Olivier van Paasschen, Interest rates and the Little Divergence by Jonge Historici

List of figures & list of tables

Introducing the Problem; Divergence, the skill premium and the interest rate Interest rates are key Interest rates and the Little Divergence; cause and effect? Plan of the Research

3 4 9 11

The Central Debate A Wage Gap of Global Proportion The European split Making sense of Divergence Fruits of Property and institutions Science Human Capital Matters; the Premium on Skill The Merit of Skill The Empowerment of Interest Rates

14 15 17 20 21 23 27 32 35

Putting together a Data Series The Blueprints Giant's Shoulders Decisive Actions

40 41 44 47

The Great Convergence Hand-in-hand The Skill premium and the Interest Rate; Are They Interconnected? Regional Interest Rates as Sole Factor of the Real Wage

52 53 58 63

The Little Divergence and the Great Convergence The Interest Rate Development; political, and, or, technological? The Little Divergence; demographic disparity

67 68 72

Conclusion: The Problem of Convergence and Divergence

` 1.

Appendix Appendix Appendix Appendix

1 2 3 4

81 82 90 95

Bibliography

104 1

List of Figures

1. The 10-year average development of the European interest rate in regions Northwestern, Central, Southern Europe and France (1250 - 1600)

2. Northwestern European 10-year average interest rate (1250 - 1600)

3. Southern-European 10-year average interest rate (1250 - 1600)

4. Central-European 10-year average interest rate (1250 - 1600)

5. Southern Europe - Skill premium and Interest Rate (1250 - 1600)

List of Tables

1. The Correlation Coefficient of Skill premiums to Interest Rates, per European region (1250 - 1600)

2. Correlation of the regional Interest Rate and the Real Wage (1250 - 1600)

Divergence, the skill premium and the interest rate

One of the key issues in the field of Economic History is the debate on the Great Divergence. This debate is focused on the divergence in standards of living between the West, including Northern America and Europe, and the rest of the world. The debate's core question is why the West could become so enormously rich from the 1500s onwards, while, for example, much more populated and historically more developed Asian societies remained relatively backward.1 Historians, like David Landes (1983, 1998), Jared Diamond (1997) and Kenneth Pomeranz (2001) have provided several influential approaches to the origins of this divergence. Their approaches are respectively focused on Western cultural superiority, environmental coincidences favoring the European side of the Eurasian landmass, and the European and American usage of land in favor of energy-intensive industries. All these theories include the same theoretical limitation; they all envision the West and especially Europe as a single economic unity of equally-spread development of real wage, standards of living and economic performance. The real wage equals the nominal wage divided by the consumer price index. However, as the following paragraph will show, this perception of an equal European performance is not the case. In the article The Great Divergence in European wages and prices from the Middle

Ages to the First World War (2001), the American economic historian Robert C. Allen observed a divergence in real incomes and thus standards of living (the real wage relative to its purchasing power) between the regions bordering the North Sea, Northwestern Europe, and the rest of Europe, originating in the period between 1500 and 1750. He argued that as real incomes fell in most European cities in the 1500s, the newly reached levels were only maintained in Northwestern Europe as English and Dutch wages did not continuously fall after 1500, but remained at the new equilibrium level. In the rest of Europe, wages continued to collapse and fluctuate between 1500 and 1750, only to regain stable ground and rise above medieval levels after 1870. Hence, the article empirically showed that European economic development was not equally spread throughout the continent, as the

1 David S.Landes, The wealth and poverty of nations; why some are so rich and some are so poor (New York 1998) 17 29.

previously mentioned Great Divergence-focused historians often assume. Allen's observation therefore opened an entirely new academic debate on this intra-European divergence in wages and standards of living; whereas the debate on the Great Divergence is focused on explaining the global divergence in standards of living and economic performance, the debate on this so-called Little Divergence does the same on an intraEuropean scale, focused on explaining intra-European differences in the development of real wages and standards of living. Interest rates are key

In the decade after publication of Allen's article, various schools explaining the Little Divergence have emerged. These schools have focused on Marxist social structures, differences in institutional efficiency in stimulating information feedback systems, and the scientification of society resulting in the emergence of both the entrepreneur and the scientific maximization of production processes. At the core of most of these arguments lies the decisive influence of accumulated human capital on economic development, arguing that the Little Divergence can be explained through regional differences in the level of human capital. Human capital is the accumulation of scientific knowledge on which technological progress, and thus also economic development, is based.2 The level of human capital in an economy can best be measured and represented by the level of the skill premium, or the percentage difference between the skilled and the unskilled labor wage.3 This percentage represents the compensation for investing in human capital for not earning an income during the training period of unskilled to skilled labor and other training-related expenses, but also reflects the efficiency of institutions like the capital and labor market.4 An approach to directly explaining the Little Divergence by using the tool of skill premiums has not yet been undertaken often, but a link between universal economic performance and the skill premium is mentioned often. In their contribution to Gary Becker's book Human

capital titled Human capital, fertility, and economic growth (1994), Becker, Kevin Murphy and Robert Tamura for example strongly emphasize a direct link between the level of the 2 G. S. Becker, Human capital: a theoretical and empirical analysis with special reference to education (3rd edition; Chicago 1994) 324. 3 Jan Luiten van Zanden, â&#x20AC;&#x2DC;The skill premium and the 'Great Divergence'', European Review of Economic History 13 (2009) 121-153. 4 Ibid., 123.

skill premium and economic performance. Not specifically mentioning of the debate, they nonetheless argue indirectly that the Little Divergence is therefore likely to be a direct result of intra-European differences in the skill premium.5 Next to that, they stress initial differences in the skill premium in the long-run result in persisting differences, as skill premium creates new skill premium. In other words, a head start in the level of the skill premium will always remain a head start.6 This would explain the continuous nature of Northwestern European economic dominance in Europe; the rest of the continent could not take over because their skill premium was relatively low and they were thus unable to produce lower skill premiums relative to Northwestern Europe, which had an advantage from the start. Important to remark hence is that economic performance is negatively connected to the skill premium; both variables move in the opposite direction. Relatively low skill premiums, for example, reflect relatively high levels of economic performance since it indicates that the cost of training is low and that the chance of acquiring a job after training is high; acquiring capital to pay for training is cheap and training is connected closely to the needs of the labor market. 7 Both the institutional capital market and the labor market are functioning efficiently. In other words, the negative connection between a low level of the skill premium and a high level of economic performance suggests that the supply of human capital grows more rapidly that the demand for it as direct result from economic performance. It suggests that the demand for human capital, influenced by technological and economic progress, only has a modest effect on long-term patterns of economic development; supply factors hence seem to dominate.8 Only fairly recently, from the 1970s and 1980s onwards, do increasing skill premiums and economic growth move in the same direction; contemporary economic growth is thus increasingly technologically biased, rather than based on the availability of human capital. However, this leaves the question what fuelled the development of the skill premium: what processes influenced intra-European differences on the level of the skill premium, and thus resulted in the Little Divergence? Sebnem Kalemli-Ozcan, Harl Ryder and David Neil for example stress in their 2000 article titled Mortality decline, human capital investment,

and economic growth the importance of declining mortality rates in increasing investment 5 G. S. Becker, Human capital: a a theoretical and empirical analysis with special Reference to education, 3rd edition (Chicago, 1994) 323 - 325. 6 G. S. Becker, Human Capital, 324. 7 Jan Luiten van Zanden, â&#x20AC;&#x2DC;The skill premium and the 'Great Divergence'', 124. 8 G. S. Becker, Human Capital, 124, 125.

in human capital; they emphasize a direct link between demographic transition and the pattern of development of skill premiums.9 The Little Divergence is therefore, according to Kalemli, Ryder and Neil, likely to be a demographic process due to intra-European differences in mortality rates. At the core of their argumentation lies the assumption that investment in human capital is influenced by the length of the period the investor is able to enjoy the fruits of his or her investment. High chances of reaching old age thus seem to empower investors to invest in their own level of human capital. A second factor influencing investments in human capital and thus the development of the skill premium is the regional level of the interest rate. Both Gregory Clark and Jan Luiten van Zanden offer approaches to explaining the Little Divergence by focusing on the development of the interest rate. At the core of their argumentation lies the assumption that the level and development of the interest rate influences the level and development of the skill premium, since the level of the interest rate provides fairly direct incentives to invest in human capital. Their approach to the Little Divergence concentrates on the development of the interest rate, since its level provides an indication of both the efficiency of markets as well as institutional efficiency embodied into one variable.10 In the 2007 book A farewell to

alms Gregory Clark argues that all over Europe, the level of the skill premium declined after the Black Death in the 1350s; the incentive to invest in human capital was thus highest before the Black Death.11 Clark rejects the demographic approach that Becker, Murphy and Tamura stress. This approach is focused on fertility and mortality rates that offer more chances to better-educated children on the labor market and thus connects education to economic performance.12 As Clark suggests, these European demographic developments did not begin to change until somewhere in the nineteenth century, well after the beginning of the Industrial Revolution, and thus the establishment of the Little Divergence.13 More likely to explain declining skill premiums are therefore the basic costs of investment: the rate of return on capital.14 The cost of capital and thus the cost of investing in human capital ought 9 Kalemni-Ozcan Sebnem, Harl E. Ryder, David N. Weil, 'Martality decline, human capital investment, and economic growth' in Journal of Development Economics vol. 62 (2000) 1; H. De Soto, The Mystery of Capital: Why Capitalism Triumphs in the West and Fails Everywhere Else (New York 2000); J.Reis, 'Institutions and Economic Growth in the Atlantic Periphery; The Efficiency of the Portugese Machinery of Justice, 1870 - 1910, paper at conference Law and Economic Development, Utrecht 2007. 10 Jan Luiten van Zanden, â&#x20AC;&#x2DC;The skill premium and the 'Great Divergence'', in European Review of Economic History vol. 13 (2009) 120-130. 11 Gregory Clark, A Farewell to Alms; A Brief Economic History of the World (Princeton 2007) 180 - 181. 12 Idem, Alms, 225. 13 Jan Luiten van Zanden, â&#x20AC;&#x2DC;The skill premium and the 'Great Divergence'', 181. 14 Gregory Clark, A Farewell to Alms, 225.

to be connected directly to the level of the skill premium. This means that the incentive to invest in human capital is high when the cost of the investment is relatively low.15 In other words, Clark argues that low interest rates will result in high levels of skill premium; the incentive to invest is high since it is simply cheap to do so. In the article The skill premium

and the Great Divergence (2009), Jan Luiten van Zanden also favors the intra-European divergence on the level of real wages resulting from intra-European differences in the level of the skill premium; the skill premiums in Northwestern Europe fell in the 1350s, and remained much lower than in other parts of Europe from the fifteenth century onwards, while these parts witnessed increasing skill premiums and thus also decreasing rates of economic performance. This interest rate-focused approach to the Little Divergence that Clark and Van Zanden provide is interesting for two reasons. First, it seems to explain both the initial decline of skill premiums and real wages all over Europe in the centuries after the Black Death in the 1350s Allen emphasized. In the centuries after the Black Death, both skill premiums and real wages plummeted. However, only in Northwestern Europe could the skill premium be retained at the new, and for economic development favorable, low post-Black Death level. As a result, the real wage increased and the Little Divergence was born. In the rest of the continent, the opposite process occurred. Skill premiums swiftly returned to high, pre-1350s level, crippling economic development in the process.16 Peter Lindert et al. hypothesized in 2002 that this divergence in skill premium and ultimately in real wages is due to differences in the level of the interest rate. Northwestern European interest rates are considered to have been relatively lower than elsewhere, making goods that require a lot of capital relatively cheap there; in the rest of Europe, low capital demanding goods where cheap due to relatively high interest rates.17 Lindert et al. contribute this initial decline in skill premiums and real wages in the post-1350 period to demographic factors. He argues that the decline of populations triggered investments in human capital in the Northwestern part of Europe where capital was cheap, while in the rest of the continent declining population levels resulted in demographic incentives to invest in the remuneration of the population.18 Second, it is an approach which has never been at the center of academic 15 Idem, 225. 16 Jan Luiten van Zanden, â&#x20AC;&#x2DC;The skill premium and the 'Great Divergence'', 130 - 140. 17 P. Lindert et al. Preliminary global price comparisons, 1500 - 1872. Paper at session on World Living Standards since the 13th century. XIIIth Economic History Congress, Buenos Aires (2002). 18 Ibidem.

interest and is thus unique in its kind. Gregory Clark and Jan Luiten van Zanden are one of the few scholars actively focusing on the influence of the interest rate on the skill premium, but always in order to explain the latter; the development of the interest rate itself seems to be always taken for granted. This research, however, will put the interest rate and its patterns in late Medieval and Early Modern Europe at the center, and therefore shed new light on the theses of both Clark and Van Zanden put forward. If Van Zandenâ&#x20AC;&#x2122;s and Clark's theories are correct and intra-European differences in the skill premium translated into a difference in economic performance and living standards, then we would expect, following their additional connection of the skill premium to interest rates, to find that there were differences in interest rates as well.

This rather broad

expectation can be split up into two smaller expectations based on the literature by Van Zanden and Clark. First, it could be expected that high skill premiums are accompanied by high interest rates. This expectation is based purely on logic: high interest rates remove the incentive to spend saved money in human capital since money is basically expensive to acquire. The authors continuously stress the interest rate providing the incentive to invest in human capital. High skill premiums are in itself an incentive to invest in human capital. However, these skill premiums are high because the cost of training is high; if not, the difference between skilled and unskilled wages would have been lower from the start since the threshold to training is low. The cost of training is determined by the level of the interest rate. In other words, the threshold to training is the interest rate since that is what makes investments cheap or expensive. High skill premiums are therefore accompanied by high thresholds, or high interest rates. Secondly, it might be expected that a skill premiuminduced increase of the real wage, or put differently, economic development as such, develops in accordance with the development of interest rates. The abovementioned authors connect the interest rate to the skill premium. Mutations in the level of the interest rate logically ought to result in mutations in the skill premium; the incentive to invest in human capital can increase or diminish as capital becomes expensive or cheap and thus will the absolute level of the skill premium move in accordance. In the face of the Little Divergence as result of intra-European differences in the level of the skill premium, interest rates in Northwestern Europe are expected to be relatively low since skill premiums are low, while those in the rest of the continent are expected to be relatively high since skill premiums are high. 8

Focused on the development of interest rates in the period 1250 - 1600, an overall European convergence of interest rates can be observed, but a divergence in skill premiums in accordance to the divergence in real wages.19 Therefore Van Zanden and Clark are correct in theoretically connecting the skill premium to economic performance, but are too bold in connecting the development of the interest rate to the skill premium. To support this statement, and as key element to this research, a data series on the development of the interest rate in more than two dozen European cities in the period 1250 - 1600 has been constructed. Based on the work of Sidney Homer and Richard Sylla's in A history of interest

rates (2005) and David Stasavage States of credit (2011), this dataset focuses solely on the interest rates on urban public debt.20 By doing so, a sound analysis of the development of interest rates throughout Europe can be made. The interest rate on public debt and private debt logically did not differ much, but were often integrated.21 As this data series shows, interest rates in Europe started to converge to an average level of five percent in the course of the fifteenth century. Next to that, Northwestern and Southern European interest rates also show similar patterns of development. From the fourteenth century onwards, intraEuropean interest rates all moved within a bandwidth of no more than four percent.22 But most interesting is that where Allen argues that the Little Divergence emerged between 1500 and 1750, Northwestern European interest rates only became lower than the Southern European rate from 1700 onwards. The latter factor makes a focus on the interest rate in the context of economic divergence in real wage even more interesting because it seems indicate that the interest rate is unconnected to the development of the real wage. Interest rates and the Little Divergence; cause and effect?

This study intends to determine the extent to which interest rate differences translate into a different skill premium, and whether the different skill premiums function as an explanation for the Little Divergence in the period 1250 to 1600. The answer to this will be no. Based

19 Robert C. Allen, 'The Great Divergence in European wages and prices from the Middle Ages to the First World War', 417; Jan Luiten van Zanden, â&#x20AC;&#x2DC;The skill premium and the 'Great Divergence'', 127. 20 Sidney Homer and Richard Sylla, A history of Interest Rates (4th edition; Hoboken 2005); David Stasavage, States of credit; size, power, and the development of European polities (2011). 21 Douglass C. North and Barry R. Weingast, 'Constitutions and commitment; the evolution of institutions governing public choice in seventeenth-century England', The Journal of Economic History vol. 49 (1989). 22 Homer and Sylla, A history of interest rates, 198, 207.

on a comparative statistical analysis using the abovementioned data series on interest rates, this study will argue that the universal accessibility to credit, the interest rate, was not universally connected to regional, intra-European differences in economic performance generated by regional differences in the level of human capital or the skill premium. The Little Divergence is therefore most likely not to be a direct effect of the development of the interest rate on urban public debts. In this project, statistical evidence will show that there is only a weak correlation between the development of the skill premium and the development of the interest rate. The developments of both variables therefore seem to be two relatively unrelated processes. Next to that, the correlation between economic performance, measured in the development of real wages, and the development of the interest rate points to no universal connection; there seems to be only a region-specific relationship between both variables. This can be considered as evidence of a lack of a direct, universal, cause-and-effect relationship between the variables of interest rate on urban public debt and the variable real wage. The reason why a direct connection between the Little Divergence and the development of the interest rate on urban public debt is missing is because both processes are of an intrinsically different nature. This research will show that both economic processes have distinctive origins, making them unrelated. The Little Divergence has its origins in differences in the level of human capital, resulting from demographic differences in the marriage pattern rather than from interest rate-generated incentives. The Little Divergence is therefore more likely to be an effect of demographic factors. The distinctively Northwestern European European Marriage Pattern (EMP) after the 1350s forced small, nuclear, one-generation households to rely on the labor market as sole source of income. This forced households to invest in human capital to maximize their chances on the labor market. In the rest of Europe, the EMP was not of decisive importance; households relied less on the labor market as a source of income. Contributing to the income of the business of the extended family shaped the strategies of households on the labor market. It provided less incentives to maximize its position on the labor market since multigenerational families provided a guaranteed income. The mortality rate-factor Becker, Murphy, and Tamura stress seems to have a minor influence since it emphasizes no processes specific to Northwestern European; the argument is too often universal to specifically explain the Little Divergence.

