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from Ken Pomeranz (kpomeran@benfranklin.hnet.uci.edu)
As I've said before, I think the case for the importance of the New World is probably best made on the basis of resources, not profits. Still, I don't think the case against the importance of extra- European profits (at least some of which seem attributable to extra- economic coercion) is as ironclad as Alan Taylor suggests. The excerpt below (from my manuscript-in-progress) suggests one possible reason why, building on the work of somebody who did not reject the applicability of contemporary Western economics to other times and places -- Simon Kuznets. Granted, the pre-modern depreciation rate in the model is Kuznets' guess, not an empirical observation -- but it seems to me within the realm of plausibility. At any rate, I'd be interested to see what people think. By any measure, extra-European profits were dwarfed by those earned in less spectacular activities within Europe; but that need not make them insignificant. Patrick O'Brien, for instance, calculated in an often-cited article that the fruits of overseas coercion could not be responsible for over 7% of gross investment by late 18th century Britons (though a later article leaves open the possibility of a higher figure); and for Europe as a whole the figure would of course be far less. But in a pre-industrial world, such a figure could have been quite significant. Typical rates of growth in output were certainly much slower than in most industrial economies today, and it has been suggested (though not proved) that pre-industrial capital goods were far less physically durable than they are now (being made of different materials, and more completely exposed to the elements). This would suggest that a much smaller proportion of the year's production that was not consumed became net capital accumulation than is the case today: most went to offset the high rate of depreciation in the capital stock. Simon Kuznets estimated 30 years ago that simply by using a lower annual growth rate for the economy as a whole (.4% vs. the 2.5% he took to be normal for industrial economies), shortening the average life-span of the capital stock from 40 to 30 years, and raising curren maintenance needs (from 1% to 2% of output) to account for these differences, he arrived at a model "pre-industrial" economy with a gross savings rate of 21.3% of annual output, but a net gain to the capital stock equal to only 1.2% of the year's output: a sharp contrast to his model "modern" economy, in which gross savings of 24.9% yield net capital formation equal to 19% of the year's output. Making further adjustments he arrived at a hypothetical pre-modern economy which, even if it saved more in gross terms (26%) than his modern one, achieved a net increment to its capital stock equal to only 1.32% of its annual output. In other words, Kuznets' estimates suggest that offsetting depreciation, only 5-10% of what a pre-modern economy withheld from consumption became net capital formation. In such a context, even a relatively small "free lunch" -- an increment to gross capital formation that was not purchased at the expense of consumption -- could lead to a very significant increase in net capital accumulation. For instance, if we imagine an economy that conformed exactly to Kuznets' second model of a pre-industrial economy (gross investment of 26% of production, net of 1.32), raising gross investment by the 7% which O'Brien concedes that "super- profits" could have added to British gross investment would more than double the year's net increase to the capital stock. Or, to imagine the opposite scenario, one would not have to lower the amount of gross capital formation by very much to wipe out most or even all net capital accumulation; either way this hypothetical 7% addition could have been very important.

Granted, one must say "could have been" rather than "was." For purposes of this argument, O'Brien has been willing to stipulate that commerce with the periphery was twice as profitable as "normal" commercial profits in this period, while he rightly points out that nobody has yet shown any such thing. And while much of the cost of coercion was paid by the chartered companies -- and thus is already accounted for in O'Brien's exercise -- some further costs were not, and would need to be deducted in any thorough attempt to complete this thought experiment. (Such an exercise would also face once again the question of how to assess the opportunity costs of labor in Early modern Europe -- would say, the Scandinavian migrants and Dutch rural unemployed who signed up to sail and fight for the Dutch East India Company otherwise have found something productive to do at home? Given the institutions of the time, many might not have.) But if coercion yielded some additional profits for Europeans, as seems likely, and small increases in gross investment may have meant large changes in net investment...

(posted 8728 days ago)

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