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Working paper 257

John H. Munro, "Entrepreneurship in Early-Modern Europe (1450 - 1750): An Exploration of Some Unfashionable Themes in Economic History", 2006-10-09
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Abstract: Entrepreneurship, by its very essence, concerns the theory of the firm --- the individual enterprise --- which in turn is the essential core of micro-economics. A major theme of this study, however, is to demonstrate the interaction of micro- and macro-economic phenomena: to show how such firms or enterprises, and entrepreneurship itself, were often shaped by, and often helped shape, such macro-economic forces as demographic changes, monetary changes, price changes --- in terms of both deflation and inflation --- long distance trade, overseas exploration and expansion (colonialism), and indeed related changes in social institutions and socio-cultural values that were also influenced by such macro-economic changes.
One generalization about macro-economic changes involving inflations and deflations has both general and considerable importance in the history of European business enterprises and entrepreneurship itself: for long-term inflations (when moderate) tend to cheapen or reduce the relative factor costs of labour (wages), land (rent contracts), and capital (fixed interest rates in loan contracts). Similarly, long term deflations tend, in reverse fashion, to increase the real or relative factor costs of labour, land, and capital, especially with pronounced wage-stickiness, and related 'stickiness' in leasehold rent contracts (and more so with customary tenures), and with loan contracts -- even if the long-term trends in real interest rates was falling over this long period. At the same time, both inflations and deflations are accompanied by changes in the relative prices of key industrial inputs. The key question to be posed is this: how did entrepreneurs respond to such changes in their factor costs, both short term and long term?
This study commences by demonstrating how deflation in mid-15th century Europe, in increasing the purchasing power of silver, provided the stimulus for two major technological innovations in silver-mining and smelting that led to the South German silver-copper mining boom of 1460-1540, which also meant major changes in commercial-industrial entrepreneurship and in industrial scales. That mining boom in turn laid the foundations for the 130 year inflation of the Price Revolution (1520-1650) --- an inflation further fostered by a financial revolution in credit and banking institutions (from the 1520s), and then further fuelled by the influx of Spanish-American silver. The heart of this study is on the role of inflation, and associated macro-economic changes, in producing the roots of modern capitalist entrepreneurship, during what is often called Tawney's Century (1540-1640). We begin, however, with two famous related theses: Hamilton's thesis of 'Profit Inflation' (in which wages lag behind consumer prices), a wrongly-constructed thesis that endures only because Keynes endorsed it; and Nef's thesis of the 'Tudor Stuart industrial revolution' --- a much ridiculed response to Hamilton --- whose merit lies in revealing the capitalist entrepreneurship, major technological changes, and changes in industrial scale that resulted from the substitution of coal --- the heart of modern industrialization --- for every more costly wood charcoal. Tawney's three theses themselves concern the origins of modern agrarian capitalism, the related 'Rise of the Gentry' debate (on the role of inflation in shifting land ownership from the aristocracy to the more 'capitalist-minded' gentry landowners), and the Weber-Tawney thesis on Religion (Protestantism) and the Rise of Capitalism, which, I endeavour to show has its real relevance only from the late 17th century. Associated with the Price Revolution era is the Age of Overseas Expansion (involving one of the most momentous technological and entrepreneurial change of the early modern era: the development of the Full Rigged Atlantic ship, with heavy artillery). England joined that overseas commercial-colonial race rather late, in the 1550s, but in doing so developed the institutional foundations of modern capitalism by creating the joint stock company. Certainly technological and institutional innovations are the real hallmark of entrepreneurship. This three-century study ends with the following era of monetary scarcity and deflation (1650-1740) that provided another macro-economic challenge whose response was revolutionary changes in banking and financial institutions --- i.e., in financial-commercial entrepreneurship. It also fostered the growth and spread of rent-seeking Mercantilist philosophies that also influenced the character of early-modern capitalist entrepreneurship.

Keywords: Entrepreneurship; Inflation; Deflation; Factor Costs; Technological Innovations; Mining and Metallurgy; Coal-Burning Industries; Joint-Stock Company

JEL Classification: E31; E40; F10; G20; G21; J10; J30; L10; L71; L72; N13; N23; N33; N83; O31