The development of the interest rate on the other hand was influenced by technological factors and to lesser extent by political factors. While the Little Divergence is most likely to be a bottom-up process due to regional demographic differences in the composition of households, the development of the interest rate is a top-down process influenced by the polity in two possible ways. Firstly, the polity can entrust investors it will repay its debts due to constitutional constraints on defaulting, and secondly, the polity will feature technological factors that enable it to repay because it is capable of keeping a close watch on its checkbook. The development of interest rates as visualized in this research provides evidence that the latter factor is of decisive importance: fluctuations connected to omnipresent dramatic political changes are missing in the data, while all over Europe interest rates converged to the level of five percent, indicating control of the polity over its interest rate and therefore also to increased technological advantage. This process results, as this research will argue, from the ongoing internationalization of capital markets, making urban public debt systems more responsive to developments of others. Competition amongst capital markets forced the adoption of more advanced technological means in order to remain an interesting investment to investors. Research structure

Structurally, this research will be divided into four main chapters and a conclusion. The first chapter will provide an overview of the historiography of the three debates the research question covers. Firstly, the debate on the Great and Little Divergence and the theoretical and technical approaches to it; secondly, the debate on human capital and the skill premium and its connection to economic performance; and finally the academic focus on the development of interest rates. This chapter aims to further explain the relationship between the skill premium and the Little Divergence and between the skill premium and the interest rate. The second chapter will deal with the methodological complications of constructing and using data series on interest rates. Next to that, the chapter also deals with the implications of the methodological decisions needed to profoundly engage in comparative analysis of interest rates and skill premiums. The goal of the chapter is therefore to explain the methods used to defend the thesis explained in the previous section of this introduction. 11

This research solely focuses on the interest rates on urban public debts since data on the skill premium is often solely available on city-level. Hence, a focus on the interest rates of these same cities results in more sound conclusions. In addition, the local interest rate is also more likely to influence incentives of households since these same households might also get some of their income from debt repayments from investments in the debts of the cities they live in. Visualizations of the results of the collected data will be presented in the third chapter, which will provide statistical evidence giving reason to believe that the presumed influence of the interest rate on the skill premium as the literature emphasized, is largely inaccurate. As the skill premium might contribute to the intra-European wage inequality that is the Little Divergence, it most likely does so not do so under the influence of the interest rate. This chapter focuses on the two expectations concerning the theoretical relationship between both variables expressed in this introduction. Firstly, do differences in the interest rate translate into differences in the skill premium and thus in the Little Divergence? And secondly, does skill premium-induced economic development of the real wage develops in accordance to the development of interest rates? This chapter provides statistical evidence for the possible lack of correlation between interest rates, skill premiums, and real wages, on the basis of which it can be argued that the literature somewhat oversimplified the connection between human capital, skill premium, and interest rate. Based on this evidence, it is possible to make three statements. Firstly, there is most likely no interest rate-focused Little Divergence between Northwestern Europe and the rest of the continent, as all over Europe interest rates converged in the studied period of 1250 to 1600. This pattern is highly interesting since real wages, and therefore standards of living, diverged in this period, while intra-European institutional frameworks influencing the interest rate converged. I coin the term "Great Convergence" as the overall process of European interest rate convergence, regardless of differences in local economic performance. Secondly, there is only a relatively weak positive relation between the development of the skill premium and the interest rate: fluctuations in the interest rate do not profoundly result in fluctuations of the skill premium. Thirdly, the evidence indicates that skill premium-induced economic development, measured in real wages, does not move in accordance with the development of the interest rate. There seems to be no universal pattern or correlation in the several European regions between the real wage and the interest rate. In each region, both variables seem to behave in accordance 12

to individual, variable-specific patterns, possibly influenced by region-specific endogenous factors. The fourth and final chapter of this thesis looks back at the debate on the Little Divergence, focused on explaining the Little Divergence based on the statistical results presented in chapter three since interest rates are unable to explain the Little Divergence. It will be suggested that the lack of correlation between the variables "skill premium" and "interest rate" is because the Little Divergence in real wages and the development of the interest rate are intrinsically different factors. The Little Divergence is a demographic process based on the level of human capital and on the demographic and institutional structure of society, influencing the development of the real wage. On the other hand, the interest rate is a political as well as an technological factor, representing the constitutional constrains on defaulting payment as well the technological efficiency of the local political structure in repaying their debts. The latter factor explains the overall European pattern of a Great Convergence of interest rates; as the development of the interest rate is a political process, its institutional framework changed under the pressure of integrating capital markets, demanding Europe-wide equally secured property rights constraining states to default their debts.

This first chapter will provide an overview of the historiography and the theoretical framework addressed in the research question. The central question of this study covers three major historical debates. This chapter will hence also be divided into three parts. The first part will provide an overview of the initial two debates that form the context of this research, the debate on the Great Divergence and the debate on the Little Divergence. Many historians who focus on the Great Divergence inaccurately seem to stress equally European standards of living and economic performance throughout the continent. However, as the economic historian Robert C. Allen observed in a 2001, this perception is somewhat inaccurate; there exists an intra-European divergence in average wages and thus living standards. With this observation, he opened the debate on the Little Divergence, adding nuance to the overall debate on the Great Divergence. There are two major schools or approaches towards explaining this intra-European divergence. The first stresses that the regional differences in the efficiency of institutions make up for the European differences in standards of living. The second emphasizes popular scientific culture prevailing in Northwestern Europe, relative to the perseverance of superstition in the rest of the continent. All these two schools have in common that they emphasize the importance of human capital in economic development. The scholars Gregory Clark and Jan Luiten van Zanden have henceforth specialized on this key factor to economic performance. The second and third parts of this chapter therefore deal with the two elements on which human capital is based: the skill premium and the interest rate. In the literature, the emphasis on human capital accumulation explaining the Little Divergence is partly based on differences in the regional institutional efficiency, of which the skill premium is ultimately an indication.23 These differences result in the amount of human capital available in a region as well as in incentives to invest in the human capital: the interest rate. The key argument of these authors is thus that regional differences in the interest rate influenced the development of the skill premium in the region, resulting eventually in the Little Divergence. The Northwestern European skill premium is lowest, due to the relatively best institutional

23 Kalemni-Ozcan Sebnem, Harl E. Ryder, David N. Weil, 'Mortality decline, human capital investment, and economic growth' in Journal of Development Economics vol. 62 (2000) 1 - 5.

efficient framework, and hence the interest rates are thus also presumed to be relatively lowest. A wage gap of global proportion

As mentioned in the introduction, the debate on the Great Divergence is one of the key issues in the field of economic history. The debate is concerned with the global differences in wealth and standards of living, the relatively large margin in real wage between Europe, the West, and ‘the rest’. The living standards in the West are clearly higher than those in most parts of the world. Yet there is no unanimous academic consensus to explain this divergence. Many historians, like David Landes, Jared Diamond and Kenneth Pomeranz, have published influential approaches to the origins of this divergence, each from a unique viewpoint. They include approaches to the debate based on firstly, cultural superiority, and secondly, the environment and the relative ratio of amount of laborers to the available amount of land in an economy. The following section will provide a short overview of these three theses and their approach to the Great Divergence. Firstly, the American economic historian David S. Landes provides a cultural approach to the Great Divergence. In his 1998 book The wealth and poverty of nations.

Why some are so rich and some are so poor, Landes argues that differences in national wealth directly result from the occurrence of specific cultural traits, stressing that European cultural traits are obvious to lead to development and Western economic supremacy. At the core of Landes' thesis stands the argument that European culture, enforced by JudeoChristian tradition and market institutions, in the long-run of economic development makes a decisive difference. Landes is thus highly focused on European exceptionality, relative of the culturally ‘inferior’ rest of the world. Next to stressing Europe's relatively moderate climate, enabling societies to develop free of environmental constrains, Landes emphasizes the key importance of both Europe's political fragmentation and Christianity. Ongoing political competition between European states, combined with Judeo-Christian traditions, resulted in profound and broadly-shared political liberties and secured property rights; these rights offered the incentives to engage in economic enterprises.24 The use of accumulated

24 David S. Landes, The Wealth and Poverty of Nations; Why Some are So Rich and Some are So Poor (New York, 1998) 34.

knowledge, unconstrained by either religion or politics, is therefore encouraged; the security of property enabled one to personally enjoy the yields of knowledge and thus be motivated to continuously advance it. Landes ultimately stresses bottom-up economic development of Europe relative to the rest of the world; popular European culture is focused on competition and the accumulation and respect of knowledge. The book hence offers a neo-liberal interpretation of economic performance, stressing the merits of small-scale institutions enforcing good government focused on property rights, education and research in favor of the interests of the masses rather than those of the aristocracy.25 Secondly, the American geographer, psychologist, and pioneer in the field of environmental history Jared Diamond in his 1997 book Guns, germs, and steel. The fates of

human societies stresses the favorability of the European climate and other geographical conditions when compared to those in the rest of the world. Diamond argues that Europe's exceptional economic performance resulting in a broad margin in standards of living with the rest of the world resulted not so much from exceptional culturally-enforced ingenuity, but from its reaction to environmentally-induced opportunities and necessities. Landes and Diamond are thus adversaries in their emphasis on the importance of culture. Culturally, Diamond argues, all societies are equal but differ in economic performance due to the opportunities they encounter in their environmental landscape.26 Biodiversity, the size and intelligence of populations and geographical constrains on migration of ideas and diseases are therefore the only elements influencing the economic development of societies.27 In the case of Europe, Diamond stresses that the local biology was relatively diverse enough to support growing populations. In addition, nowhere in Europe are populations geographically isolated; migration, and thus the diffusion of ideas, is thus relatively easy. To summarize, Diamond suggested that Europe's exceptional economic performance is due to its relatively profitable landscape, enabling the diffusion of intellect and disease, while other regions in the world lack this relative easiness of biological development.28 Finally, the American historian Kenneth Pomeranz offers a thesis based on a mere synthesis of both Landes and Diamond's arguments in his 2001 book The Great Divergence.

China, Europe, and the making of the modern world economy, Pomeranz emphasizes the 25 David S. Landes, The Wealth and Poverty of Nations; Why Some are So Rich and Some are So Poor (New York, 1998) 20 - 40. 26 Jared Diamond, Guns, Germs and Steel; The Fates of Human Societies (New York, 1997) 21 - 35. 27 Idem, 406 - 410. 28 Jared Diamond, Guns, Germs and Steel;, 407.

importance of environmental features and favors a cultural focus on economic and demographic growth. Pomeranz takes a neo-Malthusian approach to the Great Divergence, focusing on the access to food and raw materials.29 Hence, in a sense Pomeranz follows Diamond's environmental approach. Pomeranz observes the pre-Industrial economic equality of the economic heartlands of China, Japan, India and Europe: in the mid-eighteenth century they all shared similar levels of technological and institutional development. They thus had comparable living standards and institutional systems; China and Japan's core regions resembled the highly developed parts of Northwestern Europe.30 Basically, all societies faced similar problems in acquiring fuels, foods and fibers. However, all societies but Europe shifted to labor-intensive agriculture to acquire these goods. Europe, on the other hand, was able to import much of these goods from the plantations in the New World.31 The discovery and exploitation of the Americas thus play a decisive role in European economic performance and ultimately in the creation of the Great Divergence. The imports from the New World provided Europe, often mostly Britain, with a comparative advantage since it freed the local European labor force and resources from being invested in the agricultural sector. The availability of cheap coal for example, another key factor in Pomeranz' argument, is thus freed from possible investment in low-yield agricultural production but freely investible in capital-intensive production. In the rest of the world, most countries lacked a colonial empire. Locally acquired fuels and other resources thus remained to be invested in low-yield economic enterprises. Ultimately, Pomeranz stresses the profitable European use of energy resources in high-yield production, relative to those economies investing energy resources in relatively low-yield agricultural production. The European split

These three inflectional theses all hold the same theoretical implication: they all seem to unrealistically perceive Europe as a single economic unit with often equally spread levels of development, economic performance and standards of living throughout the continent. As the topic of this research indicates, this is not as historical reality has shown. The Little 29 Kenneth Pomeranz, The Great Divergence; China, Europe, and the making of the Modern World Economy (Princeton, 2001) 17. 30 Kenneth Pomeranz, The Great Divergence; China, Europe, and the making of the Modern World Economy (Princeton, 2001) 17. 31 Idem, 15 - 22.

Divergence existed in standards of living between Northwestern Europe and the other regions of the continent. One of the first mentions of a divergence in European real wages in the Early Modern era was made by the American historian Robert C. Allen in his 2001 article The Great Divergence in European wages and prices from the Middle Ages to the

First World War, in which the author provides an overview of prices and wages in European cities from the fourteenth to early twentieth centuries. Allen's article can hence be seen as one of the first to point out a European little divergence in wages and standards of living. In the article, Allen stresses the importance of wages and prices studies for understanding economic developments to understand the debate on the origins and trends of the intra-European margin in real incomes and standards of living.32 Allen argued that the dominant pattern of early modern European real wage development was divergence. Beginning in the 1500s, England and the Low Countries (consisting of both the contemporary Netherlands and Belgium) had somewhat higher real wages than the rest of Europe, but their lead was only relatively small.33 However, in the three centuries to follow, real wages declined by half on the continent while Northwestern European wages remained mostly constant.34 The standard of living followed the development of the real wage. Logically, fluctuations over this long period of time did exist. English wages, for example, declined slightly in the course of the sixteenth century, making up for the loss in the early nineteenth century. Real wages in the Low Countries, however, declined slowly but more modest than sixteenth-century English wages or elsewhere on the continent.35 To support his observation of a Little Divergence in European real wages and standards of living, Allen takes two steps. Firstly, he makes an analysis of the development of real wage and secondly, he analyses the development of the real wage compared to its purchasing power. Firstly, Allen relies on the data on the development of skill and unskilled wages in the building sector, corrected with the development of prices. Since most Early Modern buildings were commissioned by either the church or the state, there is enough documentation available with which to construct a sound database.36 However, a focus on

32 Robert C. Allen, 'The Great Divergence in European Wages and Prices from the Middle Ages to the First World War' in Explorations in Economic History vol. 38 (2001) 410 - 412. 33 Robert C. Allen, 'The Great Divergence in European Wages and Prices from the Middle Ages to the First World War' in Explorations in Economic History vol. 38 (2001) 413. 34 Idem, 413 35 Ibidem. 36 Idem, 412 - 414. Note; Allen has constructed his dataset on the sufficiently available data from which London, Amsterdam, Florence, Vienna, Milan, Valencia, Strasbourg, Krakow are the most complete. From Naples, Mardid, Paris,

nominal wages alone is not enough to perceive a development of a divergence in standards of living. One needs to incorporate the development of price levels as well. As Allen, for example, rightfully stresses, wage dispersion increased from 1550 to 1650 due to almost a doubling of nominal wages in Italy, England and the Low Countries during the price revolution. Between 1650 and 1700, wages diverged even more; English nominal wages increased, those in the Low Countries remained roughly constant, while Spanish and Italian wages remained low and continued to drop.37 To see if the dispersion of nominal wages in the sixteenth and seventeenth century also relates to dispersion of standards of living, Allen compares the nominal wage to its purchasing power measured using the consumer price index.38 Secondly, Allen uses a Laspeyres index of prices of baskets of goods connected to both time and space as to a specific lifestyle to construct such a consumer price index. For example, the Laspeyres index takes into account that middle class households in the Mediterranean will, due to its relatively hotter climate, purchase baskets of goods containing fewer fuels used for heating than those purchased by middleclass households in the colder North Sea area. In addition, the Laspeyres index also takes into account a welfare ratio; a minimum level of consumption, the lifestyle of the absolute poor. The purchasing power can thus be above a specific arbitrary level of poor living standard (ratio of 1.0), twice its level (ratio of 2.0) or only half of it (ratio of 0.5).39 When solely focused on the development of the European real wage, Allen argues that the divergence in wage was at its height between the sixteenth an eighteenth century. Between 1500 and 1750, real wages had dramatically divided Europe into three distinctive groups: 1. Real wages in London fell from the sixteenth century onwards but started to regain lost ground in the term of the seventeenth and eighteenth centuries. 2. Real wages in Amsterdam and Antwerp, high in the late Middle Ages, but continuously and slowly falling until the nineteenth century. Augsburg, Leipzig, Hamburg, Munich, Gdansk, Lwow and Warsaw data is often incomplete but still incorporated into his dataset. 37 Robert C. Allen, 'The Great Divergence in European Wages and Prices from the Middle Ages to the First World War', 415. 38 Robert C. Allen, 'The Great Divergence in European Wages and Prices from the Middle Ages to the First World War', 419. 39 Idem, 425.

3. In the rest of Europe, real wages plummeted massively. Hence, the distinctive pattern of real wages in England and the Low Countries, not increasing but steadily moving through time, was matched by wretched poverty in the rest of the continent.40 The divergence in standards of living is best observed when the development of the nominal wage is compared to the consumer price index, which provides a welfare ratio as quantitative instrument for differences in living standards. The division in standards of living between Northwestern Europe and the rest, measured in welfare ratios is striking.41 Allen argues that in England and the Low Countries, the development of the nominal wage and the consumer price index resulted in a welfare ratio of often twice as much as the Laspeyres poverty line. The English and Dutch craftsmen and laborers whose wages Allen studied, for example, now had incomes enabling them to purchase luxury items not directly needed for survival. In Eastern and Southern Europe, as Allen argues, welfare ratios fell to 1.00 or lower; local Southern and Eastern craftsmen and laborers could thus either not or only just afford the poverty basket.42 The implications of Allen's research were that in the rest of the European continent, consumers were not able to nourish themselves sufficiently, resulting in relatively small statures and relatively high mortality rates.43 To summarize: the Little Divergence expressed itself in the fact that the standards of living in Northwestern Europe where more than twice than those in the rest of Europe, resulting from a strong increase of the real wage but a modest increase of the consumer price index. Making sense of Divergence

Allen's article does not provide any sound explanation to this striking divergence in real wages between Northwestern Europe and the rest, but many others did. These authors are dividable into two schools, due to their various angles of approach, falling under the headings of institutional advantages (neo-institutionalism), and the scientification of society. However, at the heart of all these schools lies the key assumption that differences in the level of human capital in an economy were decisive for the Little Divergence. This second 40 Idem, 430. 41 Idem, 425 - 435. 42 Idem, 430. 43 Robert C. Allen, 'The Great Divergence in European Wages and Prices from the Middle Ages to the First World War', 431.

section of the chapter will provide an overview of these two schools before focusing on the key factor of human capital in the third section. Fruits of Property and Institutions

The first school explains the Little Divergence by focusing on the efficiency of the institutional framework of an economy that protects property and stimulates information flows amongst the different institutions. This emphasis on the institutional security of property rights was an important explanation in economic history in the late twentieth century. Neo-institutionalist historians in the 1980s and 1990s favored an approach to the Little Divergence focused on relative differences in the efficiency of institutions; they argue that the Little Divergence can be traced back to differences in the efficiency of formal and informal institutions in providing both secured property right as well as sound information feedback between the institutions, enabling entrepreneurs to adequately engage in economic activities.

This raises the question on the workings of this highly theoretical assumption

in practice. Douglass C. North and Barry R. Weingast have focused on the connection between secured property rights and economic performance in their 1989 article "Constitutions and commitment." In the article, North and Weingast argue that the institutional arrangements in the British post-Glorious Revolution period (post-1688) allowed the government to successfully uphold secured property rights. The revolution reshaped British institutions in order to more successfully protect property and thus prove and incentive to economic development. On the institutional level, the Revolution influenced both political and financial formal institutions. Parliament was empowered to protect the civil wealth against the arbitrary forces of the crown, while at the same time solving the crowns financial problems. The authors thus focus on two of the major implications of this revolutionary change. Firstly, the Glorious Revolution resulted in the emergence of a representative governmental structure; the fiscal, arbitrary and confiscatory power of the crown under the control of

44 Baran, Paul A., J. Hobsbawm, 'The Stages of Economic Growth', in Kyklos; International Review for Social Sciences vol. 14 (1961).

parliament.45 This resulted, secondly, in the modernization of the English financial structure, providing sound financial support for the Crown and parliament and eventually enabling the public to economically develop without the fear of being stripped of their wealth by the government. For example, the creation of the Bank of England in 1694 as formal institution and the creation of a public debt, for example, put constraints on future financial behavior by the crown and parliament. It provided efficient information feedback between investors in the public debt as the crown and parliament hunger for financial resources.46 Eventually, this formal and informal institutional change in the interest of the masses, the Crown and parliament constrained all parties to the arrangements and opportunities. In his 1990 book Institutions, institutional change and economic performance, North defined institutions as the rules of the game in a society, constraining human behavior and providing a framework for interaction.47 Institutions can either be formal codes of conduct, consisting of written rules, or informal unwritten codes of conduct that underlie and supplement formal rules. Using a sports analogy, North explains that the formal rules of the game both constrain the actions of a team during the game, as well as providing the opportunities to win by defining how to score. In addition, the teams also have to observe the informal rules of good sportsmanship like a handshake after the game, making them either good or bad winners or losers.48 North argues that institutions provide economic opportunities by continuously changing the nature of the framework, resulting in new choices. Agents operating within the framework are capable of taking these opportunities. 49 The yields of these opportunities are influenced by the amount of information available on these opportunities between institutions and agents; the amount of available information thus influences the maximization of the yields. 50 If an institution is a hundred percent efficient in supplying the right information in space and time, the profits of economic activities maximized and the transaction costs are non-existent of the agents.51

45 North, Douglass C, Barry R. Weingast, 'Constitutions and Commitment: The Evolution of Institutions Governing Public Choice in Seventeenth-Century England' in The Journal of Economic History vol. XLIX (1989) 804. 46 North, Douglass C, Barry R. Weingast, 'Constitutions and Commitment: The Evolution of Institutions Governing Public Choice in Seventeenth-Century England' in The Journal of Economic History vol. XLIX (1989). 47 Douglass C. North, Institutions, Institutional Change and Economic Performance (1990),3, 4. 48 Idem, 4. 49 Douglass C. North, Institutions, Institutional Change and Economic Performance (1990) , 15. 50 Idem, 7. 51 Douglass C. North, Institutions, Institutional Change and Economic Performance (1990),8.

