Transactions Costs and Differential Growth in Seventeenth Century Western Europe

From the Middle Ages through the sixteenth century, the major countries of Western Europe—England, Holland, France, and Spain—can be viewed as a single entity in terms of overall economic growth. Population and output rose in all until the early fourteenth century when famine and then plague caused population and production to decline for over a century. Again in the sixteenth century there exist clear indications of a general expansion of population and output levels. In the seventeenth century, however, this uniform pattern is broken. Holland and England continue to expand; France falls relatively behind; and Spain absolutely declines. A simple Malthusian model appears to go far in explaining the general contours of the pre-seventeenth-century growth pattern. The differential pattern of the seventeenth century, however, has proven less amenable to unique explanation. This paper will not provide a unique explanation of the seventeenth-century growth pattern. It will, however, attempt to focus the search for such an explanation by arguing that the source of the differential growth lay in a single sector of the economies under discussion. Specifically, it will be argued that given the relatively constant technology of the period, growth, both extensive and intensive, can be explained by population increase in conjunction with economies of scale; that the source of the economies of scale lay in the transactions sectors of the economies under study; that only England and Holland had institutional structures that allowed the population growth beginning in the sixteenth century to give rise to large market areas and thereby allow realization of the economies of scale inherent in the transactions sector; and that the productivity increases brought about through realization of these economies of scale made it possible for Holland and England in the seventeenth century to support continued population increase and to evidence an increasing standard of living. This explanation of growth will necessarily remain incomplete because no attempt will be made to explain why Crown policies, and therefore institutional structures, differed between the countries.