over banks**
* **Complemented Japanese Keiretsu**
* **Major Chaebols & Growth Trajectories:**
* **Samsung:** Transport & trading → Manufacturing → Electronics & Shipbuilding
* **Hyundai:** Construction → Shipbuilding & Automobiles
* **LG:** Retail → Consumer goods → Plastics → Electronics
* **Daewoo:** Government-financed → Heavy overseas investment

### **Heavy Industry Expansion**
* **Government-led industrialization:**
* Provided **cheap credit & tax breaks**
* **Japanese assistance:**
* Example: **POSCO (steel industry)**
* **Capital-intensive industries** → Majority of population **remained in agriculture**

### **Electronics Industry Development**
* **1950s:** Assembled imported electronics
* **1960s:** Adopted **Japanese technology**
* **1980s:** **Entered semiconductor manufacturing**
* **Growth trajectory:**
* **Large-scale production but less flexibility**

### **1997 Asian Financial Crisis**
* **Pre-crisis vulnerabilities:**
* **High inflation & low savings rate** → Dependence on **foreign borrowing**
* **Chaebols borrowed heavily throughout the 1980s**
* **Crisis Trigger:**
* **1997 Thai baht collapse** → Capital flees out of Korea
* **Rapid outflow of foreign capital** → **Korean won collapsed**
* **Effects:**
* **Chaebols were forced to restructure or split**
* **Labor market & business environment changed**
* **Currency devaluation** → Increased **debt burden**
* Shift from **debt financing to foreign stock ownership**