The Glorious Revolution can thus be seen as the altering of the institutional framework to maximize the efficiency of information flows. The information feedback system between economic institutions in England after the Revolution became relatively more efficient than elsewhere in Europe, enabling English institutions and agents to operate at relatively low costs so their investments were not wasted. The Crown and parliament were in high need of financial resources, but unable to get those financial needs without taking them from the masses. The masses on the other hand, willing to invest and profit from their investments, did not want their property to be taken away willy-nilly. Hence, both streams of information collided and altered the financial framework to include both interests. Another, more theoretical, example of how institutional efficiency influences economic performance is the labor market. Parson (1983) stressed the modernity of Medieval European economies, emphasizing the high flexibility of labor. Agrarian laborers could fairly easily become urban laborers. Thus, the agrarian and urban labor markets were integrated, suggesting an efficient information flow between the two. Growing unemployment in the cities, for example, could easily be solved using the agrarian labor force and the other way around.52 Science

Efficient institutions and secured property rights encouraged the development of new ideas and methods of production by protecting its fruits. The second approach to the Little Divergence hence focuses on the relative level of scientification in popular culture throughout Europe. The centuries up to the seventeenth century were the centuries in which science emerged in popular culture, changing human perception of their surroundings and economic activities in favor of an empirical worldview rather than a superstitious worldview. The Late Medieval and Early Modern â&#x20AC;&#x2DC;Scientific Revolutionsâ&#x20AC;&#x2122; preceded the Industrial Revolution. 53 The continuous accumulation of scientific knowledge relies greatly on the efficiency of institutions in protecting property. In the case of scientific knowledge, property can also relatively easily be defined as intellectual property. Early twentieth-century sociologist Max 52 T. Parson ed. W. Kurata, The Structure and Change of the Social System, lectures during Parson's second visit to Japan (1983). 53 Robert C. Allen, The British Industrial Revolution in Global Perspective (2009) 6.

Weber made two prominent arguments connecting scientific culture to economic performance, stressing firstly Protestantism and secondly the superiority of rationality. Firstly, Weber argued that the Reformation had led to superior rationality, stressing that Protestant regions were more intrinsically rational than non-Reformed regions.54 Weber based this argument on the correlation between the economically best performing Northwestern part of Europe and the profound presence of Protestantism in this region. Secondly, in a publication after Weber's death in 1927, titled Wirtschaft und gesellschaft, Weber argued that economic development was not only related to the presence of superior rationality resulting from the Reformation, but also to a popular-shared scientific attitude replacing Medieval beliefs of superstition and spirituality. For technological progress to occur, rationality and an empirical outlook on reality had to substitute belief in supernatural forces; the world had to be perceived as a controllable material realm, not affected by spiritual or divine forces. This required what Weber called the "disenchantment of the world", the decline of beliefs in spiritual influence in favor of empirical rationality.55 The synthetic fusion of Weber's argued superior rationality and the scientific worldview in Northwestern Europe enabled in his argumentation the emergence of highly efficiency technologies and industries. Production was no longer based on traditional production methods, but on continuously scientifically developed technology.56 This enabled production to cut in costs but increase in outlet. However, Weber's ideas have been massively criticized. Firstly, many historians have stressed the lack of sound empirical evidence of a long-term or universal correlation between the Reformation, including superior rationality threats, and economic performance. Allen even argues that this correlation did not exist in the sixteenth century and does not exist today. Hence, he massively doubts if there even ever existed a correlation.57 Secondly, the connection of economic rationality to specific regions, like solely Northwestern Europe, is not yet scientifically proven. Even though Weber's idea even influenced many governmental development policies in the 1950s and 1960s, arguing that agrarian production in economically less performing regions since they lacked a rational approach to agriculture. 54 Max Weber (1904-1905), The Protestant Ethic and the Spirit of Capitalism, trans. by Talcott Parsons, London 1930. 55 Robert C. Allen, The British Industrial Revolution in Global Perspective (2009) 8. 56 Bateman, V. (2006). Market Integration in Early-Modern Europe. paper presented at The Economic History Societyâ&#x20AC;&#x2122;s 2006 annual conference. available at: http://www.ehs.org.uk/ehs/conference2006/Assets/BatemanNRIA.doc; Persson, K. G., Grain Markets in Europe, 1500â&#x20AC;&#x201C;1900, (Cambridge 1999); R.H. Britnell, The Commercialisation of English Society, 1000 - 1500 (Manchester 1996). 57 Bateman, V. (2006). Market Integration in Early-Modern Europe, 7.

The first to reject this connection was the Nobel Prize winning economist Theodore Schultz in his 1964 book Transforming traditional agriculture. Schultz and many others have put the rationality of peasants to the test by investigating their response to changes in the agrarian production processes and their adaptability to new technologies and techniques. His research indicated that even small-scale farmers in economically dreadfully performing regions responded likewise as their colleagues in high performance regions. A second economic historian, Joel Mokyr, has developed a more advanced variation of the avoiding the implications of Weber's theses.58 In his 2009 book The Enlightened

economy, Mokyr argues that the adaption of empirical science and strong beliefs in an orderly universe governed by natural laws perceived through empirical science to technological development massively affected economic performance in Northwestern Europe. The Little Divergence, in the eyes of Mokyr, therefore is a possible result of differences in the adaptability of empirical science to economic development. The Industrial Enlightenment affected the institutional structure of these societies and economies during the Middle Ages and early Renaissance. This framework restructures and redirects energy and creativity away from rent-seeking, Malthusian, activities to economic activities with the sole purpose of increasing prosperity.59 To relate to both the neo-Marxist and neoInstitutionalist approaches mentioned above, the institutional information feedback changed in order to shift societies' structure away from serfdom towards capitalism; the institutional framework provided sufficient information for capitalist social and economic structures to efficiently develop. Mokyr uses the concept of Industrial Enlightenment to explain why the Industrial Revolution was an initially British and not Southern or Eastern European process. He stresses that the Industrial Enlightenment in Britain was more realized than in other parts of Europe.60 In Britain, popular culture relied more on empirical science to perceive reality rather than on superstition or religion; Mokyr stresses the cultural emphasis on analytical thinking prevailing in eighteenth-century Britain.61 For example, as a result, by the 1750s the male entrepreneur emerged. This entrepreneur, in contrast to other economic agents, perceived production as a solely scientific and thus measurable and controllable process which 58 Joel Mokyr, The Gifts of Athena: Historical Origins of the Knowledge Economy (Princeton, 2002) and The Enlightened Economy: The Economic History of Britain, 1700 - 1850 (New Haven, 2009). 59 Joel Mokyr, The Enlightened Economy, 63. 60 Joel Mokyr, The Gifts of Athena: Historical Origins of the Knowledge Economy (Princeton, 2002) 29. 61 Joel Mokyr, The Enlightened Economy, 60 - 65.

conceptualized the notion of production and profit in terms of weight, physical forces and percentages. Mokyr's argument is hence similar to Margaret Jacob's arguments in her book

Scientific culture and the making of the industrial West (1997), which focuses on the rise of the entrepreneur as economic agent. Jacob stresses that the Industrial Enlightenment resulted in the transformation of popular culture.62 To summarize, the core argument is that the Little Divergence resulted from relative differences in Northwestern Europeâ&#x20AC;&#x2122;s scientific culture relative to the rest of Europe. The emergence of a scientifically-minded entrepreneur enabled to perceive the economy in measureable and thus improvable units of production, profit and cost. The approach focused on popular scientification expressed by Weber, Mokyr, and Jacobs to the Little Divergence is still often doubtfully received by historians. The main critique is the changeability of the concept of culture over time. Two main arguments return time and again. Firstly, cultural differences are not universal over time. Culture in the early Middle Ages cannot be compared to culture in the late sixteenth century. Universal cultural differences between regions can therefore not possibly exist and if they do, they only do so over relative short periods of time. For example, European culture was influenced by two major processes between the 1500s and 1800s. Peter Burke, for example, as one of the main critics of the cultural explanation, argued in 2006 that European culture moved over these three hundred years towards secularization and politicization; popular culture came to emphasize wealth and success in this world rather than emphasizing the possibilities of life in the afterlife, while a focus on the afterlife had structured medieval and early modern culture.63 Secondly, a critique expressed by Allen is that those historians stressing scientific culture seem to ignore economic factors that are possibly at play. For example, Jacobs problematically argued that the British sixteenth-century lead over France resulted from the fact that the French were more theoretically focused in constructing new production methods while the British preferred practice: the French were supposed to develop scientific knowledge, while the British were supposed to melt iron and invent machines. However, as Allen argues in The British industrial revolution, these supposedly scientific cultural differences resulted not from culturally influenced behavior but from pure economic factors: the cost of melting iron and doing the research and develop new machines was relatively

62 Margaret Jacobs, Scientific Culture and the Making of the Industrial West (New York, 1997) 1, 2, 6, 7. 63 Peter Burke, Popular Culture in Early Modern Europe (New York, 1978) 257 - 260.

expensive in France and thus it was more profitable for the British to perform these tasks.64 Arguing that scientific differences solely existed due to cultural traits and hence ignoring simple economics results in oversimplified explanations. Differences in the absolute scientification of society have deeper meanings beyond society or economics; it touches, for example, upon the realm of microeconomic market strategies and opportunities. Human capital matters; the premium on skill

At the heart of the abovementioned approaches to the Little Divergence lies the suggestion that human capital is key to the economic development of real wages. The authors emphasizing the scientification of society and the institutional framework protecting the fruits of (intellectual) property all argue in favor of the use of accumulated human capital, through either the process of creation of human capital, the cultural thrive towards knowledge, or the protection of the fruits of human capital through institutional support. Many historians have specifically focused on the topic of human capital and its relationship to economic performance of which Gregory Clark and Jan Luiten van Zanden are two of the most influential ones. Both authors seem to stress that the accumulation of human capital is highly connected to microeconomic reactions to market-generated opportunities and market behavior. The first author to focus on the influence of human capital on economic development is Gregory Clark. In A farewell to alms. A brief economic history of the world (2007), Clark connects Northwestern European exceptional economic performance in the Early Modern period to a type of Darwinian natural selection processes, eliminating non-bourgeois values. Clark therefore solely emphasizes cultural factors contributing to human capital and thus to economic performance. The Little Divergence is therefore, according to Clark, the result of differences in social values between Northwestern Europe and the rest of the continent. Clark focuses mainly on the mortality and fertility rates of the upper classes, that enabled the Medieval economies to escape the Malthusian trap of shock-fueled economic growth. The fertility rate of these upper classes proved to be relatively higher than that of the lower classes. As a result, the lower classes became extinct while the upper classes survived. 65

64 Robert C. Allen, The British Industrial Revolution in Global Perspective (2009) 10 - 12. 65 Gregory Clark, A Farewell to Alms; A brief Economic History of the World (2007) 8 - 10.

Along with the extinction of the lower classes, the offspring of the upper classes experienced a process of downward social mobility. The positions of the lower classes where increasingly filled by originally upper class children. Along with this process of downward social mobility, upper class, bourgeois values of building human capital through hard work, dedication, thrift, social competition, and self improvement through education, moved along down to the social classes. Bourgeois culture of hard work and education, naturally selected by the high reproduction-rate of the fertile rich, caused an increase of knowledge and therefore efficiency per worker.66 To quote the author: 'Millennia of living in stable societies, under tight Malthusian pressures that rewarded effort, accumulation, and fertility limitation, encouraged the development of cultural forms - in terms of work inputs, time preference, and family formation - which facilitated modern economic growth'.67 To summarize, Clark contributes the Little Divergence to differences in the dominant cultural values persisting in Northwestern Europe relative to those in the rest of Europe. 68 The transcending values of upper class bourgeois elites down the social spiral in Northwestern Europe resulted in the cultural thrive towards accumulation of human capital; culturally, it was a social obligation to invest in education.69 In addition, Clark seems to reject the institutional approach to the Little Divergence offered by North and Weingast for two major reasons. Firstly, Clark stresses that the institutions beneficial to economic development, as stressed by classic economic theory, were already present in thirteenth-century England and even existed elsewhere. So, uniquely British institutions beneficial to a British industrial revolution did not exist. Secondly, Clark strongly emphasizes the deterministic course of institutional development within a large European framework. All institutions tend to evolve towards efficiency over time, inefficient institutions, benefiting for example only elite classes, will eventually shift towards institutions benefiting society as a whole. The classic assumption that the Little Divergence was the result of an abrupt shift in institutional regimes, caused by external shocks, or by differences in institutional efficiency is therefore not sustainable.70 The second, human capital-focused scholar is Jan Luiten van Zanden. Van Zanden's approach to the Little Divergence can be diveded into two theses, 66 67 68 69 70

Gregory Clark, A Farewell to Alms; A brief Economic History of the World (2007), 209. Idem, 209. Ibidem. Idem, 208 - 210. Gregory Clark, A Farewell to Alms, 8 - 10.

his demographic

structure-centered approach and his skill premium-centered approach. In both the book The

long road to the Industrial Revolution and in the article The skill premium and the 'Great Divergence', both published in 2009, Van Zanden actively focuses on the Little Divergence, building forward on Lindert's emphasis on the Northwestern European advantageous and human capital-intensive economy. The article, in contrast to the book, provides a theoretical approach to the Little Divergence, while the book offers mere practical explanations. In the book Van Zanden emphasizes the importance of the European Marriage Pattern (EMP), stressing those demographic differences between Northwestern Europe and the rest in marriage, career and household structure influence economic performance. In addition, Van Zanden focuses in his article on the remuneration of human capital, the skill premium. The skill premium is used as indicator of the efficiency of the economic institutional framework, and the capital and labor market. Van Zanden's focus on the development of human capital builds upon recent research in price and wage development. Prices and wages provide crucial information about the structure, level of development and health of the economy. The American economist Peter Lindert for example, along with a team of fellow scholars, has recently been engaged in connecting prices and wages to the debate on the Great Divergence.71 Their study suggested that the structure of prices and wages in Northwestern Europe was already distinctive from the early modern period onwards.72 Furthermore, their study argued that capital-intensive goods and knowledge-intensive products were relatively cheap in that part of Europe, due to cheap capital as result of low interest rates. As a result, agrarian and labor intensive products where relatively expensive. Northwestern Europe was thus characterized by a comparative advantage in technological products and a relatively well-developed capital market. In The long road to the Industrial Revolution, Van Zanden argues that Northwestern European economic exceptionality, and thus the Little Divergence, was born in the 1450s following a pan-European process of equally-spread economic development during the tenth and fourteenth centuries.73 Van Zanden emphasizes that this enabled the Northwestern European economies to continue the medieval pan-European growth trend, while in the rest 71 Peter Lindert et al. Preliminary global price comparisons, 1500 - 1872. Paper at session on World Living Standards since the 13th century. XIIIth Economic History Congress, Buenos Aires (2002). 72 Jan Luiten van Zanden, The Long Road to the Industrial Revolution: The European Economy in a global perspective 1000 - 1800 (2009) 95. 73 Jan Luiten van Zanden, The Long Road to the Industrial Revolution, 95.

of Europe a period of long-term stagnation set in. The wage divergence on the continent began small, but after the 1450s continuously increased, of course in occurrence with the increase of human capital in the Northwest. Internally from the 1500s onwards, the economic heartland of Northwestern Europe shifted from the Southern Netherlands in the sixteenth to the Dutch Republic in the North in the seventeenth and eventually to England in the eighteenth century. The economic structure of Northwestern Europe was distinctive since it continued its medieval economic growth path while in the rest of Europe the growth of real wages stagnated. One often emphasized explanation, that of profitable land/laborers ratios â&#x20AC;&#x201C; from the viewpoint of the merchant and the venture capitalist â&#x20AC;&#x201C; due to population and wage decline as a result of the Black Death in the 1350s, can mostly be rejected. Since in the fiftyyear period from 1450 to 1500, the population and wages all over Europe swiftly returned to its pre-Black Death levels, it gives no indication of long-term structural economic differences.74 Van Zanden argues that the economic structure of Northwestern Europe bordering the North Sea was highly integrated and complementary from the eleventh century onwards, while on the polity scale England and the Low Countries massively differed. Yet both of them seemed able to perform equally well. Polity and population therefore seem to provide no sound explanation. The explanation to its continuous trend of economic growth must, according to Van Zanden, hence lie at the micro-level of the household and its demographic and social structure.75 A possible cause of the Little Divergence can thus be the new strategies of households to adapt to new market environment that were unique for Northwestern Europe and resulted partially from the decline of population after the Black Death.76 A way to perceive the household is as a cooperative economic unit, aimed at fulfilling the physical, material and emotional needs of its, relative to each other unequal, members; the needs of parents and children differs and so does their capacity to fulfill them.77 Next to that, the household is based on explicit and implicit contracts of which the marriage contract is the most important one.78 In the late Middle Ages, a new, modern, and unique marriage pattern and therefore household structure emerged in Northwestern Europe; the emergence of the 74Jan Luiten van Zanden, The Long Road to the Industrial Revolution, 96. 75 Jan Luiten van Zanden, The Long Road to the Industrial Revolution, 103. 76 Idem, 100. 77 Idem, 103. 78 Ibidem.

nuclear family consisting of parents and their direct children, rather than the extended family of parents, elders and children.79 This marriage pattern, the European Marriage Pattern or EMP, a term coined by John Hajnal in the 1960s, has three major characteristics. Firstly, the decision to marry is taken by and in the interest of those who were to marry themselves, and not by a third party. Secondly, the newlyweds were expected to take care of each other and thus leave the parental household; they were married under God and thus perceived capable of survival together. Wage labor and market transactions therefore became integral elements of the life cycle of the household; income was solely generated through wage labor and the goods needed to survival could only be acquired on the market. Thirdly, Van Zanden argues that the post-Black Death flexible labor market enabled the possibility of newlyweds to support themselves and move out of the parental household. Ultimately, the EMP is characterized by relatively low levels of authority and power of parents over their children and men over women, but by relatively large power of the capital and labor market over the household as economic unit.80 The EMP had long-term consequences on the economic performance of Northwestern Europe to which the need to make a living through wage labor, rather than by third-party support, is key. Household income was generated through wage labor by both men and women as the labor market was highly flexible as result of the population decline after the Black Death. The successful position of the newlyweds on the labor market caused them to stop relying on the income of their parents, since they could often rely on only their own income. Income was divided in the small-scale nuclear, rather than in the extended, family. As a result of the flexibility of the labor market, the investment in human capital by schooling and traineeships also became an integral element of the life cycle of the household, delaying the age of marriage but increasing ones chances on the labor market.81 For example, the EMP influenced the level of literacy; high levels of literacy logically improved one's position in the labor market. For example, in sixteenth-century Holland, 55 percent of the bridegrooms, and 32 percent of the brides could sign their name; in 1470s London the level of literacy was even higher.82

79 80 81 82

Idem, 129. Jan Luiten van Zanden, The Long Road to the Industrial Revolution, 138 - 139. Idem, 140. Idem, 129.

