Economic Growth in Pre-Industrial Europe

A new economics article, written by Roger Fouquet and Stephen Broadberry addresses GDP per capita of six European countries six centuries before the Industrial Revolution. The main data of the article is summarized in the graph below:

The countries studied are England/Great Britain, Spain, Portugal, Italy, Sweden and Holland. A few things emerged from this graph:

(i) the authors show in the paper that economic fluctuations were not non-existent in pre-industrial Europe. There were incomes rising and falling in the long run.

(ii) there was some growth in income in the long run, although there was major fluctuations of average incomes in the short run. Except for Spain, individuals in the other five countries faced a lot of uncertainty of income from one year to the next, but in the long run, Holland, Portugal and Britain saw incomes grow. Long run incomes in Italy stabilized after 1500, although there was a lot of fluctuations,

History might help to explain why incomes of Britain and Holland rose in the long run, while Spain stagnated, even though they all were colonizing foreign lands. Britain and Holland let private enterprises engage in trade and colonization, at least till the 19th century, while Spain and Portugal kings controlled the trade.

However, the past does not necessarily dictate the present and future. At one instance, Britain, Sweden, Spain and Portugal all had similar incomes (around 1600 AD). Yet today, Sweden is wealthier than Portugal, Spain and Britain. Government policies, education and institutions all can help change growth trajectory of a country.

The Uberization phenomenon

It's an interesting phenomenon. Just like how Uber disrupted the traditional taxi cartel of big cities, and also spread taxi services in the smallest towns of the US, other firms are trying to do the same in traditionally regulated industries. Some of these industries are ripe for disruption, and startups are doing so, according to this WSJ article. http://www.wsj.com/articles/the-uberization-of-finance-1446835102

Lending and stock brokerage are seeing a rise in a phenomenon called "Uberizarion" - where peer-to-peer contacts rule. Such disruption will benefit consumers by reducing search cost and can provide borrowers who are usually shunned by banks an avenue to obtain funds. The stronghold of a few financial institutions on these services may be broken soon. Already, we are seeing a decrease in the number of bank branches. Maybe they might be a relic of the past soon? 

A New way of Voting to Raise Turnout

Voter turnout in local, state and national elections is low in the US. The voter turnout across the US during presidential elections hovers at around 60 percent. In one governor election in the state of Kentucky, the voter turnout was 30 percent, showing that most individuals are not exercising their voting rights in key elections. This problem is not prevalent only in the US; in OECD countries, the average voter turnout is around 70 percent.

Using game theory, it can be argued that a person should not vote because their one vote will not necessarily change the outcome of the election, given that everyone else votes. However, if everyone thinks the same way, we end up having few people deciding who will be in charge of the government.

One way of making people vote is to make it mandatory, like that in Australia. That itself may be unpopular. A better way I think is to make voting easier. It might be cumbersome for people to line up to vote, especially when in many countries, election day is not a public holiday. People who work on hourly jobs, or who cannot get time off may be discouraged to vote. With the rise of internet technology, governments could use internet for voting. People who are registered voters could get a special code from the government that they could use to vote on a specific website, from their smartphones or computers. Kiosks can be set up in different convenient locations, like schools, colleges, and even coffee shops or convenience stores so that people can cast their votes while dropping their children off to school or when picking up breakfast/coffee. These steps could make voting process easier which can increase voter turnout in all forms of elections.

Rising Inequality - why does it matter?

Income inequality has become an important topic of discussion since the economist Thomas Piketty wrote a book titled Capital in the 21st Century. One common measure of inequality is the Gini index, a number between 0 and 1 (or 0 and 100 if it is multiplied by 100), and the closer the inequality level is to 1 (or 100), the higher is the level of inequality. The US does have a high level of inequality, and it is one of the highest in the world. 

How can we visualize inequality in a simple way? Let us suppose there are two countries, A and B, and each country has 2 individuals. In country A, the incomes of the two individuals are 80 and 120 respectively; in country B, it is 40 and 160. In both countries, average income is 100, yet incomes are more dispersed in country B than in country A, so inequality is higher in country B when compared to that of country A. 

Although there is a general belief that in a meritocratic society, there will be some inequality, a high level of inequality can have some negative social consequences. Higher inequality can lead to more social tensions, and insecure property rights. It can also increase the incidence of violent crimes, high rates of mortality, and a deterioration of social trust. All these can reduce the future growth prospects of a nation.

Policymakers need to work into ways to reducing inequality. Increasing access to quality education and empowering trade unions can help. Strong social support programs can help the poor and middle-class recover from a negative shock. A progressive tax system can help to limit the excessive rise in inequality. These steps can help to reduce social ills caused by inequality and promote future growth and sustainability.