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econ 3


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Why do “institutions matter” when explaining economic development? Give some examples of institutions that can encourage (or discourage) development. Why are well-established and enforced property rights fundamental to a market economy?
Institutions matter when explaining economic development because laws, customs, moral principles, ideas, and cultural institutions influence individual choices and shape the economic system.
A stable and limited government – in market oriented economies you don’t want the government to be over involved
Relatively peaceful domestic and international relations-resource allocation …conflicts will demand land, labor and capital
Secure money and banking system- financial capital is fuel for physical capital
Laws establishing and protecting private property rights- demanders (buyers) and suppliers (sellers)- exchanges won’t take place unless rights are secure
Market oriented economy- move along development path most quickly these days
Use Varian (2006) to describe trends in U.S. productivity growth since the mid-1970s. Why has productivity in the U.S. “surged” in the last decade? Why have European countries not experienced a similar surge? Discuss the historical parallel to recent
U.S. productivity growth has grown 1.4% from 1974-1995 and 2.5%in the past decade. Information technology has caused productivity to surge in the U.S. European countries don’t know how to use the information technology, so it is not benefiting them. Paul David shows us that the productivity effects from the electric motor did not really show up until Henry Ford and other industrialists figured out how to use it effectively to create the assembly line.
Varian (2006) summarizes a recent study by Bloom, Sadum and Van Reenen. Describe the results of their research comparing American and British firms. What explanation has been offered for the more effective use of information technology by American firms?
Their research concluded that American multinational corporations were 23 percent more productive than the average in Britain. Non-American multinationals were about 16 percent more productive than the average, while British companies were about 11 less productive than average. Also, American companies in Britain use 40 percent more IT capital per worker than the average company. Managerial practices has been offered for the more effective use of IT such as merit-based promotion and pay, lean manufacturing techniques, performance management and employee autonomy.
Using data from Tables 14.2 and 14.3 in your text, describe the long-term effect of the Civil War on the Southern economy.
Table 14.2 shows commodity output (tangible goods) per capita by region- this shows per capita income
1860-1870, the south declines by almost 40%. It somewhat recovered in the next decade but it takes a long time for the south to recover to there pre-war position.
Table 14.3 shows that the five cotton states income grows by a smaller percentage then the other 13 southern states. And both are way behind U.S. per capita personal income growth rates
So pretty much these tables are telling us that the southern economy took a huge blow after the civil war- and it is still recovering 20 years later. The cotton states were hit extremely hard.
17. How did the abolition of slavery affect Southern cotton production? Describe changes in average farm size, economies of scale and labor supply. What was the gang system, and why was it no longer used following emancipation?
The most puzzling aspect of the decline in the Deep South was the increased concentration on cotton. The average farm size was reduced- prior to the civil war 86% of cotton produced in U.S was grown on farms of 100 acres or more and these farms owned 90% of slaves.
61% of the farms had been less than 100 acres in 1860, 81% under 100 acres in 1870- so economies of scale were lost. The gang system – very intense and speedy system of work—was lost. This meant a significant withdrawal of labor from the fields, especially by women and children.
Describe Southern food production before and after the Civil War for (1) small farms, and (2) the “Deep South” as a region.
Small prewar farms were not highly specialized in cotton but small postwar farms were. The deep south as a region prewar had been self-sufficient in food, but after it became a food importing region.
Were post-Civil War efforts to redistribute Southern land successful?
Most of the land remained in the hands of the same people who had owned it before the war (except in a few isolated areas such as the Sea Islands of Georgia and on the former plantation of Confederate Pres. Jefferson Davis, where land reform proved to be a success in promoting stable farming communities.)
1860 the wealthiest 20% of southerners controlled 75% of the land
1870 they controlled 73% of the land
What is sharecropping? How common was sharecropping after the Civil War?
Sharecropping is a system of agricultural production where a landowner allows a sharecropper to use the land in return for a share of the crop produced on the land. Instead of paying a fixed annual sum in dollars for the use of the land, the sharecropper split the crop with the land owner after the harvest. 40% of southern land was sharecropped.
What were the pros and cons of sharecropping in the late 19th century?
Pros: 1. former slaves and poor whites were provided independence from day-to-day bossing and given a chance to earn a living.
2. The risk of a very bad year was shard with the owner.
3. The sharecropping contract also gave the owner an incentive to remain interested in the farm throughout the growing season and to share information such as changing crop prices with the tenant.
4. keeps land productive and gives a labor force
Cons: incentive problems: changes the calculation of marginal benefit and marginal cost such that the tenants interest and landowners interests may not coincide. In short run, this can lead to inefficient output. In long run, sub-optimal levels of investment and improvement of farm.
Encouraged concentration of southern agriculture in cotton. Lack of diversification
. Describe the role that country stores played in the post-War South. Were the high interest rates charged by stores simply due to a lack of competition among lenders?
The country stores were the source of rural credit. High interest rates were the result of the high costs of credit to the storeowner, the risks faced by the storeowner, and the exploitation of local monopoly power possessed by the storeowner. The slow recover of southern banking in rural areas after the CW contributed to the storeowner’s costs of doing business and protected his local monopoly.
How did country stores, crop lien laws and debt peonage lead to increased dependence of Southern farmers on cotton-based agriculture?
The cropper who could not pay his debts after harvest often had to mortgage the next year’s crop to receive continued credit. This transaction was made possible by ‘crop lien’ laws passed in many states. The crop lien was a powerful means of control, and storekeepers (nearly 8,000 in rural south) soon learned that by insisting on payment in cotton, they could maintain long-term control over their debtors. The tenant was thus ‘locked’ into cotton. This led to debt peonage and over production of cotton. Spiral of indebtedness to country store
What factors led to the demise of debt peonage?
The growth of banking in the south erodes interest rates and the monopoly power of the country store.
The boll weevil, an insect that attacked cotton and gradually spread throughout the deep south after the turn of the century, weakened the grip of debt peonage.
Improved roads and the automobile also eroded the monopoly power of the local storeowner
Great mail-order houses in Chicago provided increased competition in the supply of certain kinds of merchandise.
Increasing urbanization and industrialization throughout the nation-ultimately it was northern industrialization and its growing demand for labor that allowed many southern blacks to escape from tenant farming

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