In contrast, in the rest of Europe in which the household structure was often not in accordance to the EMP, there existed no need for investment in human capital. Households in other parts of the continent relied heavily on the extended family. Parents and elders continued to have authority over their children, often deciding who and when to marry and how the future household would earn its income. There existed no financial incentive to actively participate in the labor market or improve one's position in it, since marriage itself was perceived as an financial transaction. This resulted from the importance of dowries: marriage was an economic transaction rather than an action of love, and thus is the financial interest prevailing in the decision in who marries who. Therefore, women did not participate in the labor market, often leaving the household income to rely solely on the dowry and the income of the husband.83 The marriage was hence an economic transaction in the interest of both families; the by the newly household accumulated wealth contributed to the wealth and social position of both families. Marriage was hence often just a step in the social and financial ladder of two families, rather than a chance of the parental household to lower their own financial burden. There was no practical need for all members to successfully participate in the labor market. The merit of skill In The skill premium and the 'Great Divergence', Van Zanden approaches Lindert et al., as well as his own emphasis on the importance of human capital accumulation, from a theoretical viewpoint of the skill premium. Basically, Van Zanden's argument remains the same; Northwestern European exceptional economic development was due to its relative advantage of the capital and knowledge intensive economic structure, or a better level of the skill premium. However, the approach offered in his article is more workable for this research than the demographic or cultural value-focused approaches; the skill premium is a clearly quantifiable, measurable and a comparable unit. Van Zanden defines the skill premium as the remuneration for investing in human capital. It is the compensation for not earning any income during the period of traineeship, the costs related to the traineeship itself and other expenses.84 In the long run, the skill

83 Idem, 110 - 112. 84 Jan Luiten van Zanden, â&#x20AC;&#x2DC;The skill premium and the 'Great Divergence'', 123.

premium will thus be determent by four factors determining the cost of producing skilled labor. Firstly, by the cost of training, including the income that is not earned during the period of training; secondly, by the chance that the apprentice will eventually successfully finish his training and acquire a skilled job; thirdly, by the number of years the trainee will work as skilled worker; and finally by the interest rate linking future earnings to the present. The skill premium can be calculated by taking the percentage difference between the nominal wage of skilled craftsmen and unskilled laborers.85 This percentage difference is an indication of the difference in wage between the skilled and unskilled laborer.86 For example, the average nominal silver wage of unskilled laborers in London in the period 1300 - 1349 was 2,876 grams of silver per day. The average nominal silver wage of skilled craftsmen, however, was 6,424 grams per day. The difference between the two is 3,548 grams per day; hence the percentage difference, the skill premium, between the two wages is 123 percent. Important to note is that Allen has provided two extensive data collections on the nominal silver wages of both types of laborers in multiple European cities. Van Zanden has made extensive use of these collections in constructing the data included in his graph presented in appendix 1, the content of which will be dealt with later on in this thesis. The contrast between Clark and Van Zanden is apparent; while both scholars stress the importance of human capital, Clark approaches the issue from a cultural and social perspective, while Van Zanden does so from a mere economic and quantitative viewpoint. The latter is therefore in the case of this research more suitable since it enables thourough quantitative research. However, both Clark and Van Zanden observe that economic development appears to result in a decline of human capital and thus the skill premium. Amongst other things, this suggests that in the process of economic development, the supply of human capital is usually more rapidly growing than the demand for it.87 This point is in consensus with the argument made by Becker, Murphy and Tamura (1994) that human capital (the level of which measured in the skill premium) creates new human capital, which on its turn enables economic growth. The skill premium is thus always ahead of economic progress.88

85 86 87 88

Idem, 123. Idem, 127. Jan Luiten van Zanden, â&#x20AC;&#x2DC;The skill premium and the 'Great Divergence'', 147. G. S. Becker, Human Capital (Chicago 1994) 324

The skill premium is therefore an indicator of three factors related to relative successful economic performance and development. Firstly, the skill premium gives an indication of the costs of traineeships and thus of the accessibility of training to unskilled laborers. It indicates how accessible it was to become a skilled laborer to for example the lower classes; low skill premiums indicate a low costs of traineeships and hence affordability. Secondly, the skill premium gives an indication of the efficiency of the economic institutional framework. The information flow between demands on the labor market and the supply of trainees and newly graduated skilled workers is relatively more efficient once the skill premium becomes lower. Thirdly, it gives an indication of the formation of human capital in an economy rather than the demand for skill labor. High skill premiums do not indicate that an economy has no demand for skilled laborers; it only indicates that the institutional framework is inefficient at connecting trainees and the labor market and that the costs of training are too high. This concurs with new growth theory suggesting that human capital formation is a key determinant of long-term economic performance.89 Next to that, it also concurs with North’s and Weingast’s emphasis on the efficiency of institutions. Ultimately, low skill premiums reflect the fact that households have access to relatively efficient labor and capital markets, and institutions for the formation of human capital.90 Focusing on the development of the skill premium in the period 1250 to 1600, there are two main observations to be made, indicating that there also exists a Little Divergence between the skill premium of Northwestern Europe and the skill premium of the rest of the continent. In other words, the skill premium also shows a Little Divergence and hence is an indication of this process. In appendix 1, an overview of the development of the European skill premium over 50-year periods is provided by Van Zanden. This table is divided into five geographical European regions; Western Europe, Central Europe, Southern Europe, Eastern Europe, and Northern Europe. The two trends observable in this data show striking resemblance to the trends in the development of the real wage and standard of living observed by Allen is his 2001 article. Firstly, in the first half of the fourteenth century the skill premium in most parts of Europe was relatively high, at a rate of 100 to 150 per cent of the wage of an unskilled laborer.91 This indicates that the cost of training was relatively 89 Jan Luiten van Zanden, ‘The skill premium and the 'Great Divergence'', 144. 90 Idem, 147. 91 Jan Luiten van Zanden, ‘The skill premium and the 'Great Divergence'', 129.

high and thus often inaccessible for the unskilled. In the middle of the fifteenth century, the skill premium dropped until an average level of 50 to 60 per cent was reached. 92 Secondly, these fifteenth-century levels remained constant in the Northwestern and central part of Europe until the late eighteenth and nineteenth centuries.93 In the rest of the continent, there is a tendency perceivable towards fluctuating but mostly slowly increasing skill premiums. For example, in Southern Europe, the lowest skill premium was reached in the period of 1450 to 1500 when it reached a level of 44. In the three centuries afterward, the skill premium slowly increased with a rate of 26 percent per century.94 The skill premium in these parts of Europe seems to develop in accordance with demographic developments; the general population increased in the sixteenth century, stabilized in the seventeenth century, and continuously increased from the eighteenth and nineteenth centuries onwards.95 The Little Divergence in skill premium reflects both the development of the real wages and standards of living observed by Allen as well as an additional divergence in the efficiency of labor and capital markets and institutions for the formation of human capital. The analysis of the skill premium is a good proxy of the factor endowments and the quality of the local economic institutional framework. The standards of living Allen observed to diverge on an intra-European scale are thus best accounted for by differences in the skill premium. The empowerment of interest rates

Secondly, both Clark and Van Zanden emphasize a connection between the decline of the Northwestern European skill premium, and the strongly declining interest rate in the century after the Black Death.96 The development of the interest rate is hence an element of interest on which the human capital-focused approach to the Little Divergence hinges. Van Zanden, stressing the relationship between the skill premium and the interest rate, expresses the relation between the skill premium and the interest rate as follows: "Given the fact that becoming a carpenter or a mason meant acquiring the same skills before and after the Black

92 Idem, 129. 93 Ibidem. 94 See appendix 1. 95 Jan Luiten van Zanden, â&#x20AC;&#x2DC;The skill premium and the 'Great Divergence'', 129; G. Clark, A Farewell to Alms (2007) 180 - 181. 96 Jan Luiten van Zanden, â&#x20AC;&#x2DC;The skill premium and the 'Great Divergence'', 133.

Death, the most straightforward explanation for the post-1350 decline of the skill premium in construction is that interest rates in Europe declined sharply in this period. This induced households to increase their investment in human capital, which led to the observed change in the skill premium. The fall in the skill premium occurred in different parts of the Continent, which is consistent with the fact that all over Europe interest rates seem to have halved in the century or so after the Black Death."97 The quote above shows that in Van Zanden's argumentation, the development of the skill premium is strongly linked to the development of the local interest rate. Studying the interest rate is interesting because it gives an indication of the security of property rights, the constitutional nature of the local polity, the polity's techniques of debt repayment, and of the flexibility and level of integration of capital markets.98 These five elements are stressed by, respectively, North and Weingast whom have been discussed previously, David Stasavage, Stephen Epstein, Lindert et al.99 Each of these four scholars, whom have not yet been discussed, will shortly be reviewed. However, Epstein and Stasavage are the most interesting in the topic of this research since they clearly stress the political nature of interest rate rather than an economic one. Firstly, Lindert et al. have suggested that the post-1450 fall in the skill premium in Northwestern Europe, indicating relatively high levels of human capital, resulted from favorable factor endowments in the region, i.e. low interest rates. Relatively flexible capital markets in Northwestern Europe directly resulted in low interest rates which eventually led to high levels of investment in human capital and thus to relatively low skill premiums.100 Hence, the Northwestern European skill premium, as both Lindert et al. and Van Zanden argue, could remain stably low after the 1450s since it reflected the level of the interest rate and thus flexible capital markets, while in the rest of Europe strong fluctuations in the skill premium continued to exist because this reflected the fluctuating development of local interest rates there.

97 Jan Luiten van Zanden, â&#x20AC;&#x2DC;The skill premium and the 'Great Divergence'', 135. 98 Stephen Eipstein, Freedom and Growth; The Rise of states and markets in Europe, 1300 - 1750 (2000) 17; David Stasavage, States of Credit; Size, Power, and the Development of European Polities (2011). 99 Stephen Eipstein, Freedom and Growth; The Rise of states and markets in Europe, 1300 - 1750 (2000) ; David Stasavage, States of Credit; Size, Power, and the Development of European Polities (2011); North, D. C, Barry R. Weingast, 'Constitutions and Commitment: The Evolution of Institutions Governing Public Choice in SeventeenthCentury England' in The Journal of Economic History vol. XLIX (1989). P. Lindert et al. Preliminary global price comparisons, 1500 - 1872. Paper at session on World Living Standards since the 13th century. XIIIth Economic History Congress, Buenos Aires (2002). 100 Jan Luiten van Zanden, â&#x20AC;&#x2DC;The skill premium and the 'Great Divergence'', 133, 134.

Secondly, in Freedom and growth, Stephen Epstein's 2000 book, the development of the interest rate is connected to technological rather than political disparities in the financial and fiscal institutions at the disposal of the borrower.101 This includes on a secondary level the flexibility and liquidity of local bond markets. Hence, Epstein disconnects the development the interest rate from market behavior or Smithian systems of demand and supply, but connects it to the influence of the polity. Epstein stresses the merits of centralized polities, arguing that the cooperation problems connected to institutional change in favor of economic performance are best solved by a centralized power forcing change upon agents, rather than fragmented polities struggling to cope with the interests and privileges of its fragments.102 The state supplies goods like defense, law and order and security of property rights. These institutional goods influence local economic performance since they influence the scale of markets. In order for markets to operate effectively, the institutional framework, as stressed by North, needs to be altered continuously. Centralized markets do so more effectively since they do not have to cope with individual institutional arrangements, like the medieval freedoms and the early modern privileges.103 The development of the interest rate is, according to Epstein, thus connected to the technological capacity of the state to repay its lenders. States with more efficient financial, fiscal, banking and administrative systems and structures are able to raise more cheap capital because they can simply honor their debts more easily.104 The centralized state, unconstrained by different counteracting interests and privileges, is hence more efficient in debt-repayment than the fragmented state, unable to raise funds under its various fragments. Thirdly, in his 2011 book States of credit the American economic historian David Stasavage has focused on the development of the interest rate on public debt, connected to the nature of local polity. The development of the interest rate in States of credit is perceived as a solely political process. Stasavage argues that public debt systems emergence once the state meets a few conditions: it must have a monetary source of revenue, it must be faced by expenditure shocks like sudden wars of famines, and finally it must be constrained from defaulting its debts.105 The latter is most important since it influences the available amount

Stephen Eipstein, Freedom and Growth, 24. Idem, 8. Idem, 7, 8. Idem, 24. David Stasavage, 'Why Did Public Debt Originate in Western Europe?', reviewed for publication in Fiscal Regimes and the Political Economy of Premodern States (2013) 3. 101 102 103 104 105

of credit on the market; who would logically lend money to a state that will possibly not repay? These constraints keep the state from defaulting its repayment obligations. A possible imaginable constrain is the fear of losing a reputation as a trustworthy lender.106 However, reputation is easily bypassed in times of financial needs and thus has many implications. Stasavage hence argues that a good set of informal institutional and formal constitutional constrains, provided by a representative political assembly, assures that the state will repay its debts.107 Stasavage goes beyond Epstein's emphasis on the nature of polities and their influence on the interest rate by arguing that the interest rate is connected to constitutional constrains binding the state to repayment. In Epstein's argumentation, efficient administrative structures enabling easy fund-raising and repayment do not offer any guarantee of repayment; states might chose not to repay for an almost limitless amount of reasons. Stasavage however, stresses that the state's ability to chose either to repay or to default is connected to the internal nature of the state; the constitutional constraints binding it to repayment. Next to that, Stasavage seems to be highly influenced by North and Weingast, who also stress the importance formal and informal institutional structures binding states to repayment; their emphasis on the institutional arrangements following the Glorious Revolution in England basically argues the same as Stasavage does. The presence of a representative, parliamentary assembly will, according to Stasavage, influence the interest rate on public debt, connected to the assurance of debt repayment. Stasavage stresses the advantage of city-states over monarchies in their accessibility to credit. The financial advantage of the city-state over the large-scale monarchy continued to exist after the 1500s.108 Frequently meeting representative assemblies had better access to credit, dependent on two underlying factors: geographical compactness and merchant dominance. The geographical scale of the polity influenced the intensity of the political representation. Throughout the period studied in this research, 1250 to 1600, political representation has been a problem of scale.109 The size of the population and the terrain constrained the representative assembly to fully represent all interests and rule effectively. Next to that, these same factors also determine the costs of the assembly. Hence,

106 107 108 109

Ibidem. David Stasavage, States of Credit, 1. Idem, 10. Idem, 11 - 14.

small-scale autonomous cities had a financial advantage over large-scale monarchies because they were effective in constructing a representative assembly in favor of all interests.110 In addition, frequently meeting assemblies could keep a close watch on the development of the stateâ&#x20AC;&#x2122;s incomes and expenses. Once the state came under financial pressure, the assembly could take action before the pressure crushed the system. Scale in city-states was thus not as much of a problem as it was in large-scale monarchies. The strong presence of merchant elites in the assembly also affected the interest rate. Frequently, geographically unconstrained assemblies in city-states were run by merchants, while the monarchy lacked political representation of the interests of those investing in the public debt.111 Merchants were the individuals who invested in the public debt, while those paying the indirect taxes on the public debt had no direct political influence. It was hence in their personal interest to not have the state defaulting its repayment obligations since these obligations were repaid to the assembly members themselves. The small-scale merchant city-state hence had an institutionally fully efficient public debt system. Defaults were avoided as much as possible by frequently meeting representative assemblies since the individuals taking part in these assemblies had personal interest in the repayment of the debt. Stasavage ultimately argues that the political institutional framework of the polity influenced the development of the interest rate. The institutional framework focused on debt repayment, due to for example the presence of investors in the political decision-making process, influenced the level of the interest rate. Polities strongly focused on repayment logically had lower interest rates than those who often defaulted their obligations; the first is a valuable investment while the latter is most likely to be a waste of money.

110 David Stasavage, 'Why Did Public Debt Originate in Western Europe?, accessible on http://politics.as.nyu.edu/object/DavidStasavage, 8. 111 David Stasavage, 'Why Did Public Debt Originate in Western Europe?, 9.

The goal of this second chapter is to explain the methodology concerned with the construction of the data series on interest rates, needed to analyze the connection between two types of variables: the skill premium which translates into the Little Divergence, and the interest rate. This chapter aims to elaborate on the methodological choices made while constructing this series in advance of the statistical exercises in the following chapter. Data on the skill premium has been made readily available by both Jan Luiten van Zanden and Robert C. Allen. Allen, for example, published a large data series on annual skilled and unskilled wages of construction workers from 1250 to 1800 in a large variety of different European cities. Quantitative data on the skill premium is thus available in large quantities and can easily be reconstructed for specific years and for specific areas using Allen's data. There is, however, a lack of data on Europe-wide developments of the interest rate on public debt over long periods of time that can compete with the extensive data on the skill premium by Allen. The effort to construct a data series on the interest rates on public debt throughout Europe, as undertaken for this study, is hence a necessary evil. Some research providing data on interest rates is done by Stephen Epstein, published in Freedom

and growth. The rise of states and markets in Europe, 1300 - 1750 (2000), and by David Stasavage who supplemented and corrected Epstein's data somewhat in his 2011 book

States of credit. However, both Epstein's and Stasavage's data is often unusable to achieve the goals set in this thesis; they only provide data on a few specific years but mostly over long and inconsistent time periods, while making inconsistent use of averages. New research on the development of interest rates on public debt is thus a unique contribution to earlier research. This study focuses on urban interest rates over the period 1250 - 1600, and continues where Epstein and Stasavage left off. For example, some of the sources used by Epstein have been revisited. The data series focuses on 25 different European autonomous city-states and cities part of larger political territories. Because of this large variety of different items covering many geographical regions and polities, and a massive amount of newly available annual data, this series enables sound analysis of the differences in intra-European development of interest rates on public debt and its influence on the skill premiums in the same cities over the period 1250 - 1600. 40

This chapter is divided into three parts. The first part focuses on the blueprints of the data series compiled for this research. It will answer the question to why this study focuses solely on urban public debt system. In addition, it will also focus on the way this data series on European urban interest rates over the period 1250-1600 was compiled. The second part of this chapter focuses on the research by Stephen Epstein and David Stasavage and their data. This part will thus provide an overview of the structural differences between the data used in this research and the data collected by Epstein and Stasavage. The third part of this chapter deals with the methodological implications of the research on interest rates on public debt in this research, and with the implications of using data in statistical comparative analysis. This part therefore deals with two major methodological factors: the categorization of data in different geographical regions, and the academic implications of using the newly collected dataset. The latter focuses on the methodological choices that need to be made in order to correctly engage in statistical comparative analysis. The overall results of this new data series are presented in appendix 2. This appendix provides an overview of the entire dataset, compressed in ten-year averages in order to maintain order in the vast amount of data available. The data on interest rates used in this research does not consider rates of inflation. The rate of inflation, Epstein argues, defines he deviation of the state's relative purchasing power, once including all fluctuations, can be expected to equalize over the long run.112 The analysis and visualization of the development of the interest rate as portrayed by the data series will be presented in chapter three. The blueprints

The data collected for this research deal with the interest rates on public debt of 25 European cities, including both autonomous and non-autonomous (part of monarchies, duchies or other larger territorial political entities) cities over a period of three hundred fifty years from 1250 to 1600. As the list of cities will indicate, these cities cover a variety of European geographical regions, both Northwestern Europe and the rest of the continent. The cities included are Antwerp, Arras, Barcelona, Basel, Bologna, Bremen, Bruges, Cologne, Dordrecht, Dortmund, Douai, Florence, Geneva, Genoa, Ghent, Hamburg, Holland, Madrid, Mainz, Milan, Nuremberg, Piedmont, Siena, Stuttgart, Venice, and Zurich. The decision to 112 Stephen Epstein, Freedoms and Growth, 20 - 30.

include Holland needs some clarification since Holland is historically a territorial state and not a city. It is included because Holland, as territorial state, consisted of various autonomously operating cities. The state Holland hence was a conglomeration of several smaller semi-independent cities, cooperating in the States General and as such levying taxes and issuing public debts. Most data on Holland, however, comes from the debts issued by the city of Edam, due to the easily accessible sources.113 The debts issued by the city of London for example, however, are not included since the city was part of the English royal financial system. As North and Weingast have argued, England only adapted and integrated to continental capital markets following the 1688 Glorious Revolution. Hence, London's presence in the series would corrupt any conclusions drawn from the collected data. All other cities are chosen following the example of Epstein and Stasavage.114 This is because of practical reasons since Epstein and Stasavage already collected a profound list of available literature on these cities. It was therefore from time to time possible to revisit their source material and recheck the data they have used. By doing so, it is possible to make two remarks about their dataset and data collecting strategy. Firstly, on many occasions, it turned out that the data used by both authors was often faulty or incorrectly adopted. For example, both authors often seem to ignore years for which multiple rates are available. Next to that, they also seem to use long-term averages as data for single years which are not mentioned in the sources. Secondly, both authors seem to be quite inconsistent in referring to the origins and nature of their data. While interest rates can be of short-term or long-term nature, coerced loans or life annuities, Epstein and Stasavage often seem to arbitrarily choose data to fit in into their stories. The authors also seem to make use of often inconsistent sources. Not all literature presents the data in simple graphs or tables, but both Epstein and Stasavage from time to time seem to prefer to calculate interest rates from annual municipality accounts without making any mentioning of doing so. This has the possible implication that the interest rates deriving from these calculations might have been influenced by factors other than institutional factors, making these rates unable to represent institutional efficiency over time. In the data series collected for the purpose of this research it was attempted to correct most of these flaws. 113 C.J. Zuijderduijn provides in his book Medieval capital markets. Markets for renten, state formation and private investment in Holland (1300-1550) Global Economic History Series 2 (Leiden/Boston 2009), an almost perfect data series on annual interest rates on the urban debt of Edam. This series does so, even for years in which there is no other data available on other cities. 114 Stephen Epstein, Freedoms and Growth, table 2.1; David Stasavage, States of Credit, 31, 39.

On each city, data is collected over the entire period the item in question issued public debts that contributed to the city and not to larger polities. Hence, on some items it was possible to collect data over the entire course of the studied period, while on others it was only possible to collect data on a few decades. For example, the item Barcelona issued public debts over the course of two hundred eighty years from 1360 to 1680, while the item Arras only issued a public debt in one year, in 1241. Secondly, since the focus is solely on cities issuing public debts, cities that became absorbed into larger polities and thus only issued debts in the context of this larger polity, are only included from their initial issue of a debt till the last one before they became absorbed. This way, some cities might have issued debts long after their absorption but not as city but as part of a larger polity. For example, Florence is only included from 1347 to 1493, yet there continued to be debts issued in the city after this period but these debts are not included since from that moment on, these debts are included by the state of Tuscany. There is an important question that can be posed concerning the collected data, namely: why is there such a profound focus on nominal perpetual interest rates on public debt in this research and not on interest rates on private loans? It appears be more logical to focus on the interest rates on private capital markets since the focus is on investments in human capital by households and households often only had access to private capital markets. However, for this research it is chosen not to do so. First of all since interest rates on (urban) public debts are often long-term developments and thus a measurement of the borrower's financial and institutional credibility over time.115 In a way, the level of the rate indicates the lenders trust in the economic structure in which he operates, and thus also the structure he invests in by investing in human capital. Interest rates on public debt are set at a level which the buyer would deem credible and thus more reflect long-term developments.116 Cities however did not seem to set rates arbitrarily since there is a lack of evidence of resistance by wealthy elites against forced loans; they thus did not seem to consider the rates on forced loans extortionate.117 Secondly, the choice to solely focus on the public debts of cities takes away the implications of analyzing interest rates without any direct connection to households. By focusing on those of cities, logically households

115 Stephen Epstein, Freedom and Growth, 18. 116 Ibidem. 117 Idem, 19.

borrowed money to the municipality, it is possible to draw conclusions about the way households are influenced by the interest rate they directly benefit from. The importance of urban public debts on the personal lives of citizens, and thus the influence of it on their incentives is best illustrated by an example from historical reality. Jeffrey Fynn-Paul showed for example in his study of the Van der Muelen family portfolio that wealthy citizens often invested in urban public debts throughout the seventeenth and all the way up to the eighteenth century.118 They did so increasingly on an international level. The Van der Muelen family was a prominent Dutch family of investors, making most of their income from investments in public debts, companies like the V.O.C., and other securities. Urban public debt, as Fynn-Paul's study thus indicates, hence remained an important type of investment for investing citizens like the Van der Muelens, that invested often and almost professionally. In the late seventeenth century for example, they profoundly invested in debts issued by the city of Den Haag, and in the early eighteenth century in debts issued by the city of Danzig.119 Giant's shoulders

In what way does the use of data series collected for the purpose of this research move beyond the data collected and used by Stephen Epstein and David Stasavage? Some remarks on the practical way Epstein and Stasavage have collected their data were made earlier in this chapter, as well as remarks on the merits of their extensive use of the available literature. The actual use of their data series has not yet been touched upon. Epstein's and Stasavage's main argument has already been elaborated on in the first chapter. However, it is necessary to provide short summaries of both arguments in order to understand the motives of their data series. Firstly, Epstein used the data he collected to stress the merits of centralized states in successfully implementing economic institutional change.120 The development of interest rates according to Epstein relates to the purely technological capacity of the polity to repay its debts. In a sense, Epstein stresses only practical implications to state behavior refraining

118 J. Fynn-Paul, The Evolution of Eighteenth-Century Investment Capital from an Investor's Point of View: The Van der Muelen Family Portfolio, 1738 - 1814. 119 Ibidem. 120 Stephen Epstein, Freedom and Growth, 24.

it from defaulting.121 According to Epstein, political disparities therefore play only a minor role in the fiscal and financial institutions and structures at the disposal of the borrower. The efficiency of these structures, however, does play a major role.122 The more efficient the polity's administration is in structuring the debt and keeping accounts of income, expense and financial planning, the more likely it becomes that the polity will and is able to repay, which will lower interest rates.123 More or less centralized polities, unconstrained by many minor freedoms and privileges, are relatively more capable of shifting the institutional structure and quickly adapting its institutional efficiency; it has no major constrains to sudden change in administration in order to improve its fiscal and financial technical tools. The figures Epstein has compiled focus on the nominal interest rates paid by various European governments between 1350 and 1750, and are categorized by the constitutional nature of the regime: Epstein makes a distinction between monarchies and cities and urban republics.124 Next to that, all the data he collected refers to interest on long-term debts.125 That way, Epstein is able to measure the borrower's financial and institutional credibility more accurately. The core reason for Epstein to collect these figures is hence solely to provide proof to his argument of centralized governments' capacity to influence institutional efficiency to be technologically capable to repay and thus technologically keep interest rates low. Ultimately, the factual development of the interest rate is deemed by Epstein as unimportant relative to the nominal level. Secondly, Stasavage has a very similar approach to his data as has Epstein, deeming the nominal level of the interest rate at specific points in time to be of more importance than the development of the rate over time. Therefore, Stasavage builds partly upon Epstein's main argument, but puts emphasis on the constitutional nature of each state. Stasavage has not collected much additional data since he mostly continues on Epstein's dataset.126 However, Stasavage does not focus on the technical factors connected to debt repayment, and thus uses Epstein's data structurally different. Instead, he stresses the political and constitutional factors contributing to the level of likeliness of repayment by the polity.127 The interest rate is therefore strongly connected to these factors; the better they 121 122 123 124 125 126 127

Idem, 17 -20. Idem,18 - 19 Idem, 17 - 19. Stephen Epstein, Freedom and Growth, 16 - 20, table 2.1. Ibidem. David Stasavage, States of Credit, Introduction. Idem, 31, 39.

secure repayment, the more trust there is that debts will be repaid and thus the lower the interest rate will be. The presence of frequently meeting representative assemblies, occupied by money-lending merchant elites, is a key element. The use of interest rates in Stasavageâ&#x20AC;&#x2122;s work is hence mostly evidence for the constitutional nature of polities influencing the level of the interest rate.128 Low interest rates are thus connected to polities with profound and intensively-meeting representative assemblies, while relatively high interest rates are connected to infrequently meeting assemblies or to absolute monarchies. Yet again, similar to Epstein, it does not matter how interest rates develop through time; Stasavage emphasizes solely the absolute level.129 The data series compiled for and used in this research moves beyond the use by Epstein and Stasavage in three major ways. Firstly, while Epstein and Stasavage solely focus on the level of the interest rate and not on its development through time, this research will put an important emphasis on developments, fluctuations and relative differences in time and space. In order to perceive any connection between the relative developments of the skill premium (investments and change in the level of human capital) resulting in the Little Divergence, it is important to focus on the development of the interest rate. In the third chapter, this point will play a dominant role. For now, it is important to note that the data will, in contrast to previous datasets, be used to perceive developments through time and space. Secondly, the data used in this research will, in contrast to Epstein and Stasavage, be used in connection to factors having pure economic effects like the skill premium. Epstein and Stasavage only use their data in relation to political or technical characteristics of polities, but not to factors directly influencing economic performance. Thirdly, for the one of the first times a connection will be made between the debate on the Little Divergence and the development of interest rates on public debt. The development of the skill premium is the link between the two, but it has almost never been tried to connect debts to economic performance. Epstein and Stasavage refrain strictly from making any arguments on either the Great or the Little Divergence regarding their visions on interest rates or the institutionalconstitutional nature, and technological capacity of polities.

128 Ibidem. 129 Idem, 39.

Decisive actions

The methodological implications of the research on interest rates on urban public debt in this study and the implications of using data in statistical comparative analysis will be reviewed in this section. Thus it consists of the two major methodological decisions that have to be taken before analyzing the data: how to connect the data to the Little Divergence, and how to deal with the statistical implications like outliers and averages of all kinds? First of all, the debate on the Little Divergence expressed in chapter one deals almost solely with European geographical regions, but a uniform definition of what is included in these regions lacks. Van Zanden for example emphases the exceptional economic performance of Northwestern Europe, while Robert C. Allen and Gregory Clark both have stressed the exceptionality of Northwestern Europe or the North Sea area.130 However, the data on interest rates collected for this research does only deal with individual cities. Therefore, a geographically uniform definition and division of which cities are part of the economic best performing region needs to be made in order to analyze the regional differences in the skill premium, to enable sound conclusions on the Little Divergence which solely focuses on Northwestern Europe.131 There is apparently some tension between the definitions used by both authors of the European region of relative highest economic performance. Is Allen's Northwestern Europe similar to Van Zanden's Western Europe, and which cities include the vaguely defined rest of the continent? In Van Zanden's often-mentioned article, the cities of London, Oxford, Ghent, Antwerp, Amsterdam (included as Holland) and Paris are included in the category Western Europe. This is the category perceived by Van Zanden as the region that is relatively performing best. There are however, two major implications with this division. Firstly, including England and Paris (France) into this region majorly corrupts any conclusion drawn once connected to their interest rates. As argued before, England only subjected to European continental capital markets after the 1688 Glorious Revolution, which took place after the period of study in this research. Before the Revolution, interest rates where enormously high

130 Jan Luiten van Zanden, The Long Road to the Industrial Revolution, 95, Robert C. Allen, 'The Great Divergence in European Wages and Prices from the Middle Ages to the First World War', 411 - 415. 131 Robert Allen stresses the wage inequality between Northwestern Europe and the rest of the continent, it is hence illogical to perceive this to be incorrect and to expand his emphasis on Northwestern Europe to include the geographically larger region of Western Europe as Van Zanden does. Hence, in this research, the emphasis on Northwestern Europe will be continued.

at about 10 percent (while Ghent in 1348 was already at a level of 4.86) and their connection to institutional structures questionable.132 Since the interest rate previous to the 1688 Revolution was connected to an institutional inefficient framework that kept interest rates at an exceptionally high level, England should not be perceived as an individual category but as an outlier in the period of study. France on the other hand seems to have had a history of debt default and of unstable and insecure institutional fiscal and financial structure and should hence be perceived as an individual category, disconnected from the category Northwestern Europe. This contrasts Clark's perception, who perceives France to include the North Sea area. For example, in the course of the fourteenth century, the kings of France defaulted twice, once in the course of the Hundred Years' War and again in the period 1285 - 1314.133 Up into the fifteenth century, France could only borrow at a relatively high annual rate; rates up to 42, 56 and a 100 percent were not uncommon.134 In the sixteenth century, the French Crown often even issued forced loans without any form of interest to the lender.135 Hence, it is clear that French interest rates are completely disconnected from any form of institutional structural constrains and should thus be perceived as a category of its own. Taking France as an individual category only sharpens the development of Northwestern European interest rates and hence provides a more clear picture of the workings of the institutional framework in that region. By doing so, the basic structure of the Little Divergence is not changed; profound analysis is still possible. Eventually, taking English interest rates out of the equation and perceiving French interest rates as an individual category leaves interest rates in the Low Countries as the sole region of focus in this research. However, does this mean that it is impossible to discuss Northwestern Europe as a single integrated region of economic performance? Focusing on Allen and Van Zanden's data on skill premiums, it becomes clear that English skill premiums differed not much from those in the Low Countries.136 According to Van Zanden, it is hence possible to speak of a similar level of economic performance, indicating that Northwestern Europe is a single economic unit.137 The economic structure of the North Sea was to a large extent complementary and integrated; English wool, for example, was sold and processed 132 North, Douglass C, Barry R. Weingast, 'Constitutions and Commitment: The Evolution of Institutions Governing Public Choice in Seventeenth-Century England' in The Journal of Economic History vol. XLIX (1989) 820. 133 Homer, Sydney, Richard Sylla, A History of Interest Rates, Fourth Edition (2005) 96, 104. 134 Idem, 104. 135 Idem, 110. 136 See appendix 1 and 3. 137 Jan Luiten van Zanden, The Long Road to the Industrial Revolution, 27, 29, 39, 100, 168.

on markets in Flanders and Holland.138 Even though the interest rate in England behaved in different patterns relative to those in the Low Countries, it is reasonable to assume that capital and labor markets were to some extent integrated as well; skill premium of both regions thus indicate towards similar processes. English households, as the Van der Muelen family portfolio indicates, could for example easily invest in debts issued in the Low Countries and thus be influenced by incentives provided by capital markets in the Low Countries. Next to that, the inefficient English institutional structure resulting in relatively high interest rates gives no indication of the efficiency of the labor market; trainees could still easily have acquired a job, which also influences the level of the skill premium. The focus in this research will be on the development of the skill premium of Northwestern Europe, the region to include England, the Low Countries, while this will be compared to the development of the interest rate of solely the Low Countries. This way, the English inefficiency to control interest rates is avoided and France is completely perceived as an individual economic unit. Since this research is concerned with relative differences between Northwestern Europe and the rest of the continent and not between individual regions, it does not matter which cities are included into which category, other than those included into the region Northwestern Europe; in these research data the skill premium in Van Zanden's regions will be compared to data on interest rates within the same geographical region when there is no direct data available. There is data on skill premiums available on specific regions provided by Allen. These figures will be compared to the interest rates in the same region, but not necessarily to the same city. In the case that there is no direct one-on-one data available on both the skill premium and the interest rate, there is no direct implication of using data on the geographically nearest city on which the missing data is available. For example, Van Zanden provides data on Strasbourg in the category Central Europe. However, the dataset used in this research provides no data on interest rates issued by the city of Strasbourg. Hence, the data on interest rates issued by the city of Mainz, on which there is data available from 1400 to 1444, will be used. Appendix 3 will provide a table containing an overview of all regional categories, stating for each region from which city the data on skill premium and from which city data on the interest rate will be used.

138 Idem, 100.

It is important to focus on the methodological implications of dealing with raw data of this type. Two main question arise: firstly, how to deal with outliers; and secondly, how to deal with years on which there are multiple and contradictory data available? In statistics, outliers are observations that are distant from other observations. This might have resulted from errors in the way the data is collected or from other factors like extreme historical circumstances. The latter might often be factors not within the scope of this research, such as wars, natural disasters or other events generating major demand for capital and will hence not be dealt with in the sense that their specific development will not be discussed. Outliers will eventually corrupt any conclusion since they are intrinsically faulty or influenced by external factors. Hence, they need to be excluded most of the time. The collected dataset contains two major outliers; the entire item England, and the item Nuremberg in 1553.139 The first has already been discussed in the previous section of this chapter, since it dealt with the categorization of cities. Nuremberg however, was not. In 1963, E.B. Fryde and M.M. Fryde mentioned an interest rate for Nuremberg of 12 percent.140 This rate, relative to those in other European cities at the same time as well as to Nuremberg rates in the decades before 1553, seems to be exceptionally high. For the same year, in Cologne a rate of 3,5 is mentioned, while in Venice, Genoa and Barcelona at one of 4 percent are mentioned, all of which significantly lower than Nuremberg's rate of 12 percent. These rates, from the same point in time but from different places, confirm the exceptional level of Nuremberg and thus also that this rate is an outlier. Next to that, rates in the 1540s were also at the European average level of 5 percent, indicating a declining pattern of rates over time. However, the rise to 12 percent is interesting, and most likely due to external historical reasons irrelevant for this research. Hence is it logical to exclude it from the overall analysis. In the case of Nuremberg in 1553, there was only one figure available in the vast amount of consulted literature, but what if there are multiple and or contradicting data available? The availability of multiple figures in the literature would have avoided Nuremberg's rate of 1553 to be included in the dataset; it would have provided the opportunity to include better figures. More common, however, is the availability of multiple figures in the literature. Often, two, three or even more rates are mentioned. In such cases, 139 See appendix 2. 140 Fryde, E.B., M.M. Fryde 'Public Credit, with special reference to North-western Europe' in The Cambridge Economic History of Europe; Volume III Economic organization and Policies in the Middle Ages (1963).

it has been decided that the average rate of all these figures is included in the dataset. To include the lowest number would seem like the item had an enormously efficient institutional structure and technological apparatus to repay its debts. Hence, including low figures would corrupt the overall development of items' interest rate over time. Including the highest number would have a similar effect, but then indicating inefficient structures and apparatuses. The decision to take averages if multiple figures are available does not take contradictories into account. Contradictories are defined as those rates with a broad margin in between, and hence contradicting since rates cannot be either relatively low or relatively high. For example, if the rates 3,5 percent and 15 percent are available for the same year for the same item. Taking an average would still result in a, possibly, unrealistic number. In those cases, it becomes necessary to focus on long-term trends and distillate a number in line with long-term developments. For example, the literature mentions an interest rate of an average of 4,5 increasing up to rates of 10 over a period of two decades. For one specific year after these decades, both a rate of 5,6 and 26,7 is mentioned. In this research, the rate of 26,7 will be included into the comparison since it is most in line with the upward trend perceivable in previous years. The case of contradicting figures solved by following long-term trend touches upon the problem of long-term averages mentioned in the literature. For example, Epstein mentions of a figure of 4 percent in Venice over the entire early sixteenth century. Hence, annual rates of 4 percent could be included into the dataset from 1500 to 1525 (the first quarter of the century is therefore seen meant by Epstein as the early sixteenth century). There is almost no statistical implication in doing so for Epstein since he is only concerned by the absolute level of the interest rate in a specific period. However, in this research, as mentioned time and again, the development of the interest rate is emphasized. Hence, in the statistical comparison this is to be corrected since including a 4-percent rate over a period of twenty five years shows no development but a steady horizontal development. But the literature profoundly states a 4-percent rate over the entire period. Thus, in the statistical comparison these rates will be included, but only for one year in the middle of the period mentioned in the literature; the period of 1500 to 1525 for which a 4-percent rate is mentioned will be included in to the analysis in the year 1513. That way, the rate is incorporated into the dataset, and the error of long-term unrealistic stability avoided. 51

Chapter one showed that in the historiography of economic history most authors, like Gregory Clark and Jan Luiten van Zanden, argued that the level of human capital, measured in the skill premium, is of key importance to successful economic performance. Therefore, low skill premiums are an indication of relative efficient capital markets and more importantly efficient labor markets. The interest rate subsequently heavily influences the development of the skill premium. The interest rate induces households to increase their investment efforts in human capital; it influences the cost of training, the cost of not earning an income during the period of traineeship as the level of future after-training earnings. The proposed relationship between the interest rate and the skill premium is mainly of a theoretical nature. As stressed in the introduction, there are two possible expectations based on the assumed relationshio. Firstly, it could be expected that the level of the interest rate influences the level of the skill premium. In other words, it can be expected that both developments are linked. For example, it could be expected that high interest rates are accompanied by high levels of the skill premium, since this lowers the level of investments in human capital and hence results in relatively high skill premiums. Secondly, it might be expected that economic development develops in accordance with the development of interest rates. This second expectation relies heavily on the literature, stressing that economic development is influenced by the level of the skill premium, which subsequently is influenced by the interest rate. Thus, it can be expected that economic development follows the exact same pattern as the development of the interest rate, since the latter influences the skill premium and thus the development pattern of the skill premium. This third chapter focuses on these two expectations. Based on the data on interest rates collected for this research, it is possible to analyze these two expectations and to see if they are statistically accountable to historical reality. Next to that, it is also possible to construct arguments related to the research question. As the introduction already stated, the outcomes of the statistical analysis in this chapter will indicate that is most likely that there is no direct link between the development of the interest rate and the development of the skill premium or economic performance resulting in relative differences in intra-European standards of living. It is thus arguable that the Little Divergence in standards of living and 52

real wage and measured in real wages, is most likely not explainable through differences in the skill premium and does not result from differences in the interest rate. The evidence in this chapter strong suggests that there is no direct correlation between the skill premium and the interest rate, indicating that there is arguably no direct relationship between both factors. Next to that, the collected data shows a profound convergence of European interest rate, while standards of living, real wages (as suggested by Allen) diverge; there is also most likely no universal correlation between real wages and interest rates. Both developments are hence contradicting processes, without being inversely proportional. This process of Great Convergence somewhat contrasts the development in economic performance and thus of the Little Divergence, based on skill premiums or interest rates. Chapter three is divided into two major parts. In the first part, a broad overview of the results of the data collection will be presented. The converging movement of interest rates over time will become clear. Data on both Europe overall and data on each individual region will be presented. In the second part, the two expressed expectations will be tested to historical reality using the data collection on interest rates discussed in chapter 2. The statistical results used in this chapter all result from calculations using ten-year averages. By doing so, all data series used are more complete; there are less white spots in the series. Hand-in-hand

The graph in appendix 3.3 shows the development of the skill premium between 1250 and 1600. In this graph, there are two trends visible; firstly and prominently, the initial divergence between Southern and Northwestern European skill premiums; and secondly, the convergence between Central-, and Northwestern-European skill premiums and French and Southern-European skill premiums. The latter divergence is visible from the sixteenth century onwards, when Northwestern and Central European skill premiums were clearly lower than those in France and Southern Europe. The Little Divergence is thus perceivable to be between Northwestern, and to some extend Central, European skill premiums on one end, and France and Southern Europe on the other. Based on the collected data series on interest rates, included in this research in appendix 2, it is possible to also draw a graph portraying the development of the European interest rate over the same period. The results are show in figure 1 below. 53

While the overall development of the skill premium is a pattern of divergence between Northwestern Europe and the rest, the development of European interest rates over the same period is as much more a pattern of convergence across the studied regions. It is clearly visible that the development of interest rate does directly not relate to the development of the skill premium as show in the graph in appendix 3.3, simply because the latter shows a pattern of divergence and the former convergence. From the 1330s onwards, European interest rates show to have two major characteristics.

18 16 14 12 10 8 6 4 2 0

Northwester -Europe average CentralEuropean average SouthernEuropean average 1250 1270 1290 1310 1330 1350 1370 1390 1410 1430 1450 1470 1490 1510 1530 1550 1570 1590

Figure 1. The 10-year average development of the European interest rate in regions; Northwestern, Central, Southern Europe and France (1250 - 1600). Source: Appendix 2.4

Firstly, all over Europe, interest rates follow a declining pattern. While all pre-1330s rates are shown to hover between the rates of 10 and 15 percent, they quickly decline to a level between 5 and 10 percent after the 1330s, eventually reaching and maintaining a level of 5 percent from the 1460s onwards. The rate of 5 percent thus seems to be the Early Modern European norm. There are of course fluctuations, but rates never rise above the level of 10 percent again. From the 1440s onwards, for example, the data shows that there is a slight increase of rates but never profound. The second characteristic is influenced by the overall pattern of decline; all interest rates seem to do so in the same way, indicating a level of integration. In the period 1250 to 1320, there is only data available on Northwestern and Southern Europe; interest rates in both regions were relatively high but followed very similar patterns. When Central European rates are included into the graph from the 1320s onwards,

it is directly clear that these follow the exact same pattern at the exact same rates as those in Northwestern and Southern Europe.

18 16 14

12 10

Northwest er-Europe average

8 6 4 2 0 1250 1270 1290 1310 1330 1350 1370 1390 1410 1430 1450 1470 1490 1510 1530 1550 1570 1590

Figure 2. Northwestern European 10-year average interest rate (1250 - 1600). Source: Appendix 2.4

In this section of the first part of this chapter, the development of the interest rates in each individual region will be presented. Figure 2 offers an overview of the development of only the Northwestern European interest rate. In the 1250s, the rate is relatively high at a level of 15 percent. Over the course of the century, interest rates barely fluctuate, but never more than those in other regions as graph 1 indicates. From the 1350s onwards however, Northwestern-European rates slowly started their deviation. The margin in the data between the 1440s and the 1470s does not pose any problems; the overall declining trend remains clearly visible. It is interesting to note that, as interest rates in Northwestern Europe do not seem to reach the level of 5 percent that seems to be the norm. Rates remain relatively high at 8,34 in the 1570s and 7,28 until the 1600s.

Southern-European interest rates seem to reach the level of 6 percent by the 1600s as figure 3 shows. This is interesting since it suggest that the institutional framework connected to the interest rate in Southern Europe was more efficient relative to Northwestern Europe in the late sixteenth century, yet the region seemed unable to keep up with Northwestern European economic performance. It is directly clear that, relative to those in Northwestern Europe, interest rates started at in the 1260s at a significantly lower level of 5 percent going up through 10 to a maximum rate of 15 percent in the 1290s. This low initial rate is for example due to the first debt issued by Venice in 1262 at a level of 5 percent, at which point the interest rate mentioned for Arras was 15,5 percent, at three times the level of Venice. This indicates that the Venetian state had both a relatively efficient capital market, as an institutional framework resulting in trust in the repayment of the debt. At about the same time as Northwestern European rates, did Southern-European rates started declining only to go up slightly after the 1470s but never reaching its maximum level of 15 percent, in the 1290s, again. Interest rates were however from the 1330s significantly lower than those in Northwestern Europe. It is clear that after the 1380s, interest rates declined significantly. This declining pattern lasted about a century; after the 1480s, rates slowly go up. In the 1500s, interest rates reach a rate of 7,5 percent. However, this pattern of decline in the fifteenth century but increase in the sixteenth is not unparalleled.

16 14 12

Souther nEuropea n average

10 8 6

4 2 0 1250 1270 1290 1310 1330 1350 1370 1390 1410 1430 1450 1470 1490 1510 1530 1550 1570 1590

Figure 3. Southern-European 10-year average interest rate (1250 - 1600). Source: Appendix 2.4

The average interest rates in Central Europe also follow the trans-European pattern of decline in the fifteenth and increase in the sixteenth century. Figure 4 shows the pattern of development in Central Europe. The Central-European pattern slightly differs from those in Northwestern and Southern Europe; interest rates in the region followed a more strongly declining pattern than elsewhere. Eventually, interest rates in Central Europe turned out to be the lowest on the European continent. Unlike those in Southern Europe, CentralEuropean rates never reach the significantly low levels of 3 percent (Southern Europe did so in the 1440s till the 1470s), but remained stable at an average rate of 5 percent from the 1380s onwards.

12 Central Europe an averag e

10 8 6 4 2 0 1250 1270 1290 1310 1330 1350 1370 1390 1410 1430 1450 1470 1490 1510 1530 1550 1570 1590

Figure 4. Central-European 10-year averages interest rate (1250 - 1600). Source: Appendix 2.4

It can thus be argued that the development of interest rates in Central Europe was the most stable process and the lowest in Europe followed, by those in Southern Europe. French interest rates, as graph 1 shows, show little or no significant development in the period of study. For this obvious reason there will be no individual graph on France presented. The rate first mentioned in France was in the 1410s, at a level of 25 percent. This is relatively high, since in the same period on the rest of Europe, an average rate of 6,6 percent prevailed. In the 1430s to 1450s, French rates dropped to a level of 17,5 percent, only to drop in the sixteenth century to an average level of 8,33 percent. To summarize; French interest rates in the period 1250 to 1600 were relatively low, and besides decreasing from the fifteenth 57

century onwards, were not connected to those in the rest of Europe due to the disconnection of the fiscal and financial institutional framework to the thrive towards efficiency, as explained in chapter two. The overall European development of the interest rate shows a pattern arguably in contrast to the patterns of the skill premium and real wages and standards of living mentioned in the literature. In the article â&#x20AC;&#x2DC;The Great Divergence in European wages and pricesâ&#x20AC;&#x2122; (2001), Allen emphasizes the development of European standards of living and real wages, arguing that all over Europe real wages rose in the course of the sixteenth century. Wages in London and the Low Countries remained at the newly reached high level in the course of the seventeenth and eighteenth centuries, while wages in the rest of Europe returned to the low pre-fourteenth century level. The continuous stable rise of real wages in Northwestern Europe relative to the standstill and decrease of wages in the rest of the continent created the Little Divergence. In the second half of the fourteenth century, skill premiums all over Europe declined. Over the course of two hundred years, skill premiums in Southern Europe and France slowly made up for the lost ground, while those in Northwestern Europe remained at the low, fourteenth-century level. Ultimately, the development of the real wage, including standards of living, and the skill premium followed a similar pattern: Europe-wide equality pre-1350s, late fourteenth century decline, followed by stability in Northwestern Europe while in the rest of the continent, the levels slowly returned to pre-1350s levels. Interest rates, however, follow a pattern of continuous and equally-spread decline and convergence as indicated by the graphs above. In contrast to what Allen and Van Zanden have argued focused on the skill premium and real wages, interest rates started to drop decades before the 1350s. Like the skill premium, Europeanwide interest rates declined in the course of the late fourteenth and fifteenth centuries. However, in contrast to the skill premium, interest rates all over Europe remained stable at the newly reached level of an average of 5 percent; no divergence came into existence. The skill premium and the interest rate; are they interconnected?

The outcomes of the data collection presented in the first section of this chapter can be used to connect the interest rate to the skill premium and economic development. There are two possible expectations based on this relationship, which are continuously emphasized in the 58

literature. It is hence interesting to put these two expectations to the test. The first expectation is that the level of the interest rate influences the level of the skill premium. In other words, it could be expected that there exists a direct relationship between the interest rate and the skill premium. Declining interest rates provide more incentives for households to invest in human capital than decreasing interest rates, as both Clark and Van Zanden argue. Hence, it could be expected that there exists a correlation between the development of the level of the interest rate and the development of the skill premium as expression of the level of the human capital in a society. Based on the data collection of European interest rates and the data on the European development of the skill premium, it can be argued that a direct relationship between the two does possibly not exist. Focusing on the data on the skill premium provided by Allen, it is clear that skill premiums all over Europe diverged. While the table in appendix 1 provides only a summarizing overview of the development of the skill premium in large period of fifty-year averages, appendix 3.2 provides an overview of the skill premium in ten-year averages based on Allen's data series, keeping in mind the methodological choices made for the data collection in interest rates. For example, the graph separates France from the rest of the data, and only deals with the geographical regions in which the interest rates are divided. The graph in appendix 3.3 shows clearly that Northwestern European skill premium continued in declining trend from the 1350s onwards, while in the rest of Europe skill premiums slowly returned to their pre-1350 level in the course of the fifteenth and sixteenth centuries. When both variables, of for example only of Southern Europe, are included into the same graph, as figure 5 shows, it immediately becomes visual that the regional interest rate and the regional skill premium show distinctive patterns through time. In the rest of Europe both variables developed in accordance to the same, unrelated and unconnected patterns.

180 160

Southern European skill premium average (10years)

140 120 100 80

60 40 20 0 125012701290131013301350137013901410143014501470149015101530155015701590

Figure 5. Southern Europe - Skill premium and interest rate (1250 - 1600). Source: Appendix 2.4, Appendix 3

Visually distinctive patterns perceived in graphs are no profound indication of an actual absence of mutual influence. Correlation coefficients, however, are, since they provide more quantitative and comparative insights. These coefficients give an indication of the level of mutual influence between two different data series. How does this work? A correlation coefficient can be a figure between -1 and 1. If the coefficient is a figure between 0 and 1, both series positively influence each other; when the level of one series increases, so does the level of the other all in the same pattern and speed. When the correlation coefficient is between 0 and -1, it indicates that both variables move in the exact pattern only in a negative, opposite, direction. In other words, they diverge at the same rate and in the same pattern. Important to note is that correlation coefficients between the 0,5 and 1 or between -0,5 and -1 are considered significant and thus give reason to believe there exists a mutually influential relationship of some sort. The coefficient rate of the correlation of the skill premium with the interest rate will thus be both an indication of the level of significance of any mutual influencing relationship between the skill premium and the interest rate, as well as an indication of the direction and pattern of this relationship. Van Zanden's fifty-year period data series on the development of the skill premium, as presented in appendix 1, is mostly useless for measuring a correlation between skill premiums and interest rates in regions; the figures in appendix 1 are therefore only useful for giving a basic overview of the divergence in skill premium between the European 60

regions. However, Robert C. Allen has provided thorough data collections on both the nominal silver wage of European skilled craftsman and on unskilled laborers from 1260 to 1800, enabling the construction of an additional data collection on the development of the skill premium on ten-year averages. This additional data collection on the European regional skill premium is presented in ten-year averages in appendix 3.2 to make it more compatible to the data series on interest rates which is also presented in ten-year averages. In Allen's original data series, the decade between 1250 and 1260 is not included. Hence, it is left out of the series presented in appendix 3.2. This has however no methodological implications to the final results, since correlation coefficients are only indications of the relationship between duos of figures; once opposing figures are missing, they are automatically left out of the equation. Using the regions specified in appendix 3.1, the regional averages over ten-year periods can be calculated. It is therefore more useful to use this data series on European skilled and unskilled laborers wages and extract data on skill premium from it.

Region

Correlation Coefficient

Northwestern

0.35919*

Europe Central Europe

0.21895*

France

0.25118*

Southern

0.57552*

Europe Table 1. The correlation coefficient of skill premiums to interest rates per European region (1250 - 1600)141. Source: Appendix 2.4, Appendix 3

These regional ten-year averages of the skill premium and the similar ten-year averages of the interest rates on the same regions can be used to measure the correlation between the two. Table 1 provides an overview of the results. All figures accompanied by an asterisk are significant. The first overall pattern that becomes clear is that all figures are relatively low, 141 All rates are significant.

giving reason to believe that there is almost no significant correlation between the skill premium and the interest rate in none of the studied regions. In addition, the only relatively weak correlation that does exist is a positive one, indicating that both the skill premium and the interest rate move, however modestly, in relative accordance to each other. The second element that becomes clear is that in Southern Europe the correlation between the skill premium and the interest rate is almost twice as strong as it is in the rest of the continent. While in the rest of the continent, the average level of correlation is 0.27, in Southern Europe the correlation is 0.58 and hence giving reasons to believe that this is an indication of a relatively moderate positive relationship. Reasons for why such a moderate positive relationship exists in Southern Europe, while on the rest of the continent any relationship is relatively weak, are at this point unclear. A possible explanation can be the forced nature of public debt systems in Italy.142 Italian cities often forced households to invest in the local debt, without withholding them any interest repayments. Hence, households in Italy more often directly enjoyed the fruits of the debts issued by their cities. These forced loans possibly directly contributed to household incomes, also generating incentives for these households to invest in human capital.143 A possible lack of correlation between the development of the skill premium and the interest rate across all European regions as the data in table 1 gives reason to believe that the expectation of a mutually influencing relationship between the developments of both variables does not exist, or does not exist profoundly. The emphasis on the interrelationship of? interest rates resulting on skill premiums and its result in possibly relatively successful economic performance on which much of the literature so strongly hinges, seems largely inaccurate in over the period 1250 to 1600. There only seems to be a relatively weak positive relationship between the skill premium and the interest rate, suggesting that both variables move relatively weak in the same direction and pattern at the same rate. However, the correlation coefficients are mostly too low to suggest that this relationship is of any significant importance. Therefore, the development of both interest rates and skill premiums seems to be largely unconnected processes between 1250 and 1600. Figure 5 already indicated this weak relationship; the blue interest rate-line is shown to steadily move towards the overall average of 5 percent, while the skill premium fluctuates heavily over time. 142 Boone, Marc, Karel Davids, Paul Janssens, Urban Public Debts; Urban Government and the Market for annuitities in Western Europe (14th - 18th centuries) vol.3 (2003) chapter 3. 143 Idem, 3.

Regional interest rates as sole factor of the real wage

The second expectation based on the literature is that skill premium-induced economic development develops in accordance to the development of interest rates. Why can this pattern be expected? While the first expectation elaborated on in the previous section focuses mostly on the mutual influencing connection between the absolute and quantitative levels of the interest rate and the skill premium, this second expectation focuses on the influence of the interest rate on quantitative levels of economic performance, measured by the level of real wages. The latter variable serves as an indication for the level of economic performance as well as an indicator of living standards. The Little Divergence, as stressed by Robert C. Allen, focuses on the levels of real wages and standards of living of Northwestern Europe relative to the levels on the rest of the European continent. In the course of the fourteenth century real wages increased all over Europe. However, only in Northwestern Europe could these newly reached relative high levels of real wages in the course of the fifteenth and eighteenth centuries be retained; in Southern, Central Europe and France, wages quickly returned to the low fourteenth-century level during the same period, creating a divergence in wage with Northwestern Europe. This divergence can be attributed to regional differences in the skill premium. The skill premium in a region therefore directly influences the development of wages and standards of living, and economic performance as such. As noted in chapter one, before the 1970s, low skill premiums indicated relatively successful economic performance while high skill premiums indicated institutional inefficiency and thus relatively unsuccessful economic performance. In the opposite direction to the development of wages, skill premiums declined in the course of the fourteenth century, and, just like real wages, only in Northwestern Europe fourteenth-century levels were retained while in the rest of Europe levels slowly returned to high, pre-fourteenth century "normal" levels. Skill premiums thus seem to prelude economic performance, which then influences the development of real wages and the standard of living while, as has been mentioned before, interest rates influence the development of the skill premium. It is therefore arguable that fluctuations in the interest rate influence fluctuations of the skill premium and eventually differences in economic performance. To measure the influence of the interest rate on skill premium-induced economic performance and hence standards of living measured in the development of the real wage, 63

it becomes logical to resort again to correlation coefficients. At this point, it can arguably be excluded that skill premiums provide the link between the Little Divergence and the interest rate. By focusing on the level of correlation between interest rates and real wage, it is possible to find out if the possibility of a third variable that might connect the interest rate to the real wage exists. The question thus focuses on the level on which the development of the interest rate correlates with economic performance measured by the real wage as indicator of living standards. In contrast to the first expectation, this exercise focuses on the development of the real wage and not on the skill premium, the percentage difference between nominal wages. While the latter provides an indication of the absolute wage paid to either craftsmen or day laborers, does the real wage provide an indication of the relative wealth, or purchasing power; the real wage is the nominal wage corrected by a consumer price index. The previously mentioned data series on European skilled and unskilled wages by Robert C. Allen also includes a series on the real wage of skill and unskilled workers. By taking averages for ten year periods, similar to the ten-year averages used for the interest rate, Allen's data collection offers an extensive overview of the development of European regional real wages. In appendix 4, these ten-year averages are presented. This appendix presents three tables and graphs; on skilled real wages, unskilled real wages, and on the average of the former. By comparing the graphs presented in both appendix 4.1 and 4.2, it becomes clear that the patterns shown in appendix 4.3 on the development of the average European real wage does not differ from the former two graphs; hence this research will focus solemnly on the development of the average real wage and hence make no distinction between skilled and unskilled real wage. Region

Correlation Coefficient

orthwestern

-0.562*

Europe Central Europe

-0.475*

France

0.509*

Southern

-0.335*

Europe Table 2. Correlation of the regional interest rate and the real wage (1250 - 1600). Source: Appendix 2.4, Appendix 4

144

144 All rates are significant.

Table 2 shows the levels of correlation in each region between the ten-year average interest rate and the ten-year average real wage. Again, all asterisked figures are significant. It is immediately clear that is possible to make a distinction between two categories. The first category would include Northwestern, Central and Southern Europe, in which the interest rate and the real wage seem to be correlated weakly negatively. This indicates that the real wage and the interest rate diverge at the same rate and pattern. The divergence of interest rates and real wages is logical since all over Europe interest ratesâ&#x20AC;Ś?. However, it is interesting to note that this process is also present in Central and Southern Europe, regions in which the real wage dropped relative to those in Northwestern Europe and hence, like the interest rate, followed a decreasing and somewhat converging pattern. There are thus reasons to believe that there is no distinction between Southern and Central Europe and Northwestern Europe in the nature of the relation from interest rates to real wages, while there is a sharp distinction in the absolute development of the real wage exists between these three regions. The second category would arguably only include France, in which real wages and the interest rate seem to be correlated relatively positively, an indication that both the interest rate and the real wage followed the same pattern at the same rate. Since the French interest rate, like figure 1 visualizes, followed the overall European pattern of decline, the development of the real wage apparently does the same. This is interesting since all over Europe, except in Northwestern Europe, both interest rates and the real wages declined. An explanation for this distinctive pattern is beyond the scope of this research, as it is only concerned with explaining the influence of the development of the interest rate on the development of the skill premium and thus on the Little Divergence in real wages. The correlation between the interest rate and the real wage, thus to economic development, is as table 1 indicates often troubled; there seems to be no universal connection between the interest rate and the real wage, since neither of the coefficients is of equal nature. Without focusing on the reasons for the lack of an universal connection between the interest rate and economic development measured in the development of the real wage, it is safe to say that the sole existence of un-universality is of major importance to the topic of this research. Endogenous factors in each individual region seem to influence the development of both variables in each individual region. The second explanation that skill premium-induced economic development develops in accordance to the development of interest rates is hence 65

proven to be inaccurate. There seems to be no universal relationship indicating that interest rates influence skill premium induced economic development. The lack of strong correlation between the absolute level of the interest rate and the absolute level of the skill premium, both measured ten-year averages, had already indicated that there is no direct relationship between the development of both variables. The lack of a universal-natured correlation between economic development and the interest rate seems to be strongly indicating that there are also no additional indirect factors possibly engaged in connecting both developments.

The statistical evidence presented in chapter three suggested that firstly, there exists an overall European pattern of interest rate convergence to an average level of five percent; secondly, the development of interest rates does not directly influence the development of the skill premium; and thirdly, the development of interest rates holds on universal correlation to economic performance. The latter two processes give reason to believe that interest rates have no relationship to the Little Divergence. The literature focused on the differences in the level of accumulated human capital, expressed in the skill premium, explaining the Little Divergence therefore most likely emphasizes the influence of the interest rate on the level of human capital wrongly. This means that the emphasis on the skill premium alone explaining the Little Divergence holds little truth; the influence of the interest rates presumably constructing the skill premium does not exist in the nature stressed by the literature. This raises the question on what possibly explains the nature of the Little Divergence. Clearly, intra-regional differences in the level of the skill premium are not sufficient. This chapter will therefore connect the conclusions of chapter three to the overall debate on the Little Divergence. A possible reason for why the relationship between the interest rate, the skill premium and the Little Divergence exists not to the extent the literature has emphasized, is because there is reason to believe that the development of the interest rate and the Little Divergence are two intrinsically different processes. In the historiography, the development of interest rates has been elaborated on by both David Stasavage in States of credit and by Stephen Epstein in Freedom and growth. These authors attribute the development of the interest rate to either political or technological factors. A possible explanation for the Great Convergence of interest rates can possibly be the integration of European capital markets through the integration of political and technological factors.145 The increasing internationalization of the European capital market led to the integration of institutional frameworks and thus to a Europe-wide level of interest rate of 5 percent. In order to attract foreign money, states had to compete in trustworthiness. This lead to institutional 145 Homer, Syndey, Richard Sylla, A History of Interest Rates, 4th Edition (2005) 90 - 95, 130-140.

frameworks focused on repaying debts all over Europe to begin showing profound political, bureaucratic and administrative similarities, to thereby facilitate increasingly more international capital markets. The Little Divergence on the other hand can arguably be perceived as a process fueled by differences in human capital resulting from demographic and institutional differences. Sabnem Kalemli-Ozcan, Harl Ryder, David Weil and Jan Luiten van Zanden all have emphasized the importance of the demographical factors on economic performance and the Little Divergence. However, intra-European differences in marriage patterns are perceived more likely to be of universal explanatory importance to the Little Divergence than differences in the fertility and mortality rates, which only offer regionspecific explanations. The interest rate development; political and, or technological?

In the first chapter of this research, the historiography on the development of the interest rate has been briefly reviewed. Two prominent authors, David Stasavage and Stephen Epstein, both seem to emphasize the importance of the constitutional, financial, and fiscal behavior of the polity in influencing the level of the interest rate. Economic factors such as the quantitative availability of bullion, the development of the real wage, or the overall value of commercial activities thus all seems to have only minor influence. However, as Epstein shows, the political and constitutional behavior of the polity as well seems to be of minor importance relative to the integration of the polity's technological means.146 The lack of extensive fluctuations in the development of the interest rate can be seen as evidence of a lack of dramatic political influence. For example, regime changes, wars and other political factors could easily have caused rapid changes in the pattern over development. But evidence of political shocks in the form of massive fluctuations is nowhere to be found. The development of intra-European interest rates towards European convergence thus seems to be moving in accordance to technological patterns adapting to international markets, rather than to economic or political patterns. In States of credit, Stasavage argues that interest rates develop along with the trustworthiness of the political framework of a polity not to default payment.147 Two factors

146 Stephen Epstein, Freedom and Growth,24. 147 David Stasavage, States of Credit, 1, 11 - 14.

play an important role in this process; the level of representation of lenders in the political decision-making process, and geographical scale.148 Stasavage emphasizes the importance of trustworthiness of polities, influencing the level of interest rates. In States of credit存 the level of the interest rate is perceived as a reflection of the trustworthiness of the polity in not to default its repayment obligations. The level of trust is influenced by the level of openness of the polity's governance to money-lending citizens. Those investing in debts issued by cities were often the urban industrial and mercantile elites. The level in which this group is represented in the cities decision-making process, either in the city council or otherwise, therefore influences the level in which the city as borrower is likely to default. 149 In other words, the money-lending elite is enabled to exercise control over the policy-making processes and therefore capable of controlling the expenses and incomes of the city, ensuring that the money they lent out themselves is likely to be repaid to themselves.150 Stasavage hence emphasized the political openness of polities in incorporating citizens in the city governance. The more open governance is in including citizens, or better investors in the public debt, the more likely the city as borrower is not to default. The system of incorporating investors in the polity also works the other way around; more investors involved in governance, the more trust this will put in other lenders since they can rely on the fact the lenders who are involved in the polity will take care that the city will not default.151

Geographical scale comes in place as a practical constraint to the level of

openness of polities; in very open but also very geographically large polities, money-lending elites will still have problems controlling state expenses and incomes because information needs to be spread over vast distances.152 Thus, eventually, the lowest interest rates are to be found in increasingly smaller states and cities, with the efficiency of money-lending elites to control governance focused on debt repayment relatively high because of the small distances information has to travel. Low interest rates are therefore likely to be a reflection of high levels of trust of the citizens in the polity. High interest rates on the other hand, indicate that there is a likeliness that the polity will default its obligations; hence investors are not keen to invest, but will only do so in exchange for extra money, a high interest rate, in addition to their initial 148 149 150 151 152

Idem, 11 - 14. David Stasavage, States of Credit, 1 - 10. Ibidem. Ibidem. Idem, 12, 14.

investment. What Stasavage however ignores is the influence of the efficiency of the capacity of the city government to hold a close watch on its financial and fiscal administration. In Freedom and growth, Stephen Epstein emphasized this influence of technological factors on the level of the interest rate. Epstein rejects the possibility of formal constitutional arrangements explaining the interest rate, but instead stresses technological factors enabling borrowers to repay.153 These technological factors include a banking system, administrative structures keeping track of fiscal and financial developments, and a well structured fiscal and financial juridical apparatus. When these technological factors are efficient, states are able to raise credit more cheaply, because they can honor their debts more easily.154 Hence, the development of interest rate is influenced by the practical means at the disposal of the borrower. The core difference between both authors is therefore that Stasavage perceived the development of the interest rate as an ongoing process steered and influenced by the trust that lenders put in the willingness of the borrowing state to repay, while Epstein on the other hand perceives the development of the interest rate a set process of technological factors enabling the state to repay. As chapter three showed, interest rates all over Europe converged, regardless of the intra-European differences in regional economic performance. However, during the same period of study, differences between political regimes continued to exist.155 Most cities gained more freedoms in the course of the fifteenth and sixteenth centuries, resulting in increasing levels of openness of governance to citizens. But, profound intra-European political integration did not occur.156 If differences in the nature of a polity could truly influence the level of the interest rate, it would be logical to assume that firstly, interest rates would fluctuate more often and in extreme patterns in accordance with dramatic changes in political regime; and secondly that overall, profound differences between the regional levels continued to exist over time since polities continued to differ as well. Focusing on the Europe-wide development of interest rates between 1250 and 1600 as visualized in figure 1, fluctuations continued to exist mostly but were not of major patternbreaking importance; the pattern of convergence seems to be relatively undisturbed. Therefore, it is arguable that Epstein is correctly emphasizing administrative and

153 154 155 156

Stephen Epstein, Freedom and Growth,24. Ibidem. Stephen Epstein, Freedom and Growth,24. Idem, 24 - 26.

technological factors influencing the development of the European interest rates between 1250 and 1600. As the interest rates were thus mostly influenced by mainly technological factors and intra-European rates converged, it gives reason to believe that disparities should narrow over time since more advanced fiscal and financial apparatuses were often increasingly more widely adopted.157 Figure 1 clearly shows a pattern of relatively undisturbed convergence; a pattern of continuously narrowing disparities.158 It is therefore logical to assume that technological factors indeed influence the development of the interest rate more than political factors. The question remains, however, what fueled this increasing adoption of fiscal and financial apparatuses on a Europe-wide scale, resulting in an overall convergence of interest rate. A possible explanation might be the increasing internationalization of capital markets Jeffrey Fynn-Paul has stressed.159 Investors increasingly invested in debts, issued not only by their own cities but also by cities in other parts of Europe.160 Capital markets thus became more international in nature and thus integrated, often resulting in competitive markets struggling to attract money. This forced them to adopt increasingly more advanced technological apparatuses to be relatively more attractive for lenders by offering increasingly better guaranteed bonds; lenders could only compete in trustworthiness of successful repayment and low rates, resulting from successful administrative, juridical and bureaucratic frameworks. The previously mentioned Van Der Muelen portfolio, studied by Jeff FynnPaul, for example offers an insight into the content of a Dutch professional investor. FynnPaul. however. focused on the early eighteenth to early nineteenth centuries and hence beyond the focus of this research. His research however does show that investors, like the Van der Muelens, were very keen on investing in foreign bonds. They thus did so in a wide variety of places, including Spain, France, the United States and Suriname. 161 The Van der Muelens in their role of professional investors seemed to prefer widely-spread securities by investing in bonds all over Europe. This gives any reason to believe that the international

157 Stephen Epstein, Freedom and Growth,24. 158 Ibidem. 159 Jeffrey Fynn-Paul, The Rise and Decline of an Iberian Bourgeoisie; Manresa in the Late Middle Ages (To be

published, late 2014). 160 Homer, Syndey, Richard Sylla, A History of Interest Rates, 4th Edition (2005) 91, 130. Note; the internationalization of European capital markets seems to be moving in waves. Before the thirteenth century, markets were international, afterwards little less. In the seventeenth century, the process of internationalization came, according to Homer and Sylla, in for example Italy to a general stop. 161 J. Fynn-Paul, The Evolution of Eigteenth-Century Investment Capitalism from an Investor's Point of View: The Van der Muelen Family Portfolio, 1738 - 1814, 5.

nature resulting in competing capital markets seemed to be inherent to investing in public debts. It would be logical to assume, based on examples like the Van der Muelen portfolio, that investors increasingly sought profitable and secure investments.162 International investments could offer both elements. Competition between the European capital markets, forcing them to adopt more technologically advanced frameworks to keep up the competition hence seems a logical result. The Great Convergence of European interest rates therefore seem to be likely to have resulted from mostly technological structural integration of intra-European capital markets and public debt systems. This research, however, does not stretch deeper into the field of market integration or the details of the internationalization of investor portfolios. The most important, and only note to make is thus that public debt systems, partly regardless of political regime, started to show profound resemblances in order to facilitate the internationalization of capital markets. Competition in efficiency to control capital markets by the state in creating the capacity to repay, rather than trust in repayment, therefore seems to be key. The Little Divergence; demographic disparity

Statistical evidence presented earlier in this research gave reasons to believe that it is both unlikely that the skill premium is influenced by the interest rate, and that the latter holds any direct connection to economic performance. Explaining the Little Divergence through differences in solely the quantifiable and measurable unit "skill premium" then becomes shaky; if not in interest rates, what else could have influenced differences in the level of the human capital in an economy? Institutional differences, influencing the technological and political factors controlling the level of the human capital either converged all over Europe or seem to be of minor importance, as both chapter three and the first section of this chapter indicated; macroeconomic factors seem to minor importance. The level of the human capital is therefore more likely to be influenced by external, more microeconomic factors.163

162 Ibidem. 163 Kalemni-Ozcan Sebnem, Harl E. Ryder, David N. Weil, 'Martality decline, human capital investment, and economic growth' in Journal of Development Economics vol. 62 (2000) 1; Jan Luiten van Zanden, The Long Road to the Industrial Revolution (2009) 103.

A microeconomic focus on differences in the level of human capital other than a focus on the skill premium is a focus on differences in the demographic microstructure of societies. A possible merit of this microeconomic and demographic approach is that it perceives differences in specific economic performance in the context of economic structural differences, regardless of often relatively universal institutional or political frameworks. Hence, it enables an analysis of the context of the particularity of Northwestern European exceptional economic performance, focused on demographic similarities rather than on differences in polity structure. This is of key importance, because of the internal divergent nature of Northwestern European polities. The Dutch and English political frameworks diverged to such an extent that it is impossible to connect any sound conclusion to it. 164 Northwestern Europe was, in terms of socio-political institutions, far from homogenous: while England was a centralized and feudal monarchy throughout the period of focus in this research, the relatively highly urbanized Low Countries consisted of fragmented and highly autonomous polities.165 However, their economic system was throughout the late Middle Ages and sixteenth century, integrated with the rest of Northwestern-Europe. England produced wools, minerals and other resources, whicih were processed and sold in the Low Countries; Northwestern Europe hence functioned as a single economic unit, consisting of two comparative entities.166 The demographic approach offering relatively regional specific explanations makes the mortality-rate focused approach by Sebnem Kalemli-Ozcan, Harl Ryder and David Weil (2000) less applicable relative to Jan Luiten van Zandenâ&#x20AC;&#x2122;s and John Hajnalâ&#x20AC;&#x2122;s marriage pattern-focused approach. While the former approaches the influence of demographic factors on economic performance from the assumption that fertility and mortality rate, expressing life expectancy influences the level of the human capital, the latter assumes that economic performance is influenced by the bound demographic and cultural factor of marriage patterns.167 Kalemli, Ryder and Weil argue that the expectancy of longer life raises the quantity of schooling because investment in education will earn a return over relatively

164 Jan Luiten van Zanden, The Long Road to the Industrial Revolution, 99. The Dutch were a highly autonomous and fragmented Republic, well into the fifteenth century. Before that, it was an quasi-autonomous part of first the Bourgondy Empire and later the Habsburg Empire, but at all times able to wield authority over themselves. 165 Jan Luiten van Zanden, The Long Road to the Industrial Revolution, 99. 166 Jan Luiten van Zanden, The Long Road to the Industrial Revolution,, 99, 100. 167 Kalemli-Ozcan, S, Harl E. Ryder, David N. Weil, 'Mortality decline, human capital investment, and economic growth' in Journal of Development Economics vol. 62 (2000) 1 - 3; Jan Luiten van Zanden, The Long Road to the Industrial Revolution, 99 - 101.

longer periods of time.168 While ignoring the institutional framework that influences the life expectancy, they seem to emphasize solely the influence of human capital. Human capital creates new human capital which on its turn, it creates a higher life expectancy. Their approach, as interesting and valuable to economic science it might be, is not suitable to explain the Little Divergence solely because it leaves no room for, regional, exceptionality. The authors seem to argue that sudden shock in fertility and mortality rate can massively influence economic performance in positive and negative ways; their thesis often lacks a long-term focus on processes like the continuous economic exceptionality of Northwestern Europe. Solely focusing on these rates would not seem to be able to explain several centuries of exceptional performance since it relies too much on the assumption that during this centuries-long period, nothing of major importance is happening capable of influencing fertility or mortality. In 2009, Van Zanden published his book The long road to the Industrial Revolution, in which he approaches the Little Divergences from a long term, demographic perspective. Similar to his article â&#x20AC;&#x2DC;The skill premium and the 'Great Divergence'â&#x20AC;&#x2122;, the book is focused on explaining the Little Divergence based on the assumption that differences in the level of human capital are key, but approached from the microeconomic angle of the European Marriage Pattern (EMP). In the book, Van Zanden emphasizes the rise of both European population levels and real wages in the period of 900 to 1300. The breaking point of this upward pattern was the Black Death in the 1350s, after which the pattern was only sustained in Northwestern Europe; in the rest of the continent, wages and population levels stagnated.169 This gives reason to believe that a possible explanation to the Little Divergence can be found in differences in the absolute levels of population, indicating larger markets, and larger scales of production.170 However, Van Zanden rejects these differences in the absolute levels of populations between Northwestern Europe, arguing that populations all over Europe swiftly returned to pre-1350s levels.171 Therefore, Van Zanden favors a microeconomic approach, focused on the household as key economic unit, capable of explaining the exceptionality of Northwestern European economic performance. 172

168 Kalemli-Ozcan, S, Harl E. Ryder, David N. Weil, 'Mortality decline, human capital investment, and economic growth', 18. 169 Jan Luiten van Zanden, The Long Road to the Industrial Revolution, 95. 170 Idem, 95 - 103. 171 Idem, 95. 172 Idem, 103.

The EMP perceives the household as a single economic unit relying on wages as sole source of income, while relying on the consumer markets to satisfy its economic needs. Van Zanden, much like John Hajnal in the 1960s, makes a distinction in the nature of the composition of households between roughly Northwestern Europe and Southern Europe. In Northwestern Europe, households seem to be often constructed in accordance to Hajnal's characteristic marriage pattern, the EMP.173 These households consisted of small nuclear families, in which the marriage patterns both married at a relatively old age, but also out of mutual consent.174 As a result, women played an important and distinctive role in Northwestern Europe; they participated in the labor market and could hence make their own income and thus often remained unmarried.175 Household income was therefore likely to be generated by both the male and female marriage partners; there was often no income generated by other generations, since the household only consisted of two: the married couple and their children. In Southern Europe however, households were often constructed in the exact opposite, consisting of large and extended families; marriage partners married at a relatively young age and women did not extensively participate in the labor market since they lived in households consisting of multiple income-generating men.176 This gives reason to believe that the EMP seems to have influenced Northwestern-European household structures to be more adapted to labor market opportunities, relative to non-EMP households; the EMP places trust markets for income (the labor market generated wages) and consumption.177 Important to possibly eventually influence differences in the level of human capital between Northwestern Europe and the rest, is the difference between the way in both marriage patterns that income is being generated, regardless of dowries or inheritances. In Northwestern Europe, the nuclear household generates its own income, while in Southern Europe income is generated by the multiple generations of male participants of the household. In order to begin a household the former region of one's own, a steady income has to be guaranteed. Both bride and groom equally contributed to this income, needed to support themselves and their children.178 In the latter region, income is often guaranteed by 173 J. Hajnal, European marriage pattern in historical perspective, in D.V. Glass, D.E.C. Eversley, Population in History (London 1965). 174 Jan Luiten van Zanden, The Long Road to the Industrial Revolution, 124. 175 Idem, 125. 176 Ibidem. 177 Idem, 127. 178 Jan Luiten van Zanden, The Long Road to the Industrial Revolution, 125.

the multiple generations of which the household consists. They are thus financially dependent of their parents until they could start their own households. In a way, this is a vicious circle of children being dependent of their parents' income, needing an income to start their own household and again having children how are dependent of their income. In EMP-styled household often adapt their skills and labor strategies in accordance to the labor market; they invested in future generations to guarantee future incomes. 179 In other words, parents invested in the human capital of their children in order to let their children successfully generate their own incomes.180 Since the household relies on the labor market for income, investing in the maximization of the position of the household within the labor market also maximizes the income generated by it. For example, by educating children to read and write, they will have a better chance of getting high-income jobs once released onto the labor market, relative to children who cannot read and write. In Southern Europe, the non-EMP area, children would often remain loyal to the income of the extended family, whilst lacking any incentive to invest in the future. The key difference is thus between contributing to existing income versus generating future income based on investment in human capital. There is also a minor social factor connected to the incentives to invest in human capital deriving from the two distinctive marriage patterns. Economic success in Southern Europe is measured in the level of contribution, often of non-monetary value, to the family business. In Northwestern Europe, the previously mentioned maximization of one's position in the labor market is regarded as economic success. To summarize, in The long road to the Industrial Revolution Van Zanden emphasized the influence of the European Marriage Pattern on the level of human capital. The importance of market-generated income in Northwestern Europe provided the incentive to actively invest in human capital in order to maximize one's position in the labor market. In the rest of Europe, household income was more often generated by previous generations, eventually lacking the incentive to maximize and create new income in favor of contributing to existing income. The origins of the Little Divergence in differences in the level of human capital between Northwestern Europe and the rest of the continent are thus possibly contributable to differences in the marriage patterns and the structures of households in each region. The marriage pattern is solely influenced by social elements like the presence

179 Idem, 100, 125 - 130. 180 Idem, 128.

of dowries or the availability of women on the labor market. Focusing on interest rates, they seem to have little or no influence on the marriage pattern. As a result, it is possible to perceive the European Marriage Pattern and its economic effect on the level of the human capital as a key distinctive characterization of Northwestern Europe.

The Problem of Convergence and Divergence

This research intended to determine the extent to which interest rate differences translate into a different skill premium, and whether the different skill premiums function as an explanatory factor for the Little Divergence in the period 1250 to 1600. By doing so, this research places the Little Divergence in the context of the financial and theoretical study of interest rates. The latter serves as an indicator of institutional frameworks focused on fiscal and financial structures. In the literature it is extensively argued that such a relationship exists since the regional level of the skill premium, an indicator of the regional level of human capital, directly relates to the level of the interest rate, whereas the interest rate provides incentives to invest in human capital based on the costs of doing so. The core of this argumentation focused on the Little Divergence is thus that regional differences in the interest rate will eventually result in regional differences in the level of the skill premium and thus that it will influence the regional level of economic performance. Northwestern Europeâ&#x20AC;&#x2122;s exceptional economic performance in the period 1250 to 1600 (and beyond), thus seems to have resulted from seemingly preferable levels of the regional interest rate, resulting in favorable levels of skill premium and thus in exceptional economic performance. To make any sound conclusions on presumed assumption deriving from the literature, a data series on European urban interest rates over the period 1250 - 1600 and on over thirty items was complied. Based on these data, it is possible to argue that there exists no profound or universal connection between the interest rate and the level of the skill premium, or between the interest rate and economic performance measured in the level of the real wage. The thirty studied entities were grouped according to Jan Luiten van Zandenâ&#x20AC;&#x2122;s and Robert C. Allen's definition of European economic regionsm and this research thus concentrated on Northwestern, Southern and Central Europe and considered France to be and individual category. The categorization in these four regions, containing all cities within the region, is used also when focused on data on skill premium or real wages. By constructing a data series on European regional interest rates over the abovementioned period, it became possible to draw sound conclusions based on long-term 78

developments. The literature suggested that two major expectations could be distinguished. Firstly, it could be expected that the development and pattern of the skill premium is mutually influenced by the development and pattern of the interest rate. Statistical analysis gave reason to believe that such a mutually influencing relationship only exists as a weak positive correlation between both variables. It is therefore arguable that a direct relationship between the developments of both variables is often of relatively minor importance. The second expectation is that it might be expected that skill premium-induced economic development develops in accordance with the development of interest rates; or in other words, a connection between the Little Divergence in real wages and the level of the interest rate. Yet again did statistical evidence on the correlation between interest rates and real wages indicate that there exists no universal pattern from which to draw a sound theory or conclusion. It seems only to invite for further research, since there seems to be a relatively high region-specific connection. The correlation coefficients for example show that in Northwestern, Central and Southern Europe the real wage and the interest rate only relatively weakly negative correlates in regional-specific patterns. Interest rates and real wages diverged, while on the other hand, did real wages in France correlate positively. It is therefore suggested that it is most likely that there is no indication that the Little Divergence resulted from intra-European differences in the level of the interest rate, influencing either directly the level of the human capital or, indirectly, economic performance. A possible explanation for the lack of connection between both variables emphasized in this research is their intrinsically different nature. The final chapter of this study showed that the interest rate seems to be influenced by often technological factors, while the level of the human capital and thus the skill premium is influenced by demographic factors. The emergence of the European Marriage Pattern and the high level of trust in market structures for household income and consumption, forced Northwestern European households to maximize their position in the labor market through profound investments in their human capital. In the rest of Europe, such a marriage pattern and connected effects lacked, relying on multigenerational income and family businesses; there was no incentive to invest in human capital relative to the incentive presented in Northwestern Europe. The most important trend visualized by the data collection used in this research is the convergence of European interest rates in the period 1250 - 1600 to a Europe-wide average of five percent. This is interesting since it occurred at the same time and pace as 79

the divergence of real wages and economic development and between the same regions. While the wealth and standards of living of intra-European households diverged, the regional price of capital they paid converged. This means that there is increasingly more easy access of city governments to credit, regardless of economic performance. In other words, while the levels of real wages between cities started to show increasing margins, cities within all regions could borrow money more cheaply even though they might suffer under relatively unsuccessful economic performance. This research has two possible implications. Firstly, as suggested in the paragraph above, it seems to indicate that the connection between the development of the interest rate and economic development are unconnected fields of study since they deal with unconnected factors. Therefore, those theorems incorporating any influence of the interest rate are likely to be swiftly rejected. A second implication deals with the convergence of interest rates. It can be asked why the convergence of these factors did not generate economic performance. The technological institutional frameworks of urban polities all over Europe integrated over the course of the fifteenth and sixteenth centuries. Hence, their fiscal and financial structures were increasingly equal in nature; they could all support increasingly lower interest rates. This means that all over Europe, cities were increasingly regarded as politically trustworthy when It came to repaying their debts but also technologically capable of keeping track of expenses and incomes, and thus in a practical sense capable of repaying. However, their economic institutional frameworks did not integrate. Economic performance, much like differences in wealth and standards of living, is therefore arguably regarded as an autonomous process, unrelated to the influence to the functioning of the polity structure. The discrepancy between converging interest rates and diverging real wages, all based on increasingly equal institutional frameworks, offers interesting perspectives for future research. Possible questions future research might focus on hinge on the theoretical connection between public debt systems and the level of the interest rate and economic performance. Human capital, as this research indicated, seems unable to explain a possible connection. The question might thus be why this connection is lacking while incentives to acquire cheap credit increase over time.

Appendix 1 Jan Luiten van Zanden's data series on the Skill premium of construction workers in Europe, 1300 - 1800 (averages per 50-year period). Source: ‘The skill premium and the ‘Great Divergence’’, European Review of Economic History 13 (2009), 121-153.

Appendix 2.1. Ten-year averages of the interest rates issued by European cities and urban republics. Arras Year Basel

Bremen Cologne Dortmund Geneva Hamburg Mainz

Nuremberg (1388 - 1565) Stuttgart (1550) Zurich (1325 - 1414) (1241)

1250

15,5

1260 1270 1280 1290 1300 1310 1320

1330

1340

1350

8,33

6,67

1360

7,415

6,67

1370

5,675

5,145

11,67

6,67

1380 8,3

8,33

5,25

11,67

6,67

9,48

5,25

11,67

6,67

8,57

1390 6,776 1400 5,698

6,67

3,5

8,6

1410 5

7,085

4,833

6,67

3,5

1420 4,783

6,67

4,75

6,67

3,5

7,05

9,25

1430 4,2

4,17

6,67

1440

3,75

6,67

1450

3,6

6,65

6,67

3,5

6,67

1460

6,492

5,583

1470 4,487 1480

5,663

6,67

1490

5,61

6,67

1500

5,08

6,67

1510

4,79

1520

4,89

1530

1540

5,28

1550

4,708

1560

7,42

6,67 5 6,67

6,83

5,85

7.67181

5,25

8,3

5,84

5,5

1570

4,875

8,33

1580

4,9

1590

1600

5,3

5,06

6,67

181 As mentioned in chapter two, in this decade a rate of 12 percent is given in the literature for the year 1553. This rate is however significantly high and thus excluded from analysis.

Appendix 2.2. Sequel appendix 2.1 Piedmont

Year

Douai

Barcelona

(1295 - 1399)

(1360 - 1640)

Bologna (1555 - 1655)

Madrid

Florence

(1489 - 1779)

(1347 - 1493)

Genoa (1303 - 1785)

(1410 1785)182

1250 1260 1270 1280 1290

9,1

1300

1310

1320

1330

1340

7,81

1350

8,52

1360

7,69

9,86

1370

8,35

10,01

1380

7,47

8,54

6,13

4,15

7,36

1390

182 While the city of Pietmont itself only issued public debt from the late seventeenth century onwards, the column incorporates all French rates mentioned by the authors under the general nominator "France". Fryde and Fryde (1963) 483, 488; Goubert (1970) 227; Van der Wee (1977) 379;Riley (1980) 111; Bonney (1981) 19 and 318; Collins (1988) 47, 73 and 86; Munro (2003); Homer and Sylla (2005) 116, 120, 129, 167-169 and 170; Stasavage (dataset 24-1-2014).

1400

4,7

7,5

5,96

1410

4,75

3,75

1420 1430

5,5 4,91

17,5

1440

3,375

1450

3,375

1460

17,5 4

17,5

5,6

1470

3,25

1480 1490

10 4,2

3 2,25

1500

1510

9,75

1520

9,25

4,49

8,33875

1530

4,47

8,33

1540

6,46

4,21

8,33

7,064

6,52

5,59

1560

7,01

6,75

6,17

1570

7,01

6,75

3,79

1580

7,01

5,68

2,92

1590

7,01

5,8

3,31

1550

4,01

1600

2,92

8,33

Appendix 2.3. Sequel appendix 2.1 Milan Year

Siena

(1543 - 1785)

Venice

Bruges

Ghent

(1262 - 1785) (1299 - 1492) (1288 - 1399)

Holland

Dordrecht

(1400 - 1800)

(1555 - 1572)

Edam

1250 1260

1270

11,25

1280

10 15

11,25

1290

1300

1310

18,75

1320

14,42

9,29

1330

13,14

1340

8,72

4,5

1350

8,75

4,68

1360

2,99

1370

1380

4,2

12,5

8.25

1390

12,5

5.55

1400

6,46

7.85

1410

6,46

8.45

1420

6,46

8.125

10.175 9.85 15.852

1430

1440

5.3

1450

1460

1470

1480

4,8

6,7

1490

1500

6.25

1510

6.25

1520

1530

4,75

6,25

6.3 6

1540

5,15

6,25

1550

8,44

3,7

7,81

1560

11,21

4,4

6,25

1570

11,3

7,9

14,17

1580

11,1

1590

10,02

1600

6,58

6,8

7,28

5.6 8,3

6.3 6.2

7,3

Appendix 2.4. Ten-year averages of the regional interest rates issued by European cities and urban republics. Northwester-Europe

Central-European

Southern-European

Year

average

1250

15,5

1260

1270

11,25

1280

10,625

1290

10,89166667

1300

11,33333333

1310

12,58333333

1320

12,5875

10,90333333

1330

9,85

11,07

1340

15,825

6,5075

1350

7,34

8,75

6,8175

1360

6,495

8,52125

6,8875

1370

10,5

7,901666667

7,09

1380

10,375

7,757142857

6,3025

1390

8,4

7,897666667

5,41

1400

7,155

6,8276

5,54

1410

8,45

6,506857143

4,875

1420

7,2925

5,5455

4,75

1430

7,627

4,455

17,5

1440

5,3

11,4875

3,6875

17,5

1450

5,125

3,791666667

17,5

5,417666667

4,8

1460

France

1470

4,885666667

3,625

1480

6,7

6,1665

5,933333333

1490

6,14

3,816666667

1500

6,25

5,875

7,5

1510

6,25

4,79

7,375

1520

6,275

5,78

6,246666667

8,33875

1530

5,74

8,33

1540

5,925

5,975

5,273333333

1550

7,194166667

5,612

5,3768

1560

6,225

6,463333333

6,0825

1570

8,3675

6,6025

6,3625

1580

4,9

5,9025

1590

6,03

5,985

4,86

1600

7,28

8,33

Appendix 3.1. Overview of European geographical regions used in the thesis and from which items the averages of data is used to represent these regions within analysis. Skill premium

European region Northwestern Europe

Interest Rate



Antwerp



Arras 183



Amsterdam



Douai184



London



Bruges



Oxford



Ghent



Holland



Dordtrecht

France



Paris



Piedmont

Central Europe



Strasbourg



Basel



Augsburg



Bremen



Leipzig



Cologne



Vienna



Dortmund



Geneva



Humburg



Mainz



Nuremberg



Stuttgart

183 Arras lies in contemporary France, but was part of Flanders throughout the Middle Ages. 184 Idem.

Southern Europe



Zurich



Florence



Barcelona



Valencia



Bologna



Madrid



Florence



Genoa



Siena



Venice

Appendix 3.2. The newly calculated regional skill premiums through time (1250 - 1600), using Robert C. Allen's data collection on nominal wages of skilled craftsmen and unskilled laborers.

year

Northwestern European skill

French skill premium

Central European skill

Southern European skill

premium average (10-years)

average (10-years)

premium average (10-years)

1250 1260 1270 1280 1290 1300

99,31

1310

133,25

1320

136,195

86,96

1330

130,29

104,03

1340

80,295

160,51

1350

103,785

86,86

1360

153,17

82,34

1370

79,68333333

39,64

1380

75,92666667

35,29

1390

86,24666667

1400

75,37

1410

64,25666667

65,83

45,35

67,92

38,84

70,83

37,595

1420

60,90666667

62,75

39,45

1430

55,21

62,99

37,12

1440

59,29

57,16

24,81

1450

60,47333333

54,39

37,61

1460

60,47666667

54,715

41,7

1470

60,47666667

60,1

47,595

41,435

1480

60,18

38,095

41,795

1490

57,24

48,105

53,63

1500

53,96

37,08

68,785

1510

60,0625

53,67333333

73,595

1520

54,9425

51,66333333

77,56

1530

58,25

61,02

52,07666667

71,4

1540

82,67

55,7

54,77

63,63

1550

62,38

60,29

54,66

56,275

1560

57,8425

68,34

51,445

62,915

1570

51,395

68,29

48,61

62,955

1580

58,565

58,77

67,635

50,2025

57,0525

68,765

1590 1599

Appendix 3.3. The development of the European skill premium in regions based on the data collection presented in appendix 3.2 (1250 - 1600). 160 140 Northwestern European skill premium average (10-years) French skill premium average (10-years)

120 100 80 60 40

1250 1260 1270 1280 1290 1300 1310 1320 1330 1340 1350 1360 1370 1380 1390 1400 1410 1420 1430 1440 1450 1460 1470 1480 1490 1500 1510 1520 1530 1540 1550 1560 1570 1580 1590â&#x20AC;Ś

Appendix 4.1. The development of the European unskilled real wage in regions (1250 - 1600).

Year

Northwestern European average

French average

Central European average

Southern European average

(10 years)

1250 1260 1270 1280 1290 1300

4,139875814

1310

3,459333931

1320

3,702240759

4,413201796

1330

4,210742181

3,521025575

1340

4,589149

2,268621933

1350

4,018927817

5,756756732

1360

3,777550241

6,295366105

1370

5,737875408

4,572311244

1380

6,51110427

1390

6,510391535

5,683053873

1400

7,190204465

5,867775773

1410

7,190204465

6,019149968

7,786242172

1420

7,432633558

5,847378111

7,771655849

1430

7,12385392

4,404891134

5,82136237

7,270397034

1440

8,01033038

6,605596971

7,350869157

7,862680846

1450

8,148196202

6,592183843

7,500303207

7,997165376

1460

8,606245466

6,263198847

7,132352174

7,386743981

1470

8,064274642

5,802871021

7,41042939

7,268612559

1480

6,629706413

5,26939659

6,818055926

6,393605707

1490

7,859543485

4,987996335

6,7780378

7,262679329

1500

7,799498662

4,89545022

6,413120083

6,343321385

1510

7,290494411

4,707375355

6,013353314

6,8016133

1520

6,561356393

4,448411099

5,778447158

4,699494631

1530

6,758611503

4,180060514

5,25413853

4,841885096

1540

6,375044005

3,914868302

5,084791574

4,567175588

1550

5,516577728

4,396974212

4,544157523

3,925876198

1560

6,228281499

4,398522313

4,0060253

4,638418271

1570

5,810643525

4,659552039

3,446387315

4,366712844

1580

6,194705844

5,198901634

3,319320725

4,055308666

6,170327569

3,471547287

3,049590392

3,901795735

1590 1599

Development of European unskilled real wages (1250 - 1600) 10 9

Northwestern European average (10 years)

French average (10 years)

5 4

Central European average (10 years)

3 2 1 0

1250 1260 1270 1280 1290 1300 1310 1320 1330 1340 1350 1360 1370 1380 1390 1400 1410 1420 1430 1440 1450 1460 1470 1480 1490 1500 1510 1520 1530 1540 1550 1560 1570 1580 1590 - 1599

Axis Title

Southern European average (10 years)

Appendix 4.2. The development of the European skilled real wage in regions (1250 - 1600).

Year

Northwestern European average

French average

Central European average

Southern European average

(10 years)

1250 1260

7,645139263

1270

6,931378863

1280

7,372572882

1290

6,450271417

1300

7,458599782

1310

7,278121645

1320

7,898113619

8,250768576

1330

8,729732068

7,169307191

1340

7,477175292

5,847001802

1350

7,409751286

10,75492488

1360

8,629760744

11,46987657

1370

9,476380612

9,014716194

1380

10,12838442

8,577379419

1390

10,3183847

9,424651302

9,011476794

1400

11,76005989

9,853585934

10,08423395

1410

11,20813993

10,28271453

10,32868405

1420

11,47883213

9,525621061

10,89216162

1430

10,41984796

7,047825814

9,487954188

9,696166034

1440

11,98714901

10,56895515

11,62678934

10,06198361

1450

12,23259616

10,54749415

11,63688707

10,16351687

1460

12,75709494

10,02111816

11,01076539

10,6404656

1470

12,12639273

9,295233872

10,60023354

9,15625472

1480

10,31662952

8,431034543

9,434002074

9,15625472

1490

11,71169731

7,980794135

10,04336682

9,5598301

1500

11,4422653

7,832720353

9,390649335

9,487460337

1510

11,17707293

7,38890147

8,977884779

10,55206152

1520

9,827626269

7,117457759

8,593400158

8,109432422

1530

10,10947914

6,725750006

7,795671112

8,344151468

1540

11,13387134

6,102487976

7,751147008

7,381472952

1550

9,369928157

7,044499124

6,99440447

6,080660959

1560

9,387946776

7,381006229

5,823391568

7,56216754

1570

8,391161792

7,874346566

5,092066401

7,149176819

1580

9,346981323

8,318242615

5,220872065

6,660261867

8,409305881

5,554475659

4,686722067

6,294677039

1590 1599

Development of European skilled real wage (1250 - 1600) 14 12

Northwestern European average (10 years) French average (10 years)

Central European average (10 years)

6 4

Southern European average (10 years)

2 0

1250 1260 1270 1280 1290 1300 1310 1320 1330 1340 1350 1360 1370 1380 1390 1400 1410 1420 1430 1440 1450 1460 1470 1480 1490 1500 1510 1520 1530 1540 1550 1560 1570 1580 1590 -â&#x20AC;Ś

Axis Title

100

Appendix 4.3. The development of the European average real wage in regions (1250 - 1600).

Northwestern European average Year

(10 years)

Central European average French average (10 years) (10 years)

Southern European average (10 years)

1250 1260

7,645139263

1270

6,931378863

1280

7,372572882

1290

6,450271417

1300

5,799237798

1310

5,368727788

1320

5,800177189

6,331985186

1330

6,470237124

5,345166383

1340

6,033162146

4,057811868

1350

5,714339551

8,255840805

1360

6,203655492

8,882621337

1370

7,60712801

6,793513719

1380

8,319744345

8,577379419

1390

8,414388118

7,553852588

9,011476794

1400

9,475132176

7,860680854

10,08423395

1410

9,199172199

8,150932248

9,057463111

1420

9,455732845

7,686499586

9,331908733

101

1430

8,771850938

5,726358474

7,654658279

8,483281534

1440

9,998739694

8,587276063

9,48882925

8,962332229

1450

10,19039618

8,569838996

9,568595138

9,080341122

1460

10,6816702

8,142158502

9,071558782

9,013604789

1470

10,09533369

7,549052447

9,005331464

8,212433639

1480

8,473167969

6,850215567

8,126029

7,774930214

1490

9,785620395

6,484395235

8,410702309

8,411254714

1500

9,620881981

6,364085286

7,901884709

7,915390861

1510

9,233783673

6,048138413

7,495619046

8,67683741

1520

8,194491331

5,782934429

7,185923658

6,404463526

1530

8,434045323

5,45290526

6,524904821

6,593018282

1540

8,754457671

5,008678139

6,417969291

5,97432427

1550

7,443252942

5,720736668

5,769280996

5,003268579

1560

7,808114137

5,889764271

4,914708434

6,100292906

1570

7,100902658

6,266949303

4,269226858

5,757944831

1580

7,770843584

6,758572124

4,270096395

5,357785267

7,289816725

4,513011473

3,86815623

5,098236387

1590 1599

102

Development of the average European real wage (1250 - 1600) 12 Northwestern European average (10 years)

French average (10 years)

Central European average (10 years)

Southern European average (10 years)

103

1580

1590 - 1599

1570

1560

1550

1540

1530

1520

1510

1500

1490

1480

1470

1460

1450

1440

1430

1420

1410

1400

1390

1380

1370

1360

1350

1340

1330

1320

1310

1300

1290

1280

1270

1260

1250

Axis Title

Albers, H., Veroffentlichungen aus dem Staatsarchiv der freien Hansestadt Bremen (Bremen 1930). Allen, R. C., 'The Great Divergence in European Wages and Prices from the Middle Ages to the First World War' in Explorations in Economic History vol. 38 (2001).

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